DEPARTMENT OF JUSTICE
CROSS-LICENSING AND ANTITRUST LAW
Address by
JOEL I. KLEIN
Acting Assistant Attorney General
Antitrust Division
U.S.
Department of Justice
Before the
American Intellectual Property Law
Association
San Antonio Marriott
Rivercenter
San
Antonio, Texas
May
2, 1997
Page 1
I am happy to be here today -- or, should I say, as happy to be here
as
any head of the Antitrust Division could ever be facing down a
horde of
intellectual property lawyers at the Alamo. Seriously, I'm flattered
to have been
invited, and grateful for the chance to speak with you at the close of
your
Spring Meeting. I view it as a sign of how far we at the Antitrust
Division have
come in the last few years that I can come before you with the
sense that we
share a lot of common ground. I especially want to mention how
gratified I am
by the cooperative and productive relationships we have developed
with our
colleagues at the Patent & Trademark Office and the Copyright
Office, and
want to thank Commissioner Lehman, Register Peters and Solicitor
Linck. The
open lines of communication among our offices have helped us
understand
and take into account each other's concerns, and I know, for our
part, that our
own work as competition advocates has benefited greatly as a
result.
I.
Antitrust Enforcement and
Intellectual Property
Let me make clear at the outset, the intersection of antitrust law
and
intellectual property has become a major agenda item for the
Antitrust Division.
It figures prominently in the work of three of the Division's
sections. Moreover,
it raises such important and difficult questions, frequently
involving
consultations with other parts of the Executive Branch, that my
predecessor
Anne Bingaman appointed a senior counsel specifically for
intellectual property
and antitrust. This high priority makes sense to me, too. In a world
where so
many important products and services are driven by technology, it
is becoming
increasingly apparent that competition among technologies, and in
the
development of those technologies, is often as important to
consumer welfare
as the price competition that has been the traditional focus of
antitrust
attention. This point was repeatedly emphasized in the fine
hearings that the
Federal Trade Commission recently held concerning the effects of
globalization
on the U.S. economy.
And, I should also add, the competitive significance of
intellectual
property rights is not limited to patents: on the contrary, our most
recent public
activity has involved material protected by copyright. Most
recently, in an
extensive investigation of competitive conditions in the market for
legal
research materials, we saw the competitive barrier that West
Publishing
Company was imposing through its assertion that other case law
publishers'
use of star pagination, showing the fact of where page breaks
appeared in
West's own case reports, infringed its copyright. Consequently, we
filed
amicus briefs in two declaratory-judgment
actions brought by other publishers,
Page 2
contending that star pagination does not infringe West's
copyright. 1 And,
in
another matter, only last August, we sued General Electric over
restraints it
imposed on over 500 hospitals and clinics that had licensed
software for use
in maintaining GE medical imaging equipment -- restraints that, we
contend,
amount to naked agreements keeping the licensees from competing
with it in
servicing and maintaining medical equipment of any kind. The
effect of the
agreements is to limit competition in providing service for medical
equipment,
raising the cost of that service for hospitals and clinics, and
ultimately harming
competition and raising prices in medical equipment markets too --
all leading
to higher health-care costs. We are also grappling with a case we
filed a little
earlier -- in 1941, to be exact. Our antitrust consent decrees
governing the
licensing and royalty-distribution functions of both ASCAP and
BMI are getting
serious study and analysis, as we consider whether the licensing
model the
decrees employ is the right one in a world that could barely have
been
imagined when we entered into the BMI decree in 1966,
let alone in 1941,
when the original ASCAP decree took effect.
More generally, a great deal of attention given to our work
involving
intellectual property has focused on the drafting, issuance and
application of
the Antitrust Guidelines for the Licensing of Intellectual Property,
which the
Antitrust Division and the Federal Trade Commission released a
little over two
years ago. As the Guidelines indicate, our public focus has been
primarily on
fairly straightforward licenses, in which protected technology or
creations move
in one direction -- from the licensor to the licensee. 2 We've said little about
our
analysis of licensing transactions that combine the intellectual
property of
Page 3
different owners -- i.e., cross-licensing -- or patent pools,
if you will. 3
And
we've said even less about the subset of licensing arrangements that
bundle
intellectual property rights together and present them to licensees in
a
mandatory package.
But, as some of you may know, we've spent a considerable amount
of
time looking at both of these complex subjects. And, while I can't
pretend to
tell you that we've got all the answers now, a few things have
occurred to us
along the way. In the future, I'll have something to say about the
bundling
issue. Today, I want to focus principally on the competitive issues
posed by
cross-licensing and pooling agreements. They concern both
substantive
issues that are likely to get our attention when we review
combinations of
intellectual property rights and some procedural ideas that should
help us do
a better job of identifying those combinations that are likely to
be
anticompetitive, while not standing in the way of the rest of them.
To put matters in perspective, I should make clear at the outset
that I
would expect that by far most cross-licenses and pools are, on
balance,
procompetitive. That means that, at bottom, they help sellers
provide
consumers with better products and services at lower prices
because of
benefits ranging from cost savings -- due to more efficient
production
technologies -- to improved product quality -- resulting from
combining
complementary inventions.
4 At the same time, cross-licenses can have
anticompetitive effects, too, including increased prices, cutbacks in
production,
and reduced innovation. This is particularly true when the
cross-license is
between firms that are competitors, whether in producing goods or
services,
licensing intellectual property, or in R&D. In that case, our
antitrust antennae
go out: we have to be alert to the possibility that the cross-license
can serve
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the interests of the parties, at the expense of competition and
consumers.
