IP and Antitrust

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    2006 Foley & Lardner LLP

    When Can Intellectual PropertyProtection Create AntitrustProblems?

    Hosted By:Carole E. Handler, Foley & Lardner LLPG. Michael Halfenger, Foley & Lardner LLP

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    The foundation of today's technologyrevolution is intellectual property.When does its exploitation conflictwith the antitrust laws that protect

    free competition?

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    Opposed or Harmonious Ideas

    The test of a first-rate intelligence is theability to hold two opposed ideas in the mindat the same time and still retain the ability to

    function.F. Scott Fitzgerald, The Crack-Up , p. 69

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    Historic Views Have Changed1970s the Nine No-Nos1995 DOJ/FTC jointly issued Guidelines for the Licensing of Intellectual Property , 4 TradeReg. Rep. (CCH) 13, 132, emphasizing pro-competitive nature of licensing.

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    Common Objectives

    The intellectual property laws and antitrustlaws share the common purpose ofpromoting innovation and enhancingconsumer welfare. The intellectual property

    laws provide incentives for innovation . . .

    DOJ/FTC 1995 Antitrust Guidelines For TheLicensing of Intellectual Property (IP Guidelines

    at Section 1)

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    5

    I. Antitrust Principles

    Both legal systems embody significant

    cultural values from the 18 th Century (Lockeand Newton).Antitrust is the economic equivalent of the

    First Amendment; clash of ideas promotestruth, clash of competing economic actorspromotes consumer welfare.

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    AntitrustPromotion of competition and absence ofmonopoly has been seen as an idea opposed toconstitutionally-based intellectual propertyownership.Antitrust laws guard against marketplace

    restraints; there should be no artificialimpediments to free flow of economic forces.Unfettered competition is a significant, quasi-constitutional cultural value.Enhances consumer welfare.Abuses of market power impede competition.Horizontal restraints impede competition.

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    Fundamental ProhibitionsSection 1, Sherman Act; no contract,combination, or conspiracy consumerchoices and market forces will enhanceconsumer welfare. [Horizontal agreements, boycotts, tying,

    price fixing] [Rule of reason or per se illegality]

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    Fundamental ProhibitionsSection 2, Sherman Act; no attempts to

    monopolize or to maintain monopoly;bigness is bad, concentrations of economicpower must be broken up, size matters.

    Monopoly or market power is an evil. Particularly feared in entertainment

    mergers with a First Amendment context.

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    Abuse of Market Power Is Key

    Market power the ability to unilaterally

    and profitably raise prices or restrict output.Exercise of market power distorts thecompetitive process and affects efficiency.

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    Does Antitrust Remain Relevant?

    Can and should laws designed to manage

    the emergence of industrial and naturalresource monopolies in the late 19th andearly 20th Centuries be applied to the

    technology and intellectual property giants ofthe 21st Century?The Remedy for Microsoft , N.Y. Times,

    Apr. 28, 2000 at A22.

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    The issue is whether we accept the corevalues implicit in antitrust principles. Noone says that the First Amendment, older

    than the Sherman Act, should not apply tostate regulation of media because theinternet, Google and cable television, not

    Federalist pamphlets, are involved.

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    II. Intellectual Property Principles

    The patent and copyright laws allow theholders of rights to exclude others fromusing, selling, copying, making, ordistributing protected items for alimited period legal monopolies.

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    When does exploitation or lack thereof of

    intellectual property impede competition?Must intellectual property receive specialincentives to promote innovation, bring new

    goods to market?Should a different (more or less stringent)standard apply to application of antitrust

    principles to creative products than towidgets (media versus copiers)?

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    U.S. Constitution, Article III, Sec. 8,

    cl. 8; Congress has the power to promotethe Progress of Science and useful Arts, bysecuring for limited Times to Authors and

    Inventors the exclusive Right to theirrespective Writings and Discoveries.

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    How Do We Balance IP Protection WithTechnological Change?

    From its beginning, the law of copyright hasdeveloped in response to significant changesin technology.

    Sony Corp. of America v. Universal City Studios, Inc. , 464 U.S. 417, 430 (1984)

    Copyright was technologys child from thestart.

