1. Intellectual Property and Antitrust Antitrust Basics Lesson III: Intellectual Property November 8, 2006 Sean P. Gates Federal Trade Commission

2. Disclaimer The views expressed here are mine alone and do not necessarily reflect the views of the Federal Trade Commission, any Commissioner, or other FTC staff. The views expressed here are mine alone and do not necessarily reflect the views of the Federal Trade Commission, any Commissioner, or other FTC staff.

3. Overview Introduction Introduction Basic assumptions Basic assumptions Analytical Framework Analytical Framework Open Issues Open Issues

4. Introduction Types of Intellectual Property Types of Intellectual Property Applicable Antitrust Laws Applicable Antitrust Laws

5. Types of Intellectual Property Patent: exclusive right to make, use, or sell a product or service embodying the invention Patent: exclusive right to make, use, or sell a product or service embodying the invention Copyright: exclusive right to reproduce, prepare derivative works, and distribute copyrighted material Copyright: exclusive right to reproduce, prepare derivative works, and distribute copyrighted material Trademark: exclusive right to use mark in commerce Trademark: exclusive right to use mark in commerce

6. Applicable Antitrust Laws Section 1: coordinated conduct Section 1: coordinated conduct –Licensing agreements –Patent pools Section 2: unilateral conduct Section 2: unilateral conduct –Refusals to license –Bad faith enforcement Section 7: acquisitions Section 7: acquisitions –Patent accumulation

7. Basic Assumptions Historical Views Historical Views Current US View Current US View International Views International Views

8. Historical Views IP and Antitrust are in conflict IP and Antitrust are in conflict Initial View: IP Prevails Over Antitrust Initial View: IP Prevails Over Antitrust Early View: Antitrust Must Limit IP to the Scope of the Grant Early View: Antitrust Must Limit IP to the Scope of the Grant

9. Initial View: IP “Trumps” Antitrust IP law gives “immunity” from antitrust IP law gives “immunity” from antitrust “Very object” of IP is to grant “monopoly” “Very object” of IP is to grant “monopoly” IP law therefore gave “absolute freedom” IP law therefore gave “absolute freedom”

10. Early View: Antitrust Must Limit IP Focus was on scope of IP grant Focus was on scope of IP grant Conduct inside scope was immune Conduct inside scope was immune Conduct outside scope was unlawful Conduct outside scope was unlawful

11. Current US View: 1995 IP Guidelines IP law and antitrust share common purpose: promoting innovation and enhancing consumer welfare IP law and antitrust share common purpose: promoting innovation and enhancing consumer welfare Antitrust analysis of IP like other property Antitrust analysis of IP like other property IP does not necessarily confer market power IP does not necessarily confer market power Licensing is generally procompetitive Licensing is generally procompetitive

12. International Views: Countries with Competition Laws: 1980 Source: ICN: Assessing Technical Assistance (2005)

13. Countries with Competition Laws: 2005 Source: ICN: Assessing Technical Assistance (2005)

14. International Convergence: EC Regulations (2004) Same “basic objective”: “promoting consumer welfare” Same “basic objective”: “promoting consumer welfare” IP not immune from competition law IP not immune from competition law Market power based on extent of substitutes Market power based on extent of substitutes Technology transfer agreements usually pro-competitive Technology transfer agreements usually pro-competitive

15. International Convergence: CCS Guidelines (2005) IP and competition laws both “promot[e] economic efficiency and innovation” IP and competition laws both “promot[e] economic efficiency and innovation” IP “essentially comparable” to “other property” IP “essentially comparable” to “other property” IP “does not necessarily create market power” IP “does not necessarily create market power” Licensing generally procompetitive Licensing generally procompetitive

16. Analytical Framework Key Questions Key Questions Applications Applications

17. Analytical Framework: What are the key questions? What is the competitive relationship between the parties? What is the competitive relationship between the parties? Do the parties have market power? Do the parties have market power? What is the mechanism of potential harm? What is the mechanism of potential harm? What are the procompetitive benefits? What are the procompetitive benefits?

18. What is the relationship between the parties? Horizontal v. vertical relationship Horizontal v. vertical relationship Are the parties actual or likely competitors? Are the parties actual or likely competitors? –depends on scope of IP –depends on relationship of IP

19. Do the parties have market power? Market power: the ability to profitably price above competitive level for significant period of time Market power: the ability to profitably price above competitive level for significant period of time No presumption No presumption Depends on availability of substitutes Depends on availability of substitutes Must define relevant market Must define relevant market

20. Market Power: in what relevant market? Goods market Goods market –Market for goods made using the IP and subs Technology market Technology market –Technologies and goods that are close economic substitutes Innovation market Innovation market –R&D to particular new goods or processes, and close substitutes for that R&D

21. What is the mechanism of potential harm? Limiting competition between parties Limiting competition between parties –market division –price fixing Limiting competition from others Limiting competition from others –exclusive dealing –tying –package licensing/ patent pools

22. What are the procompetitive benefits? Exclusive dealing Exclusive dealing –encourage investments and promotion Patent pools Patent pools –integrating complementary technologies –reducing transaction costs –clearing blocking positions –avoiding costly infringement litigation

23. Application: Cross-license with Territorial Market Division

24. Cross-license with Territorial Market Division Competitive relationship? Competitive relationship? –are the patents blocking? –are the patents complementary? Market power? Market power? Mechanism of potential harm? Mechanism of potential harm? –agreement not to compete What are the procompetitive benefits? What are the procompetitive benefits? –integrating complementary resources?