Based on our experience, we think this possibility is probably
greatest in
the context of settling infringement litigation. The stakes are high,
particularly
if the dispute involves a market with a small number of competitors
to begin
with or a particularly broad or fundamental intellectual property
claim. The
defendant may be facing the possibility of continuing in business
only at the
sufferance of the plaintiff; for the plaintiff, the litigation may
determine its ability
to decide who it will or won't allow to compete. Consequently,
settlements are
often based on considerations that lead parties to give up rights that
they might
well vindicate if they went to the mat. And when intellectual
property rights are
at stake, the consequences of those compromises can align the
settlers'
interests against the interests of consumers.
Essentially, we analyze these cross-licensing or pooling issues in
the
same way as we look at all licenses under Section 1 of the Sherman
Antitrust
Act. We ask, first, does something about the license hurt
competition that
either already existed or likely would have come into being without
it? And if
the license does have such an anticompetitive effect, we then ask, is
that harm
reasonably necessary in order to bring about some even greater
procompetitive benefit? These two basic questions -- what are
the
anticompetitive effects, what are the procompetitive benefits --
constitute
what's known in antitrust law as the Rule of Reason. 5
The application of such a rule-or-reason analysis to cross-licenses
is
pretty straightforward. Obviously, our principal concern is whether
the patents
or their owners are using the arrangement to blunt competition that
would
otherwise take place -- a rather-switch-than-fight strategy, if you
will. And so
when we look at one of these arrangements, we generally analyze
the
following particulars, which have been common to our competitive
analysis
from the very beginning. They include the relationship of the
intellectual
property rights being combined; the nature of the markets in which
those rights,
and the goods or services in which they're used, compete; the extent
to which
the pool controls access to those rights; the openness of the pool to
outsiders;
and the extent to which the cross-license controls the terms on
which future
innovations in the field will reach the market. Fortunately, I can
give some
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color to this rather arid description of what we do by taking an
historical
example -- involving airplanes and World War I -- that is
remarkable for its
endurance. If nothing else, when one relies on some venerable
precedent to
highlight contemporary concerns, it always has the sound of
erudition.
II. The Manufacturers Aircraft Association
By the time of America's entry into World War I in April 1917,
our
Government had become an eager consumer of airplanes.
Airplanes were still
so new that the Wright brothers' basic patent, then in the hands of
the Wright-
Martin Aircraft Corp., still blocked would-be manufacturers, at
least for all
practical purposes. 6 So too, apparently, did "numerous important patents"
in
the hands of the Curtiss Aeroplane & Motor Corp. 7 The two firms were
demanding royalties from other aircraft manufacturers, although
the Attorney
General singled out Wright-Martin for seeking "high" royalties. 8 The upshot for
the Government was not only "excessive" airplane costs but an
inability even
to obtain enough planes, since the cost of licensing constrained
industry
capacity.
In the face of this problem, an obvious and time-honored
Washington
solution presented itself: an advisory committee. This one,
though, had a
better-than-average pedigree, having been convened by Assistant
Secretary
of the Navy Franklin D. Roosevelt.
9 After a series of consultations with the
truculent patentees, 10 the committee recommended the formation of a
patent
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pool, which was in place by the end of July 1917. The aircraft
pool, which
encompassed "practically all" airplane manufacturers, 11 resolved all pending
infringement claims and bound the members to give each other
nonexclusive
licenses to "all airplane patents of the United States (with
unimportant
exceptions) now or hereafter owned or controlled by them." 12 Membership
was
open to three types of entities: (1) any "responsible" present or
potential
airplane manufacturer; (2) any manufacturer to which the federal
government
had awarded a contract for ten or more planes; 13 and (3) any owner of
U.S.
aircraft patents. 14 The pool's charter contemplated only 100 members, but
that
was apparently more than adequate to accommodate the
potential
membership. 15 Members promised not to put relevant patents out of the
pool's
reach, as, for instance, by taking an exclusive but non-sublicensable
license. 16
In consideration for access to the basic patents, manufacturing
members would
pay a flat $200-per-aircraft royalty, from which 67.5% went to
Wright-Martin,
20% to Curtiss, and the remainder to the pool entity for
administrative costs. 17
Wright-Martin and Curtiss were entitled to these shares, up to a
maximum of
$2 million each, until their patents expired. 18 An arbitration panel
would decide
Page 7
what other pooled patents merited royalties and would set those
royalties. 19
Unlike the flat $200 royalty,
20 the fee for other royalty-bearing patents
was
predicated on actual use; the rest of the patents were available to
the pool
members on a royalty-free basis.
21
In September 1917, the Secretary of War passed along to the
Attorney
General a request for an antitrust advisory opinion. 22 The Attorney
General
responded in less than three weeks, concluding that there were
no
anticompetitive effects that came close to outweighing the very
real
procompetitive benefits resulting from assembling these patents
into an
affordable package available to all comers. 23 In reaching that
conclusion, he
touched on one after another of the issues that we would raise today
as well.
Let me go through them with you.
