1. Constantine & Partners 1 Constantine Cannon 1 C C 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

2. Constantine & Partners 2 Constantine Cannon 2 C C Role of Antitrust Protect consumer welfare Reflects policy that competition benefits consumers by ensuring: –Lower prices –Increased output –Incentive to innovate

3. Constantine & Partners 3 Constantine Cannon 3 C C Key Antitrust Statutes Sherman Act Section 1 Sherman Act Section 2 Clayton Act Section 7 FTC Act Section 5

4. Constantine & Partners 4 Constantine Cannon 4 C C 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.

5. Constantine & Partners 5 Constantine Cannon 5 C C Sherman Act § 1 Conspiracy to restrain trade –Requires concerted action involving at least two actors E.g., patent pools, licensing arrangements

6. Constantine & Partners 6 Constantine Cannon 6 C C 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

7. Constantine & Partners 7 Constantine Cannon 7 C C 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).

8. Constantine & Partners 8 Constantine Cannon 8 C C 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

9. Constantine & Partners 9 Constantine Cannon 9 C C Sherman Act § 2 Monopolization claims Concerns unilateral single firm conduct

10. Constantine & Partners 10 Constantine & Partners Constantine Cannon 10 C C 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.

11. Constantine & Partners 11 Constantine & Partners Constantine Cannon 11 C C 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

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

13. Constantine & Partners 13 Constantine & Partners Constantine Cannon 13 C C 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.

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

15. Constantine & Partners 15 Constantine & Partners Constantine Cannon 15 C C 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

16. Constantine & Partners 16 Constantine & Partners Constantine Cannon 16 C C 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

17. Constantine & Partners 17 Constantine & Partners Constantine Cannon 17 C C 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

18. Constantine & Partners 18 Constantine & Partners Constantine Cannon 18 C C 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 Sherman Act § 2

19. Constantine & Partners 19 Constantine & Partners Constantine Cannon 19 C C 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

20. Constantine & Partners 20 Constantine & Partners Constantine Cannon 20 C C 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? Sherman Act § 2--Patent Acquisition

21. Constantine & Partners 21 Constantine & Partners Constantine Cannon 21 C C 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

22. Constantine & Partners 22 Constantine & Partners Constantine Cannon 22 C C 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

23. Constantine & Partners 23 Constantine & Partners Constantine Cannon 23 C C 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

24. Constantine & Partners 24 Constantine & Partners Constantine Cannon 24 C C 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 Sherman Act § 2: Enforcing IP Rights

25. Constantine & Partners 25 Constantine & Partners Constantine Cannon 25 C C 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 Sherman Act § 2: Enforcing IP Rights

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

27. Constantine & Partners 27 Constantine & Partners Constantine Cannon 27 C C Recent Case Law & Enforcement Activity –Image Technical (9th 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 Sherman Act § 2: Refusals to Deal

28. Constantine & Partners 28 Constantine & Partners Constantine Cannon 28 C C 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 Sherman Act § 1

29. Constantine & Partners 29 Constantine & Partners Constantine Cannon 29 C C 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 Sherman Act § 1

30. Constantine & Partners 30 Constantine & Partners Constantine Cannon 30 C C 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)

31. Constantine & Partners 31 Constantine & Partners Constantine Cannon 31 C C 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

32. Constantine & Partners 32 Constantine & Partners Constantine Cannon 32 C C 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

33. Constantine & Partners 33 Constantine & Partners Constantine Cannon 33 C C 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

34. Constantine & Partners 34 Constantine & Partners Constantine Cannon 34 C C 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

35. Constantine & Partners 35 Constantine & Partners Constantine Cannon 35 C C 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

36. Constantine & Partners 36 Constantine & Partners Constantine Cannon 36 C C 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

37. Constantine & Partners 37 Constantine & Partners Constantine Cannon 37 C C 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

38. Constantine & Partners 38 Constantine & Partners Constantine Cannon 38 C C 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

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

40. Constantine & Partners 40 Constantine & Partners Constantine Cannon 40 C C 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

41. Constantine & Partners 41 Constantine & Partners Constantine Cannon 41 C C 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