Antitrust Pitfalls Common to Joint Development Agreements

Antitrust pitfalls common to Joint Development Agreements.

In the late 1970s, the Justice Department promulgated the famous “nine no-no’s” to be avoided as antitrust pitfalls when licensing patent rights. In that era, many of the no-no’s were per se unlawful. Even if some were scrutinized under a rule of reason, those were hard to justify. The nine no-no’s included:

1. Tying in: conditioning a license grant on purchase of unpatented items;
2. Grantbacks (grantforwards): mandating that the licensee (or licensor) exclusively or nonexclusively grant or assign improvements to the other party;
3. Restricting resale: limiting or blocking the ability of a customer to sell a patented item in the used market;
4. Restricting competitive development: limiting or blocking the ability of a licensee to deal with products or technologies outside the scope of the licensed patents.
5. Exclusive licenses: problematic if these involve extensive cross licensing, patent pooling, or unduly enhancing market power;
6. Mandatory package licenses: can enhance competition or can be a type of tying arrangement such as when multiple parties pool patents relating to industry standards;
7. Unreasonable royalty: royalty not reasonably related to sale of items covered by the licensed patents;
8. Restrictions on output of patented process: potential problem in some scenarios such as where prices are fixed or customers or territories are restricted:
9. Price fixing: mandating prices for licensed products.

Even with the passage of time, all nine no-no’s still raise anticompetitive flags and are subject to antitrust scrutiny. But, the sense that these nine practices are inherently and inexorably evil has softened to a significant degree. For example, tying used to be a per se violation of antitrust laws with no redeeming features. But now, tying is evaluated under a rule of reason.1 This creates the possibility that tying restrictions can be acceptable in some circumstances. Tying remains risky business, with very little guidance to suggest when a party can tie with impunity as being too weak in the market to have antitrust worries.

Antitrust policies on one hand, and intuition on the other, are at odds in the minds of many joint development parties. Left to intuition, many parties instinctively create joint development provisions that tie in, tie out, restrict competitive development, fix prices and supply, require onerous grantbacks and grantforwards, etc. Parties are not born knowing, but instead must learn, that certain conduct poses antitrust risk.

1 The judicial temperance is strongly evidenced by Illinois Tool Works v. Independent Ink Inc., 547 US 28 (2006), which eliminated any presumption that existence of a patent conferred market power. Prior to that case, market power in tying cases was presumed when a patent was at play. The case held that market power always must be proved.

Restricting competitive development (the fourth of the nine no-no’s) is an excellent example of the conflict between natural business instincts and antitrust policies. Parties with great regularity pen joint development provisions that restrict one or both parties from selling competitive products or from working alone or with others to develop competitive technology. The following is a typical restriction of this ilk:

During the term of this Joint Development Agreement and during the term of any JOINT PROGRAM LICENSE authorizing ACME under BOB’s BACKGROUND RIGHTS and/or BOB’s JOINT PROJECT PATENT RIGHTS to make, use, sell, offer to sell, and/or otherwise distribute RUSTPROOF WIDGETS, ACME shall not develop on its own or with others any widgets or related products that are competitive with the RUSTPROOF WIDGETS.

This clause suppresses competitive development, prohibiting one joint development party from developing competitive products or technology outside the joint development agreement. This kind of competitive suppression is risky under antitrust principles. Although not a per se antitrust violation, competitive suppression is still analyzed under the rule of reason standard. A patentee generally cannot leverage patent rights so as to unduly block the other party from developing competitive technologies and products without regard to whether or not the licensor’s patent rights are used.

The Federal Circuit recently confirmed judicial hostility to such suppression in Princo Corp. v. ITC, 96 USPQ2d 1233 (Fed. Cir. 2010).2 At issue was whether suppressing competitive technology using Patent A as leverage could be misuse as to Patent B. In other words, does questionable conduct surrounding Patent A affect the enforceability of a different Patent B? The Federal Circuit held that improper behavior relating to Patent A was not a misuse of separate Patent B. Patent B itself had to be misused for that misuse defense to taint Patent B. The court acknowledged, though, that the competitive development restrictions leveraged by Patent A raised antitrust concerns. Because the antitrust concern was not at issue on appeal, the court did not resolve it.

In contrast to clauses that improperly suppress competitive development and technology, joint development parties have much more freedom to control how their own patent rights are used by others. Protecting one’s own patent rights is much different and much less offensive to antitrust policies than restricting how someone else can develop or use its own patent rights. Clauses that limit how the licensee can use the licensor’s patent rights are a viable strategy and might look like the following:

ACME will use BOB’s BACKGROUND PATENT RIGHTS and the JOINT PROGRAM PATENT

RIGHTS only for the purpose of manufacturing, making, having made, marketing, selling, offering for sale, importing, or otherwise distributing RUSTPROOF WIDGETS and PRODUCTS and for no other purpose. This use restriction shall survive any expiration or termination of this Agreement.

2 Other courts for decades have shared this hostility to clauses that improperly suppress competitive development and technology. See, e.g., Tampa Electric Co. v. Nashville Coal Co., 365 U.S. 320 (1961) (evaluating legality of exclusive dealing under section 1 of the Sherman Act and section 3 of the Clayton Act); Beltone Electronics Corp., 100 F.T.C. 68 (1982) (evaluating legality of exclusive dealing under section 5 of the Federal Trade Commission Act); see also, U.S. v. General Electric, 80 USPQ 195 (D.N.J. 1949); Kobe, Inc. v. Dempsey Pump Co. 89 USPQ 54 (N.D. Okla. 1951), aff’d on other grounds, 94USPQ 43 (10th Cir. 1952).