An unspoken but important premise of the Attorney General's
analysis
is that the patents were valid. Of course, restraints imposed in
conjunction with
licenses of invalid or illusory intellectual property rights would be
highly
anticompetitive. 24 Moreover, as the possessor of its own blocking, and
presumably valid patents, Curtiss had more to gain than anyone
else from
challenging the validity of Wright's patent. If there were any
significant doubt
about validity, the cross-license between the firms could entail a
real loss to the
market, since Curtiss would no longer have that impetus to
eliminate a
Page 8
principal entry barrier. 25
The Attorney General's stated analysis began with the patents'
relationship to the airplane industry and each other. In particular,
he observed
that the pool solved what we now call the bilateral monopoly
problem. Both
Wright-Martin and Curtiss separately had the industry over a
barrel. Anyone
that wanted a license from Wright-Martin had to pay the
"excessive" royalty the
Attorney General mentioned, only to find that Curtiss wanted
something, as
well. Combining the Wright and Curtiss patents in the pool
resolves this
dilemma: the Attorney General noted that the pool royalty is
"materially lower"
than what Wright-Martin alone had demanded, leading to "a
substantial saving
to the Government." 26
Implicit in this analysis is that Wright-Martin and Curtiss had
each other
over a barrel as well. 27 If each had not needed the other's intellectual
property
to make a viable aircraft, their technologies would have been
competitors, not
complements, and the combination of the patents would have been
a very
different story. In that case, instead of reducing a series of
monopoly rent-
seekers to one, it would have made a monopolist out of the only
two
Page 9
competitors in the field. Then, manufacturers probably would have
faced a
higher royalty than the two competitors quoted separately. 28 As it was,
though,
the complementary relationship of the patents made their
combination in the
pool procompetitive.
Just how procompetitive it was depended in part on
whether the benefit
that Wright-Martin and Curtiss were bestowing on each other
would be freely
available to their manufacturing competitors. Because the pool was
open to
all, the Attorney General found, the cross-license "render[ed]
competition freer
by giving every responsible manufacturer of aircraft access to all
the inventions
in the field." 29
On the other hand, an agreement by the two firms not to
license their
patents to others would have drastically limited the procompetitive
benefits that
the Attorney General saw in the pool. If the two firms' patents
were
competitors, such an agreement would be little more than a
horizontal boycott
by competitors, which is a clear Sherman Act violation. To be
sure, when, as
here, the patents compete neither with each other nor with any
others, there
is no current competition to be harmed. But if there were or might
soon have
been alternatives to the pooled patents, an agreement not to license
to others
might then have prevented Curtiss, for example, from combining
its patents
with some technology that substituted for Wright-Martin's. This
could be a
potent strategy for stifling new rivalry. On the other hand, in a
robustly
competitive market, mutually exclusive cross-licenses might not be
at all
troublesome.
What if Wright-Martin and Curtiss agreed that they would make
their
pooled patents freely available, but only as a package? Again, as
long as the
firms' patents truly blocked the industry, and each other, it is hard
to see how
such an agreement would harm competition. But once plausible
alternatives
appeared for either Wright's or Curtiss' inventions, the mandatory
package
would begin to look more like a tying arrangement. But even that's
not the end
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of the issue. Under our Intellectual Property Guidelines, tying
arrangements
are generally subject to an analysis that balances procompetitive
benefits
against anticompetitive effects.
30 And, as I indicated at the outset, we will
be
giving some additional guidance in the future about the tying and
bundling
together of intellectual property. For now, suffice it to say that the
general
question is whether the tie really helps to increase output, lower
costs, or
create an otherwise unavailable product -- or whether it simply
serves to raise
the price of the tying product.
The fact that the Wright and Curtiss patents blocked the industry
also
made the flat per-airplane royalty acceptable. This provision, the
Attorney
General observed, "at first sight seems objectionable as possibly
designed to
extend the patent rights of these corporations to objects not covered
by their
patents." 31 While this is phrased in the parlance of misuse law, the
concern is
much the same as the one raised by Microsoft's per-processor
license for
DOS, which was at issue in the case we brought against Microsoft
in 1994. 32
Since the flat royalty must be paid whether or not you use the
licensed
technology, it discourages you from using competing technologies.
But in the
1917 aircraft industry, there was no OS/2, no operating system
from Apple, and
apparently, no new entrants on the horizon. In short, since there
was
essentially no technological competition out there to be squeezed,
the
convenience that the per-airplane royalty offered could not be
outweighed by
any anticompetitive effects.
The true antitrust cognoscenti among you will probably be amazed
to
learn that nowhere in the opinion letter did Attorney General
Gregory discuss
the concept of innovation markets. I can attribute this lapse only to
the press
of wartime, and perhaps the fact that our Intellectual Property
Guidelines were
not issued until 78 years later.
33 But while he didn't explicitly enunciate
the
concept of a specific "market" in which innovation takes place,
competition
among the pool's members in aircraft research and development
was clearly
an important factor in the Attorney General's analysis. He noted
that the
Page 11
members' obligation to contribute future inventions to the pool,
for
compensation to be determined by arbitrators, "might possibly be
used to
secure valuable inventions at unreasonable compensation." 34 But taking
into
account that the obligation helped ensure that each subscriber's
patents would
be open to all, the Attorney General concluded that the obligation's
"possible
abuse . . . scarcely justifies its condemnation in the absence of such
abuse." 35
Today, I believe that the impact on the members' incentives to
innovate
would receive at least a bit more attention. The obligation to
contribute future
patents was not limited to improvements on the fundamental
patents; thus, it
didn't serve simply as insurance against the possibility that a
licensee might
expropriate the entire value of a patent in the field. Instead, it
guaranteed that
any innovation, no matter how revolutionary, would be thrown into
the pot,
probably for nothing and otherwise for an amount to be determined
by
arbitration. Now, it may be possible that the arbitration
mechanism was so fair
that other manufacturers could have felt confident that their
research and
development would be competitively rewarded. But in ordinary
circumstances,
I wonder whether "the purpose of keeping [all] the patents of each
of the
subscribers open to all" ought to prevail over the drag such a broad
obligation
might exert on innovation.