    Paul Goldstein, Copyrights Highway; FromGutenberg to the Celestial Jukebox (1994)

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    The Independent Ink DecisionTying" of an unwanted product to a patent orcopyright has often been before the Supreme Court(Paramount Pictures, U.S. v. Loews, Inc.)Until Independent Ink , market power sufficient tocoerce such purchases was presumed if the tying

    product was a patent or copyright; the SupremeCourt struck the presumption for patents.Will the decision apply to copyrights? And, otherthan eliminating the presumption, does it changethe antitrust IP balance in tying cases?

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    Slide Title

    Do you think the Independent Ink decision willchange your practice in any way?

    Yes

    No

    Live Meeting Poll

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    Slide Title

    If you are a defendant, will it make it easier todefeat tying claims when the tying product is apatent or a copyright?

    YesNo

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    III. Summary of IssuesA. Can the mere exercise of the constitutional IP grant

    violate the antitrust laws?

    B. Should special antitrust rules apply tomonopolists?

    C. When is intellectual property ownership ajustification for conduct that would otherwiseviolate the antitrust laws?

    D. Should patent litigation settlements requiregovernment (DOJ, FTC) approval, and if so, when?

    E. When should formulation of standards in high-techindustries be free of antitrust scrutiny?

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    Under copyright law, a copyright owner has

    the capacity arbitrarily to refuse to licenseone who seeks to exploit the work. Stewart v. Abend (Rear Window case), 495 U.S.

    207, 228-229 (1990). Indeed, nothing inthe copyright statutes would prevent anauthor from hoarding all of his works duringthe term of the copyright. Id.

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    But, Microsofts primary copyrightargument borders upon the frivolous. The

    company claims an absolute andunfettered right to use its intellectualproperty as it wishes . . . . That is no

    more correct than the proposition that theuse of ones personal property, such as abaseball bat, cannot give rise to tort

    liability. U.S. v. Microsoft , 253 F.3d 34,68 (D.C. Cir. 2001).

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    Must an IP Holder License to Others?

    1. Generally there is no duty to license; see1995 Licensing Guidelines, 52.2; SCM Corp.v. Xerox Corp. ; 35 U.S.C. 271 (d)(4); but seeImage Tech. (Kodak) .

    2. Data General Corp v. Grumman Sys. Support Corp. , 36 F.3d 1147 (1st Cir. 1994); DataGenerals refusal to license its copyrightedsoftware was not a violation of the antitrustlaws. Case establishes a rebuttablepresumption that a copyright ownersrefusal to license is reasonable.

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    Must an IP Holder License to Others?3. Rationale; compelling a license would chill

    innovation and defeat the essential grant.Disfavored strongly by this administration.

    4. Remedy used sparingly, primarily limited tomerger cases as an alternative todivestiture. See U.S. v. Microsoft.

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    The European Experience ContrastsRadio Telefis Eireann v. Commission ,1 (EC. (CCH) 400) 1995 (Magill Case).Information protected by copyright, butindispensible to ability to compete in adownstream market, had to be licensed.Magill has been widely read as establishingan essential facility doctrine that couldrequire compulsory licensing of intellectual

    property rights to competitors.

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    B. Is the IP Right Constrained WhereThere Is Monopoly Power ?

    Where a party maintains substantial marketpower, his activities are examined through aspecial lens. Eastman Kodak, Inc. v. Image

    Technical Services, Inc. , 504 U.S. 451, 448(1992) (Scalia, J., dissenting); Aspen SkiingCo. v. Aspen Highlands Skiing Co. , 472 U.S.585 (1985) (monopolist may haveaffirmative duties).

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    Three Basics TestsThree basic tests are applied to constrain

    monopoly power in IP cases;1. Changes in the pattern of dealing (may

    not pull the rug out from an enterprise

    preventing it from flourishing ( AspenHighlands ).2. The essential facilities doctrine (e.g., is

    Microsofts OS an essential facility)?3. Monopoly leveraging cannot use power

    in one market to monopolize the second.

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    Under Aspen Highlands , a party with market powerwho changes business practices must show alegitimate business purpose)

    In Kodak , reasons for terminating sale and licensingof copyrighted and patented materials to ISOswere found not to be sufficient; on remand, NinthCir. found intellectual property justificationpretextual, masking an anticompetitive intent.Image Technical Services v. Eastman Kodak Co. , 125F.3d 1195 (9th Cir. 1997), cert. denied , 523 U.S.1094 (1998).However, judges are deferential to product

    innovation and design changes. Microsoft. Toviolate antitrust law, changes must harm thecompetitive process, not competitors. If thedefendant proves a justification, burden shifts toplaintiff to show anticompetitive impact.