25. Application: Exclusive Dealing

26. Exclusive Dealing Competitive relationship? Competitive relationship? –vertical or horizontal? Market power? Market power? Mechanism of potential harm? Mechanism of potential harm? –foreclosure of competitors –foreclose licensee internal development What are the procompetitive benefits? What are the procompetitive benefits? –encourage investment or promotion

27. Open Issues Refusals to license Refusals to license Proving market power Proving market power “Reverse Payment” Settlements of IP Litigation “Reverse Payment” Settlements of IP Litigation

28. Open Issues: Refusals to License US View US View –In re ISO Antitrust Litigation (Xerox), 203 F.3d 1322 (Fed. Cir. 2000) –Image Technical Services, Inc. v. Eastman Kodak Co., 125 F.3d 1195 (9th Cir. 1997) EC view EC view –DG Comp Article 82 Discussion Paper

29. Refusals to License: Underlying Issues Relationship between IP and innovation Relationship between IP and innovation –Does strong IP foster innovation? –Will requiring licensing in certain circumstances diminish incentives? –Does the answer depend on the industry?

30. Open Issues: Proving Market Power or How do we know a patent is blocking? “[O]nly the legal force of the [patents] themselves … can exclude competitors, and patent claim interpretation is… to be decided by the courts” Minebea v. Papst, _ F. Supp. 2d _, 2006 WL 2374458 (D.D.C. Aug. 17, 2006) “[O]nly the legal force of the [patents] themselves … can exclude competitors, and patent claim interpretation is… to be decided by the courts” Minebea v. Papst, _ F. Supp. 2d _, 2006 WL 2374458 (D.D.C. Aug. 17, 2006) In re Union Oil Co. of Cal., 2004 FTC Lexis 115, 127 (2004) (market power could be established through evidence of business conduct and responses to threats and suits). In re Union Oil Co. of Cal., 2004 FTC Lexis 115, 127 (2004) (market power could be established through evidence of business conduct and responses to threats and suits).

31. Market Power Issue: Cross-license with Territorial Market Division

32. Open Issue: “Reverse Payment” Settlements of IP Litigation Judicial treatment Judicial treatment Open analytical issues Open analytical issues

33. “Reverse Payment” Cases in the Courts of Appeals Decisions from Sixth, Eleventh and Second Circuits Decisions from Sixth, Eleventh and Second Circuits Sixth Circuit: Applied per se test. Sixth Circuit: Applied per se test. –In re Cardizem CD Antitrust Litigation, 332 F.3d 896 (6th Cir. 2003)

34. “Reverse Payment” Cases in the Courts of Appeals Eleventh Circuit: Applied three-part test: Eleventh Circuit: Applied three-part test: –“potential exclusionary effect” of patent –extent the agreement exceeded scope –anticompetitive effects Valley Drug Co. v. Geneva Pharms., 403 F.3d 1056 (11th Cir. 2003) Valley Drug Co. v. Geneva Pharms., 403 F.3d 1056 (11th Cir. 2003) Schering-Plough Corp. v. FTC, 402 F.3d 1056 (11th Cir. 2005) Schering-Plough Corp. v. FTC, 402 F.3d 1056 (11th Cir. 2005) Andrx Pharms. v. Elan Corp., 421 F. 3d 1227 (11th Cir. 2005) Andrx Pharms. v. Elan Corp., 421 F. 3d 1227 (11th Cir. 2005)

35. “Reverse Payment” Cases in the Courts of Appeal Second Circuit: Generally followed logic of Eleventh Circuit. Second Circuit: Generally followed logic of Eleventh Circuit. In re Tamoxifen, _ F.3d _ (2d Cir. 2006) In re Tamoxifen, _ F.3d _ (2d Cir. 2006) –Settlement after patentee loss at district court not suspect –Reverse payment not suspicious so long as litigation not a sham –Restrictions within exclusionary scope –Agreement did not cause bottleneck

36. “Reverse Payment” Cases: District Court Kaiser Found. Health Plan v. Abbott Labs., CV 02-2443-JFW (C.D. Cal.) Kaiser Found. Health Plan v. Abbott Labs., CV 02-2443-JFW (C.D. Cal.) –Hytrin opt out –agreement deemed per se illegal –causation tried to jury would generic enter “but for” agreement would generic enter “but for” agreement –Jury verdict for defendants

37. “Reverse Payment” Cases: View of Patent Rights Probabalistic patent rights Probabalistic patent rights Commission’s Cert. Petition, FTC v. Schering-Plough: Commission’s Cert. Petition, FTC v. Schering-Plough: –“the ‘probabilistic’ nature of patents” –“As both economists and legal scholars have remarked, ‘a patent is not a right to exclude, but rather a right to try to exclude.’”

38. Conclusion Basic assumptions Basic assumptions –refined over time –international convergence Analytical Framework Analytical Framework –Key questions Open Issues Open Issues –Some key questions remain unresolved