Of course, these weren't ordinary circumstances: there was a war
on and
the U.S. needed airplanes quickly. The government was willing to
give up
long-term innovation -- and accept what we now have learned to
call "dynamic
inefficiencies" -- in exchange for the current technology at an
attractive price.
And in this situation, that "policy choice" -- even with the benefit
of hindsight --
would still appear to make sense. Unless World War I had
developed into
another Thirty Years' War, the promise of long-run innovation
competition
would have been pretty cold comfort to our troops.
Still, as long as there isn't a war on the next time you form a patent
pool,
give some thought to members' future-patent obligations. Do they
have to
contribute only improvements? Or anything they invent in the
field? If the
latter, what is the justification? Are members free to license their
future patents
Page 12
independently of the pool? Or is the pool going to be the only
route the
technology can travel to the market? Again, if the latter, what's
the
justification? 36 If the answers to these questions don't tell a very
persuasive
story about how the future patent obligations contribute to the
pool's
procompetitive purpose, you may want to rethink what's going on,
or else risk
Sherman Act exposure. The question of compensation that the
Attorney
General addressed is worth considering, too. The most obvious
threat to the
innovation incentive is if pool members have to give royalty-free
licenses. But
even if the pool agreement provides for a "reasonable" royalty, the
actual
royalty for new inventions may be artificially low if it set by the
rest of pool --
i.e., by the innovator's competitors. 37
III. The Need for a New Notification Regime
All this thinking about how we look at cross-licenses won't
amount to
much, of course, if we don't have the ability to investigate them
effectively.
Based on my activities at the Division over the past couple of years,
I am
convinced that, unlike with respect to mergers and many other
kinds of
business practices, cross-licenses have remained largely off our
screen. I also
believe that there are some cross-licenses in place now that, had we
been
aware of them at the time of their inception, we might have sought
to block
under the antitrust laws. Indeed, these two conclusions I have
drawn apply not
only to cross-licenses, but to license agreements generally. The
reason that
Page 13
they have stayed off our screen is because they are not by any
means open
and notorious, unlike, say a merger, and the two statutes that might
have been
thought to bring such arrangements to our attention generally do
not. Let me
elaborate.
Those of you who are familiar with the antitrust laws know that
the
premerger notification provisions of the Hart-Scott-Rodino
Antitrust
Improvements Act of 1976 require notification to both the Antitrust
Division &
the FTC of stock and asset acquisitions that give the acquirer an
interest of
more than $15 million in the acquired company's stock or assets, if
the acquirer
and acquiree exceed some size thresholds. 38 You probably also know
that the
FTC Premerger Notification Office, which is the arbiter of
Hart-Scott-Rodino
notification rules, views some intellectual property licenses as
asset
acquisitions. 39 But this has not made Hart-Scott-Rodino notification
an
effective net for potentially anticompetitive licenses.
For one thing, only licenses that on their face are literally
exclusive --
retaining no rights in the licensed field, even to the licensor --
qualify for HSR
notification. 40 That is understandable, since HSR is meant to deal with
asset
acquisitions, in which the seller parts with beneficial ownership of
whatever the
acquirer is getting. I think we could all agree, though, that licenses
not literally
exclusive on their face can also raise competitive issues. For one
thing,
facially nonexclusive licenses can be de facto exclusive,
due to devices such
as royalty structures that penalize additional licensing, or, as in our
suit against
S.C. Johnson & Sons and Bayer AG, a side agreement. 41 For another, a
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nonexclusive license between two competitors could lead one of
them to give
up on its own technology, making its own product more like its
competitor's and
giving consumers less choice. In other situations, as where the
royalty on a
an input accounts for a large proportion of the finished good's sales
price, a
nonexclusive license could enable the parties to coordinate their
prices with
each other. These situations may not involve asset acquisitions
within the
purview of Hart-Scott-Rodino, but we as antitrust enforcers would
still like to
know about them.
Even among exclusive licenses, only those that pass Sec. 7A's
size-of-
person and size-of-transaction tests require notification.
Essentially, anything
acquired from a non-manufacturing firm that has assets of less than
$10 million
and sales of less than $100 million will escape notification in any
event. When
it is an intellectual property right that is being acquired, it does not
strain the
imagination that a large, even dominant firm, could acquire a
competitively
important technology from a research and development outfit with
assets and
sales below the threshold levels. Such a transaction flies under the
Hart-Scott-
Rodino radar. So too will the licenses that fall short of the $15
million size-of-
transaction test, a test difficult to apply objectively to a stream of
royalty
payments keyed to uncertain factors such as usage, production, or
sales. 42
Given all this, you won't be surprised to learn that licenses account
for
no more than a tiny fraction of the approximately 3000 transactions
that are
reported annually pursuant to Hart-Scott-Rodino filings. The
problem is not
with how Hart-Scott-Rodino is construed. The real problem is that
the statute
simply wasn't designed to apply to licenses in the first place.