    1. Aspen Highlands

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    2. Essential Facilities DoctrineOne firm with an essential facility denies a secondfirm access to something essential to competition,cutting off competition in downstream market.Alaska Airlines, Inc. v. United Airlines, Inc. , 948 F.2d536, 542 (9th Cir. 1991). An alternative must not befeasible.In Intergraph Corp. v. Intel Corp. , 3 F.Supp. 2d 1255(N.D. Ala. 1998) Court found Intel had monopolypower over microprosessors; Intels refusal to supplyIntergraph violated Section 2 of the Sherman Act.Reversed, because parties did not compete in thesame market (195 F.3d 1346 (Fed. Cir. 1999)).Verizon Communications, Inc. v. Trinko, LLP , 540 U.S.398, 410 (2004); Supreme Court has neverendorsed this doctrine.

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    3. Monopoly Leveraging

    (use of monopoly power obtained in one market toachieve market power in another market)Otter Tail Power Co. v. United States , 410 U.S. 366(1973); power company illegally leveraged itsmonopoly in upstream, wholesale market intodownstream, retail market.Berkey Photo Inc., v. Eastman Kodak Co. , 603 F.2d263, 275 (2d Cir. 1979), cert. denied , 444 U.S. 1093(1980); theory applied when monopolist merelysought a competitive edge, not a monopoly, in thesecond market.Overruled by Trinko ; to apply leveraging doctrine,there must be a dangerous probability of successfulmonopolization in second market.

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    EU Law is diverging from U.S. law; EC

    concluded that Microsoft abused its marketpower by restricting interoperability betweenWindows PCs and non-Microsoft work

    groups, and by tying its windows mediaplayer (WMP), with its OS. This leveragedits strong OS position into a competitiveposition for MPs. Required to remove codeto eliminate leveraging (controversial).

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    Slide Title

    Do you deal with licensing restrictions in your

    practice?

    Yes

    No

    Live Meeting Poll

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    Slide Title

    Have you encountered unilateral refusals to

    license?

    Yes

    No

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    C. When Is IP Ownership a Complete

    Justification for Conduct That WouldOtherwise Violate the Antitrust Laws?

    Two Paradigm U.S. Cases;

    Xerox and Image Tech (Kodak) find oppositesolutions to the restriction on competitioncreated by intellectual property andantitrusts prohibition of restraints on

    competition and refusals to license.

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    Image Technical Services v. Eastman Kodak Co.

    In Image Technical Services v. Eastman Kodak Co. ,

    125 F.3d 1195 (9th Cir. 1997), cert. denied , 523U.S. 1094 (1998), antitrust principles trumpedIP rights.There, the 9 th Circuit upheld a judgment fortreble damages resulting from Kodaks refusalto sell patented parts and provide copyrightedmanuals to ISOs. The case did not involve a

    refusal to license a patent. The Ninth Circuitfound Kodak was using its monopoly power overparts and equipment to exclude competition inthe service aftermarket.

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    The case had previously been before the SupremeCourt in Eastman Kodak Co. v. Image TechnicalServices, Inc. , 504 U.S. 451 (1992). The SupremeCourt held that Kodaks policy could be an illegal tie-in as well as monopolization of the parts market,and remanded for trial of those issues.On remand, Kodak argued that its parts andsoftware enjoyed patent and copyright protection.The court found Kodaks IP defense to be pretextual,

    masking anticompetitive intent and disallowed it.Court recognized Data Generals rebuttablepresumption.

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    This Case Went Beyond PreviouslyAccepted Principles

    Previously accepted principles:1. Extension of monopoly power into a second marketis illegal (tying);2. Commission of other antitrust violations (price fixing

    on resale, other horizontal agreements) is illegal;

    and3. One cannot enforce meritless intellectual propertyrights; BUT

    4. Mere refusal to license does not create liability.

    The bases for decision was simply thepretextual nature of the patent-copyrightjustification

    38d d

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    38Independent Service Organizations

    Antitrust Litigation ( Xerox )By contrast, Xerox, 203 F.3d 1322 (Fed. Cir. 2000),cert. denied , 121 S. Ct. 1077 (2002), strikes thebalance in favor of intellectual property exploitation.In Xerox, ISOs who serviced high speed copiersclaimed that Xeroxs refusal to sell them diagnostic

    software and replacement parts was an antitrustviolation because it precluded them from competingwith Xerox in the service aftermarket. Xeroxterminated a pre-existing market. The FederalCircuit, concluding that here, the exploitation of themonopoly right granted by Congress was fair,refused even to consider that the purpose of Xeroxsactions was anticompetitive or pulling the rug out.