Some of you might think that filings of patent interference
settlements,
pursuant to 35 U.S.C. ? 135(c), might help to bring some
potentially important
matters to our attention. Enacted in 1962 to discourage competitors
from using
the medium of an interference settlement to collude, 43 the statute requires
"any
agreement or understanding between parties to an interference,
including any
collateral agreements referred to therein, made in connection with
or in
Page 15
contemplation of the termination of the interference" to be filed
with the PTO,
from which the Antitrust Division may obtain it for review. The
filing
requirement not only gives us a look at settlement agreements but
also should
dissuade parties from entering into the most egregiously
anticompetitive
agreements.
At least, that is, so long as parties obey their obligation to file their
entire
agreement. Disobedience carries a facially harsh penalty: it renders
the
agreement and any related patents unenforceable. But I still can't
help but
wonder whether the statute is fully effective in ensuring filings.
The PTO is not
in a position to police the requirement that there be no unfiled side
agreements.
Nor are third parties, who may find it difficult even to see what has
been filed;
most settlers designate their agreements as confidential, shielding
them from
public view except upon "good cause." And only way we're likely
to find out
about a failure to file is through serendipity in an already-opened
investigation.
That did happen once, but it's not a happy story. In the course of
an
investigation, we concluded that the FMC Corporation had failed to
honor its
obligation to file all the agreements connected with an interference
settlement
it had entered into. We sued, asking the court to declare FMC's
resulting
patent unenforceable under Section 135(c). The district court
found no
violation of the statute; 44 on appeal, the Third Circuit held that the statute did
not give the Government standing to have the patent declared
unenforceable. 45
The Department did not seek certiorari, and FMC is the
sole case on this
issue. A bill to add an explicit right of action for the Government
was
introduced into Congress and died there in 1985.
So, with the Antitrust Division apparently unable to enforce the
statute,
who can? Infringers, who might otherwise raise unenforceability
as a defense,
are unlikely to learn of a failure to file on their own, and almost
certainly won't
be able to learn about it from us. The Antitrust Civil Process Act
imposes strict
confidentiality requirements on our use of documents and
information we
obtain through Civil Investigative Demands. 46 Consequently, when, as
in FMC,
we learn through CIDs of a violation of Section 135(c), we cannot
place an
Page 16
announcement in the New York Times.
What this means, then, is that the only people who are likely to
know
about a violation of Section 135(c) and to be able to do something
about it are
the parties to the settlement themselves. Of course, sometimes
even cartels
break down. But to hinge law enforcement on changes of heart by
violators
places more hope in redemption of the human spirit than one in my
position
can afford to have. Even the Third Circuit recognized that denying
us standing
under Section 135(c) makes the filing requirement toothless. But
that, the
panel concluded, was a matter for Congress to redress. 47
As I indicated, Congress did take a brief look in 1985 at a bill that
would
have solved the problem with a simple addition to the end of
Section 135(c):
"The U.S. may bring an action for equitable or declaratory relief to
enforce the
provisions of this Section."
48 The bill enjoyed the support of the Commerce
Department, but did not emerge from the Judiciary Committee. I
think it may
be time for another, more serious look at the same simple
legislative fix. At the
same time, if the opportunity to overturn FMC came
along through litigation, I
would jump at it. Like William Baxter, the distinguished leader of
the Antitrust
Division at the time of FMC, I think the case was
wrongly decided. But the
chance to persuade a court of that may not come again soon.
FMC was one
of only a very few instances where we came across a failure to file
in the
course of an antitrust investigation; who knows, given the difficulty
of
determining whether a required filing has been made, when the
next instance
will be.
But whether we do it by legislation or litigation, vindicating our
right of
action would give the Section 135(c) filing requirement teeth, and
consequently
have some measure of confidence that we will learn about
interference
settlements that could otherwise stifle competition from outsiders
and protect
potentially invalid patents. But that fix, alone, addresses only one
subset of
potentially anticompetitive agreements, which may or may not
involve the
cross-licenses I've been talking about.
IV. A Proposed System of Notification
As I just indicated, the problem I see is not limited to just one
particular
setting, such as the settlement of interferences, or one particular
device, such
Page 17
as a cross-license. The problem is with our inability to learn of a
whole range
of agreements involving intellectual property rights, agreements
which may
impede competition while affording no countervailing competitive
benefits. One
solution, and of course the only way to assure full detection of all
licensing
arrangements, would be a mandatory filing system. But, frankly,
that would
swamp the boat as far as I'm concerned. A practical solution
hinges on our
ability to articulate some special characteristics common to these
agreements,
so that we could insist on being told about some -- where
competitive scrutiny
might be worth the candle -- while letting the large majority go. I
think that
eventually we can come up with those identifying characteristics,
based on the
essence of the agreements themselves rather than what specific
form they
take or whether they result from a lawsuit, an interference, a
cease-and-desist
letter, or a government advisory committee. In the meantime,
though, I
propose that we start with the setting that concerns us the most:
settlement of
infringement disputes.
We should identify a category (or categories) of infringement
cases in
which we get notification at the outset. We could then monitor
such cases and,
if the parties decided to settle, we could either step into the
defendants' shoes
if we thought the settlement was anticompetitive or, perhaps, adopt
a regime
where the court, based on our comments and those of other
interested parties
--
could reject the settlement on public interest grounds. I should
note that Bill
Baxter made a similar proposal just last year. Our experience with
West's star-
pagination infringement claim provides an illustration of how this
might work
and a demonstration of the limitations of the status quo.
First, let me remind you of what is at stake for competition in the
fight
over star pagination. To put it simply, to produce a viable case law
product,
any case law publisher other than West itself must be able to
star-paginate to
tell the reader where each portion of each case it publishes may be
found in
West's printed system, so that the reader may employ pinpoint
citation to the
particular part of the case relevant to his analysis. West, however,
contends
that star pagination to its system infringes its copyrights by copying
the
"arrangement" of those volumes. It finds support in West
Publishing Co. v.
Mead Data Central, Inc.,
49 where the Eighth Circuit held that Lexis' use of
star
pagination did indeed infringe West's copyright. West ultimately
granted Lexis
a license but, until it agreed with the Department recently in an
antitrust
Page 18
consent decree to license the right to star paginate on request, 50 West had
licensed only one other publisher to star paginate -- in a set of
Virgin Islands
case reports. And competition has not thrived. In the meantime,
though, the
Supreme Court's Feist decision
51 pulled the rug out from under the
Eighth
Circuit's analysis, at least as we see it. Thus you shouldn't have to
have a
license to star paginate, but as long as West sees it the other way,
the difficulty
of getting a license is a considerable entry barrier into the case law
publishing
business.
Because of our interest in competition in the provision of legal
research
products and services, we followed the two declaratory-judgment
actions
brought against West by rival case law publishers with
considerable interest. 52
We sought to appear as amicus in both at about the same
time, but at very
different stages. In the litigation brought by Matthew Bender and
HyperLaw
against West in the Southern District of New York, we filed our
brief during the
pendency of the plaintiffs' motions for summary judgment. The
brief we filed
in Oasis v. West, though, was in the Eighth Circuit; the
District Court, following
West v. Mead, had already entered
summary judgment for West. Ordinarily,
we are wary of weighing in at the District Court level, since the
record
frequently is not as well developed, and the legal issues are not
always as
clearly delineated, as we might like. In this instance, though, the
legal issue --
whether star pagination infringes West's copyright -- was
straightforward, and
so were the facts, enabling us to contribute as intelligently to the
summary-
judgment question before Judge Martin in New York as we were to
the Eighth
Circuit's appellate review. And, as it turned out, the one decision
that has
come down on this issue where we have been heard as
amicus has gone our
way, whereas the courts that did not hear us, both the District Court
in Oasis
and the courts in West v. Mead, went the other way. But
even though our
amicus filing may have had an impact
here, I am not convinced that such a role
is enough.
Page 19
For one thing, although we were able to be heard in these
proceedings,
we cannot prevent the parties from settling and taking the issue
away from us.
A settlement in the Oasis matter, for example, would not
only still our voice but
also leave West v. Mead intact. For another thing, we
were lucky: the West
cases are the rare instance where we actually are aware of
infringement
litigation because we had a pre-existing interest in this industry. In
the more
usual situation, an infringement dispute could go to court and settle
without
ever coming to our attention. Notice of an infringement action
would at least
allow us to assess what is at stake for competition in the matter
while it is
pending, putting us in a position to decide quickly and, I would
hope,
confidently when confronted with a settlement.
If we had that right to be heard, we could ensure that
meritorious
defenses would not be abandoned, and questionable intellectual
property
claims would not triumph, without at least an opportunity for us to
consider
whether broader societal interests in competition warrant putting
the claims to
their proof, and to bring those considerations to the court's
attention. Then,
those broader interests would not be held hostage to the defendant's
own
economic interests, which may be subject to limited resources for
litigation and
a strong aversion to the consequences of defeat, no matter how
remote the
chances. Of course, we might well still wish to be heard as
amicus on the
merits when the dispute does go to litigation, as it has in the current
star-
pagination cases. But it is easy to imagine a case being at a stage
where
amicus participation might not yet be
prudent, for the reasons I alluded to
above, yet a settlement would be very troublesome. There, the
additional right
to be heard in some manner in advance of any settlement would be
essential
to ensure that competitive concerns be heard at all.
In sum, I see a lot of merit in a new notification requirement, and
I'm
giving serious thought to how we can make it work. Of course,
such a system
could require a significant investment of Antitrust Division
resources, both in
reviewing proposed settlements and in following through in the
occasional case
by litigating on behalf of the settling defendant or providing
comments to the
court. But it's an important enough challenge that we ought to
figure out how
we can meet it. I think we could devise a notification regimen that
would
impose only mildly on the settling parties. I recognize that many
settlements,
for understandable reasons, are confidential. Those of you who
have dealt
with the Division know that our staff deals daily with the most
sensitive
confidential business information, and has a well-deserved
reputation for
Page 20
guarding it carefully. There is every reason to think that we could
accord the
same degree of care to confidential settlements.
I recognize, of course, that this may not be much comfort to
patentees,
who might find themselves put to their proof more often. But I
remain
convinced that the current situation means that, whenever there is
even a more
than trivial possibility of infringement, the costs of litigation skew
the parties'
decisions, steering them away from a serious test of the bounds of
the rights
of the patentee or copyright holder and towards agreements that too
often
make teammates out of rivals. Since society picks up the tab for
these
agreements over the long run, I think it may be worth an investment
of our
resources up front to head them off where necessary.
Lastly, lest there be any misunderstanding here, I want to make it
clear
that I don't think it is necessary for the Division to get notice of
every last
infringement settlement. We should be able to come up with some
easily
understood and applicable criteria. Whether they ought to be on
the basis of
the size of the parties, their shares of the relevant markets, the
economic
significance of the alleged infringement or the product or service in
which the
allegedly infringed intellectual property is put to use, or some
combination of
the above, needs to be considered carefully. Whatever criteria we
adopt, I
want to assure you, will be designed to impose a minimal bar to
settlements
that don't pose a serious competitive threat, and to limit the call on
the Antitrust
Division's resources to reviewing economically significant and
competitively
troubling agreements.