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    The Meaning of Kodak (Governs9th Circuit)

    The mere exercise of the exclusive right to refuse tolicense or sell a patented invention or copyrightedmaterial may give rise to antitrust liability if thesubject intent of the intellectual property owner isanticompetitive, and the claim is a pretextualbusiness justification. (This circuit previouseschewed subjective intent in Professional RealEstate Investors .)Antitrust liability may accrue in the 9th Circuit fordoing exactly what the patent and copyright lawspermit.

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    The Meaning of Xerox A patentee or copyright owner may refuse to

    license unless very limited exceptions apply;intellectual property rights are virtuallyunfettered. Courts should not inquire intosubjective intent, even if the result isanticompetitive and/or a prior businessrelationship has been terminated.

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    Recent cases after Kodak and Xerox have notfollowed Kodak . Goldfine and Vorrasi, The Fall of theKodak Aftermarket Doctrine; Dying a Slow death in theLower Courts , 72 Antitrust L.J. 209 (2004).But doctrine may reemerge in context ofentertainment industry prosecutions of on-linecopyright violations, if it deems copyright owners tobe wrongfully extending their copyright claims intoother areas. See DSC Communications Corp. v. DGITechs, Inc. , 81 F.3d 597 (5th Cir. 1996) (refusal tolicense use of copyrighted system was an attempt toextend copyrighted software protection touncopyrighted materials); A&M Records, Inc. v.Napster, Inc. , 239 F.3d 1004, 1026 n.8 (9th Cir.2001) (a unilateral refusal to license a copyrightmay constitute wrongful exclusionary conductsubject to the Kodak presumption).

    Live Meeting Poll

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    Slide Title

    Should the government be able to screen patent

    settlements to see if they are impedingcompetition?

    YesNo

    Live Meeting Poll

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    D. When Should Patent LitigationSettlements Require Government Approval?

    Settlement of Intellectual Property Litigation

    Implicates Three Sets of PoliciesAntitrust concerns; Protect competition and enhance consumer

    welfarePatent concerns; Protect intellectual property and encourage

    innovationValue of settlement Dispose of litigation that impedes competition

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    The IP Grant Complements Antitrust

    Principles

    Competition among technologies patentand copyright-based is deemed critical toconsumer welfare. Innovation is to beencouraged

    Intellectual property grant is not unlimited;does not protect fraudulent procurement, orimmunize sham litigation, or, in the Ninth

    Circuit, mask anticompetitive intent ( Kodak )

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    The Right to Exclude Is Implicitin the Grant

    An intellectual property holder may excludeothers within scope of the patent orcopyrightThe intellectual property holder is notobligated to license or exploit her grantLitigation often tests validity of patent

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    Settlement ConcernsPublic policy favors resolution of cases by

    settlementCross-licensing and patent pools are oftenused in settlement of patent disputes;

    normally competitively neutral or pro-competitive

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    R l f R A l i A li d

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    Rule of Reason Analysis Applied to

    Patent Settlements: Questions to be AskedWhat is the relationship of the intellectualproperty rights combined -- competitive orcomplementary?What is the nature of the markets in which thoserights compete? concentrated, diverse, fewplayers, innovative, stagnant?Does the license or pool control access to rights?Is pool open to outsiders?Does pool govern what happens to futureinnovations?

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    Other Critical Concerns in Evaluating

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    Other Critical Concerns in Evaluating

    AgreementsThreshold issue is market power of the parties

    as a result of settlement.Are the patents valid? Restraints inconjunction with illusory, fraudulent, or invalid

    rights would be anticompetitive.Without the license, would there be a bi- or tri-lateral monopoly problem? Are costs toconsumers being lowered?Are benefits available to competitors? (If not,possible boycott.)