V. Conclusion
Again, I want to say how grateful I am for the chance to speak
with you
today. I am very interested in your thoughts as to the ideas I have
put forward,
and more generally about the Antitrust Division's protection of
competition in
the creation and exploitation of intellectual property. As the
advocates for the
competitors in this arena, you can and should be significant
contributors to our
efforts to develop antitrust doctrine for intellectual property that is
at once
vigilant, sensitive to the facts of each case, capable of consistent
application,
predictable, and, of course, to come back to patent law concepts,
useful
without necessarily being too novel.
.
FOOTNOTES
1 See
Matthew Bender & Co. and HyperLaw, Inc. v. West Publishing Co., No. 94 Civ. 0589
(JSM) (S.D.N.Y. November 22, 1996)(bench ruling), appeal withdrawn, No. 96-9711
(2d Cir., March 4, 1997); Oasis Publishing Co. v. West Publishing Co., No. 96-2887
(8th Cir., oral argument held March 10, 1997).
2 See, e.g.,
United States v. General Electric Co. (D. Mont., complaint filed August 1. 1996);
United States v. S.C. Johnson & Son, Inc., 1995-1 Trade Cas. (CCH) ? 70,884 (N.D.
Ill. 1994)(consent decree); United States v. Pilkington plc, 1994-2 Trade Cas. (CCH) ?
70,842 (D. Ariz. 1994)(consent decree); United States v. Microsoft Corp., 1995-2
Trade Cas. (CCH) ? 71,096 (D.D.C. 1995)(consent decree). The complaints in General
Electric, Pilkington, and Microsoft, as well as numerous pleadings from
the many other cases we have brought over the last few years, are available at the Antitrust
Division's web site, www.usdoj.gov/atr.
3 By
"cross-licensing," I mean the interchange of intellectual property rights between two or more
persons. By "patent pool," I mean the aggregation of intellectual property rights which are the
subject of cross-licensing, whether they are transferred directly by patentee to licensee or through
some medium, such as a joint venture, set up specifically to administer the patent pool. I hope
my use of these terms comports reasonably well with your own; I take some comfort in knowing
that the Supreme Court has stated that "patent pool" is not a term of art. United States v.
Line Materials, 333 U.S. 287, 313 n.24 (1948).
4
Our Intellectual Property Guidelines give several examples of intellectual property
licensing's procompetitive benefits. Antitrust Guidelines for the Licensing of Intellectual
Property ("IP Guidelines"), ? 2.3 (1995).
5 Only a very
few licenses are likely to fall prey to Section 1's per se rule, which automatically
condemns the most egregiously anticompetitive agreements. IP Guidelines, ? 3.4.
6
Manufacturers Aircraft Association -- Antitrust Laws, 31 Op. Atty. Gen. 166 (1917).
7 Id.
at 167.
8 Id.
The Wright company was demanding $1000 per plane, George Bittlingmayer, Property
Rights, Progress, and the Aircraft Patent Agreement, 31 J. L. & Econ. 227, 232 (1988),
which then amounted to five percent of airplanes' $20,000 average cost, Harry T. Dykman,
Patent Licensing Within the Manufacturer's Aircraft Association (MAA), 46 J. Pat. Off.
Soc'y 646, 649 (1964).
9 Dykman at
647.
10
Id. Dykman characterizes the aircraft manufacturers and patentees as classic rugged
individualists who were damned if they would readily give their competitors access to their
inventions "under anything like a reasonable basis." Id. Of course, this tends to suggest
that, if they were each that determined to go it alone, they either were not blocked by, say, the
Wright patent, or they were deluding themselves. In any case, it appears that the specter of
eminent domain helped bring them all to the table. See Bittlingmayer at 232.
11 31 Op.
Atty. Gen. at 167.
12
Id. at 168. Among them were some very basic patents indeed, such as "Method of
Getting a Hydroairplane Off the Water Into the Air," and "Heavier Than Air Flying Machines."
Dykman at 648-49.
13 Evidently
the award of a government contract was deemed a satisfactory indicator of responsibility.
14 31 Op.
Atty. Gen. at 171.
15 Of
course, 100 would seem like an absurdly high number for today's aircraft industry, but that's
another speech.
16
Id. at 168-69.
17 Dykman
at 650. The following year, the Secretary of the Navy, armed again with the threat of eminent
domain, jawboned the per-unit royalty down to $100, although the $2 million ceilings remained
in place. Id. at 655; see also Manufacturers Aircraft Association v. United
States, 77 Ct. Cl. 481, 490-93 (1933)(action by pool for payment of royalties on airplanes
made for U.S. government by non-members of pool).
18 31 Op.
Atty. Gen. at 169.
19
Id. at 169.
20
Id. at 169, 170.
21 Dykman
at 650.
22 The
Secretary may have been acting under duress, since the pool's formation had provoked an uproar
about an "aircraft trust." Bittlingmayer at 235 n.30. Today, if you were to ask us for a business
review letter on conduct your client had embarked on five months earlier, you'd be out of luck.
See Antitrust Division Business Review Procedure, 28 C.F.R. ?50.6, ? 2.
23 31
Op. Atty. Gen. at 170-71.
24 This
was the point of our suit against Pilkington PLC, which employed a web of exclusive licenses on
its expired patents and commonly known know-how to maintain an international cartel in the
manufacture of float glass. See United States v. Pilkington plc, n.2, supra.
25
While the Attorney General had to take validity on faith, soon after, the Bureau of Aircraft
Production submitted the question to a panel of patent experts, who confirmed both validity and
the bargain the $200 royalty represented. See Manufacturers Aircraft Association v. United
States, 77 Ct. Cl. at 489-90. Because the pool provided that Wright-Martin's and Curtiss'
royalties would terminate upon the expiration of their patents, the Attorney General did not have
to consider the implications of any mechanism to provide post-expiration income to the
patentees. It is not clear from the Attorney General's opinion whether the two firms' role in the
pool's governance was to expire with their patents.
26 31
Op. Atty. Gen. at 167. Absent government arm-twisting, one might not expect every such pool
to lead to such dramatically reduced aggregate royalties. But any combination of complementary
intellectual property rights brings with it the potential for genuine savings in transaction costs
and provides a forum for owners of blocking complementary patents to reach a royalty agreement
that will make access to their technologies feasible.
27 All
that was judicially determined was that Wright had Curtiss over a barrel. Wright sued Curtiss in
1909, contending that Curtiss' use of wing flaps (suggested by Alexander Graham Bell) infringed
the basic Wright patent. Bittlingmayer at 231. Although Wright won, Curtiss altered its
invention, reopening the dispute, which was still underway at the time of the pool's formation.
Id. At a minimum, the Curtiss invention seems to be a valuable improvement on
Wright's.
28
Admittedly, they would save the cost and inconvenience of negotiating a competitive
royalty.
29
Id. at 171. This conclusion, which focuses on the pool's cross-license, seems to depend
upon the representation made to the Attorney General that the by-laws' limitation of membership
to 100 was more than adequate to accommodate the likely interest in membership. Id.
However, the Attorney General stated, that limitation "may prove objectionable" if the industry
expanded. Id.
30 IP
Guidelines, ? 5.3.
31
Id. at 170.
32 See
United States v. Microsoft, n.2, supra.
33
The Attorney General would have found Section 3.2.3 especially helpful.
34
Id. at 170. This was essentially the very same issue that fueled our 1994 inquiry into
the intellectual property policy of the European Telecommunications Standards Institute, which
raised the specter of a technology buyers' cartel. Because ETSI changed its policy, we chose not
to pursue the matter further.
35
Id.
36
The answer to this question could be very important if the new technology were itself a rival of
the basic pool technology or could be used in combination with such a rival.
37 That
our own analysis today of the pool at its outset would be very much along the lines of the
Attorney General's doesn't mean that our stance towards conduct we assess in a business review
might not change over time if the facts or circumstances change, or antitrust analysis evolves. In
fact, while the aircraft pool got a clean bill of health from us in 1917, it was the subject of several
antitrust investigations, and ultimately was ended by a consent decree we obtained after suing in
1972 to break it up, on the ground that it had, in fact, retarded innovation. See United States
v. Manufacturers Aircraft Assn., 1976-1 Trade Cas. (CCH) ? 60,810 (S.D.N.Y. 1975). This
suit has been the subject of thought-provoking commentary. See, e.g.,
Bittlingmayer at 235-40. The moral of this story is that not even a business review is forever,
and that, to be responsible enforcers of the antitrust laws, we have to reserve the right to review
the effects of old practices as times change, especially if things pan out differently from how they
were originally presented to us.
38 See
15 U.S.C. ? 18A.
39 See
Premerger Notification Practice Manual, 1991 ed., American Bar Assn., Section of
Antitrust Law, Interpretation 49 at 45.
40
Id.
41 Bayer
had undertaken extensive preparations to enter the U.S. market with a patented new insecticide,
which was likely to provide potent competition to S.C. Johnson & Sons, the incumbent market
leader. At the last minute, though, Bayer instead licensed the product to Johnson. Because we
concluded that the license would be the only one Bayer would grant in the U.S., it deprived US
consumers of a likely entrant in the insecticides market -- Bayer itself -- without any
countervailing benefits. The consent decree we obtained enjoined the license. See United
States v. S.C. Johnson & Sons, n.2, supra.
42
See, e.g., id., Interpretation 116 at 95.
43 See
United States v. Singer Mfg. Co., 374 U.S. 174 (1963). There, the defendant and a
Swiss competitor settled an interference, scuttling evidence that cast doubt on the validity of the
Swiss firm's patent, as part of a larger set of understandings that allowed them to focus their
energies on excluding Japanese competition. See id., 374 U.S. at 197-99 (White, J.,
concurring).
44
United States v. FMC Corp., 514 F. Supp. 1166 (E.D. Pa. 1981), reversed,
717 F.2d 775 (3d Cir. 1983).
45
717 F.2d at 787.
46 15
U.S.C. ? 1313(c)(3).
47
717 F.2d at 787.
48 S.
1358, 99th Cong., 1st Sess. (1985).
49 799
F.2d 1219 (8th Cir. 1986), cert. denied, 479 U.S. 1070 (1987).
50
See United States v. The Thomson Corp. & West Publishing Co., Civ. Action No.
96-1415 (PLF) (D.D.C., consent decree entered March 7, 1997) (resolving competitive concerns
raised by West's acquisition by The Thomson Corporation).
51 Feist
Publications, Inc. v. Rural Telephone Service Co., 499 U.S. 340, 349 (1990).
52 See n.1, supra. Our brief in Oasis, which is largely the same as the one we filed in Bender, is available at our web site. See n.2, supra.