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    Example: Agreement Stricken

    FTC Enforcement Action in Laser SurgeryArea (Complaint, In re Summit Technology,Inc. and VISX, Inc. ; Dkt No. 9286)

    Summit and VISX only two firms with FDA approval tomarket equipment.

    Both licensed to shell entity which licensed exclusively backto them (restricting access by others). Both licensed eye doctors; doctors paid shell entity $250

    per procedure, effectively setting a price for consumers aswell as doctors. Ultimately settled by consent order.

    Anticompetitive effects; closed the market and fixedconsumer pricing. No redeeming pro-competitive virtues.

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    Pharmaceuticals

    Settlement agreements between brand nameinnovators and potential followers,

    manufacturers of generic drugs The antitrust agencies have aggressively

    monitored the industry in the name of

    protecting consumers from risinghealthcare costs.

    Consumers, advocacy groups, third-party

    payors of health benefits, and others havealso brought class actions.

    53Pharmaceutical Settlements are Closely

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    Pharmaceutical Settlements are Closely

    Scrutinized Due to the Nature of theIndustry

    Critical market increasing in concentrationMultiple mergers 100 companies control96% of U.S. market (Glaxo-SmithKlinebudget is greater than the National CancerInstitute budget)Particular scrutiny because of importance toconsumers

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    Hatch-Waxman Act OverviewAbbreviated New Drug Application Proposed generic is bioequivalent of approved

    drug If certifies brand name patents invalid or not

    infringed, FDA may approve before patent expires

    First to file gets 180-day period of exclusivityfrom when it starts marketing its generic or winspatent infringement suit

    If pioneer manufacturer sues within 45 days,

    there is a 30-month stay of FDA approvalCertain settlements must now be filed with DOJ/FTC

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    Does Settlement Cause Anticompetitive

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    p

    Harm?Reverse Payments Litigation Patent holder settles by paying potential generic

    entrant, which agrees to stay out of market OR Patent holder settles by paying potential entrant,which agrees to stay out of the market and getsother IP rights from patent holder

    Patent holder settles by paying litigation costs itwould have incurred, potential entrant agrees tostay out

    Are other potential entrants affected?

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    What Is the Proper Antitrust Analysis?

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    p y

    (cont.)Other courts: Rule of Reason? Have to show patents scope exceeded?

    Relitigate the patent case?Presume valid?Presume bona fide case of infringement?

    Size of the settlement payment matter? Market power?Particular drug?

    Substitute compounds or methods matter?

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    What Is the Proper Antitrust Analysis?

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    p y

    (cont.)Second Circuit: Settlement after court foundunderlying patent invalid, but while case was onappeal. Reverse payment to stay out of market. Settlement permissible if: (1) does not extend the monopoly

    beyond the patents scope; (2) patent not obtained byfraud; and (3) underlying litigation not a sham or objectivelybaseless

    So long as the patent litigation is neither a sham norotherwise baseless, the patent holder is seeking toprotect that to which it is presumably entitled, a lawfulmonopoly over the manufacture and distribution of thepatented product.

    In re Tamoxifen Citrate Antitrust Lit. , 429 F.3d 370,392 (2d Cir. 2005)

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    What Is the Proper Antitrust Analysis?

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    y

    (cont.)Eleventh Circuit: FTC held that reversepayments to stay out of market and acquireother IP rights anticompetitive. Determine whether settlement is permissible by

    examining: (1) the scope of the exclusionary

    potential of the patent; (2) the extent to which theagreements exceed that scope; and (3) theresulting anticompetitive effect.

    If the agreements exclusionary effect was within

    the scope of the patent, then not illegal. Schering-Plough Corp. v. FTC, 402 F.3d 1056,1066 (11th Cir. 2005), cert. pending .

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    Impact of Recent DecisionsSettlements violate per se antitrust rules ifthey

    Restrict non-infringing goods Prevent other parties from entering the market

    Perpetuate litigation simply to limit

    marketplaceManipulate other laws (e.g., Hatch-Waxman180-day generic exclusivity period)

    Otherwise, Rule of Reason applies

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    Policy IssuesHow desirable is government oversight ofsettlements?Which policy should prevail antitrustoversight or encouraging settlement, even ifsettlement has anticompetitive aspects?Should there be settlement immunity?Should there be a Noerr-Pennington screen?

    Should a reporting device be instituted(e.g., a Hart-Scott-Rodino type screening)?

    Live Meeting Poll

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    Slide Title

    Do you have clients who participate in standard

    setting groups?

    YesNo

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    Slide Title

    Have you instituted antitrust protections for those

    clients?

    YesNo

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    E. StandardsImportant in network industries where

    interoperability and systems compatibilityare critical (low-tech; Beta/VHS).Two kinds of standards; de facto market

    leadership or collective standards byindustry competitors; both raise antitrusthigh-tech.

    Important in information industries, DVDs.

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    Standards are the Central NervousSystem of the 21 st Century Economy

    The more consumers are connected to a network,the more it increases in value.Information is our most valuable commodity theeconomics of networks applies to informationservices.The value of high-tech digital products increasesas more consumers use them.

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    Network Market Power Is Easy to

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    Network Market Power Is Easy toAccumulate

    The market is susceptible to tipping, withconsumers gravitating to a winner.Many network markets end up dominated by

    a single firm or a group of firms with jointstandards.

    67Traditional Antitrust JurisprudenceO A ti iti I l d I

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    Opposes Activities Involved InStandard Setting

    The traditional rules; Competitors should not collaborate. Single firm dominance is disfavored. But, for true interoperability, standards

    are essential.

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    But standard setting is not immune from

    antitrust. Ownership or control of standardscan facilitate market power, whetherunilateral or shared by competitors.

    Facilitating interoperability must becompatible with competition and avoiding

    market power abuses.

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    Standard Setting Can Be

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    gPro-Competitive By

    Increasing price competitionIncreasing compatibility and interoperabilityEnhancing use of a particular technology

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    Standard Setting Can Be

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    Standard Setting Can BeAnti -Competitive By

    Entrenching an inferior standardThwarting innovationProviding a forum for collusion

    One competitor may manipulate the process

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    Collective Standard Setting

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    Collective Standard SettingThe courts emphasize fairness of the process; if asingle company can capture the process toachieve its goals, the process is anticompetitive.Allied Tube & Conduit Corp. v. Indian Head, 486 U.S.92 (1988).

    General Rules: Standards should not overreach Standards should not restrict the product more than

    necessary

    Standards must not stifle innovation Standards must apply evenly to members and non-members

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    Unilateral Standard Setting

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    Unilateral Standard SettingA dominant firm can set a de facto standardwhich gives dominance to a single technology

    (Microsoft in the operating systems market). De facto standards that result from marketchoices in a competitive environment wouldreflect consumer choice, serve competition.In practice, de facto standards may result fromtipping, or the ownership of intellectualproperty rights, leveraging, or predatory pricing-- in short, from anti-competitive acts.

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    Problems In Standard Setting

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    Who participates? If someone is excluded, can thatgroup claim a boycott?Will a single group with a strong veto strangleinnovation?Is an organization over-inclusive?Are competing standard setting groups preferable?Leveraging may affect competition in complimentarymarkets.Bundling monopoly product to next generation

    product decreases competition and innovation.Belated assertion or intellectual property rights in astandard.

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    Standard Setting And Market Power

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    Addamax v. Open Software Foundation ,Inc., 888F.Supp. 274 (D. Mass. 1995)

    OSF, a joint venture of computer manufacturers, wasformed to establish an operating system to competewith an AT&T/Sun Microsystems product.Addamax sued because of OSFs standard settingrole; OSFs choice of technology amounts to anunqualified endorsement of the technology by sevenor eight giants of the industry. Id. at 184.Standard setting by information industry consortiamay be subject to more intense scrutiny thanunilateral action that creates a de facto standard;judges may react to a field they do not know.

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    What Can Network Industry

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    Participants Do?Adhere to procedures of standard settingorganization.There should be a reasonable basis forstandards.

    Avoid capture, or Addamax -- like rhetoricabout beating the competition.Judicious -- that is, restrained -- enforcementof intellectual property rights in standards isimportant.Standards should be inclusive.

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    Thank You For Attending

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    Thank You For Attending

    Please contact the Web Conference Co-Hosts if youhave any additional questions

    A copy of the slides and a recording of thepresentation will be made available at the event sitewww.foley.com/iplitwebconference .

    Carole E. [email protected](310) 975-7860

    G. Michael [email protected](414) 332-7304