Proposed changes to the US Antitrust Guidelines for the Licensing of Intellectual Property – a transatlantic perspective

Just over a week ago, the US Federal Trade Commission and the Department of Justice’s Antitrust Division published a proposed update to the current US Antitrust Guidelines for the Licensing of Intellectual Property (the IP Licensing Guidelines). Issued in 1995, the IP Licensing Guidelines are the US equivalent of the European Commission’s Technology Transfer Guidelines, and set out the US agencies’ antitrust enforcement policy on the licensing of patents, copyright, trade secrets and know-how.  Whereas the Technology Transfer Guidelines were introduced in 2004 and updated in 2014 (our contemporaneous comments on the changes can be found here), the IP Licensing Guidelines have been in effect for rather longer.  The FTC and DOJ have asked for comments on the proposed update from interested parties – including lawyers, economists, consumer groups and the business community – by 26 September 2016.

According to this FTC press release, the US agencies’ aim is to “modernize the IP Licensing Guidelines without changing the agencies’ enforcement approach with respect to intellectual property licensing…”.  The proposed update thus retains the basic analytical framework of the 1995 guidelines.  As FTC Chairwoman Edith Ramirez puts it, the updated guidelines “reaffirm our view that US antitrust law leaves licensing decisions to IP owners, licensees, private negotiations and market forces unless there is evidence that the arrangement likely harms competition”.

The proposed revisions do, however, take into account developments in US case law that have occurred in the last 20 years or so.  One of the most significant such developments was the US Supreme Court’s decision in Leegin Creative Leather Products v PSKS (2007) that resale price maintenance (RPM) agreements should be assessed under the rule of reason, rather than being treated as per se illegal.  The proposed amendments to the guidelines reflect this change in thinking.  Although the Leegin case arose in a sale of goods context, the US agencies take the view that the Supreme Court’s analysis of vertical pricing restrictions applies equally to price maintenance in IP licences.  The rule-of-reason treatment of RPM by the US courts and agencies stands in contrast to the stricter EU approach: RPM is treated as a ‘hardcore restriction’ in the Commission’s Technology Transfer Block Exemption.  Another area in which the US and EU agencies take divergent approaches is in relation to the treatment of obligations to pay royalties after the expiry of the licensed IP right. The revised US guidelines refer to the recent Supreme Court case of Kimble v Marvel (2015), in which it was confirmed that post-expiry patent royalties are unenforceable.  In contrast, the Commission’s Technology Transfer Guidelines state (at paragraph 187) that “the parties can normally agree to extend royalty obligations beyond the period of validity of the licensed intellectual property rights without falling foul of Article 101(1) of the Treaty”.

Yet in other respects, US and EU attitudes to the relationship between IP licensing and competition law are very similar.  Both view IP licensing as typically pro-competitive and good for innovation.  The draft revised text of section 2.3 of the US guidelines states: “Licensing can allow an innovator to capture returns from its investment […] through royalty payments from those that practice its invention, thus providing an incentive to invest in innovative efforts”.  This echoes the view expressed by the Commission in paragraph 9 of its Technology Transfer Guidelines: “[…] licensing as such is pro-competitive as it leads to dissemination of technology and promotes innovation by the licensor and licensee(s)”.  In addition, the function of the antitrust “safety zone” outlined in section 4.3 of the US guidelines is akin to that of the “safe harbour” established by the Commission’s Technology Transfer Block Exemption: both seek to provide a degree of certainty for licensors and licensees alike and use market share thresholds.

In the final analysis, the proposed revisions to the US guidelines are arguably most striking for what they omit to deal with.  They do not address, for example, any issues relating to the licensing of standard essential patents (SEPs) or (other than in a single, brief paragraph) settlement agreements.  This is perhaps surprising given that both the FTC and the DOJ have paid considerable attention to such issues in recent years.  While the Commission’s Technology Transfer Guidelines also do not address these subjects exhaustively, they are in this respect arguably more helpful to practitioners and businesses than the US equivalent.  Where licensing agreements relate to both EU and US markets, however, it remains important for those involved to have regard to both sets of guidance.

Online poster seller in the frame for algorithm-centred price-fixing cartel

A few days ago, the CMA issued a decision confirming that two Amazon Marketplace vendors had fixed prices by using and configuring “commercially-available automated repricing software”.  The vendors, Trod Limited and GB eye Limited, which sell licensed sport and entertainment merchandise adorned with images of popular stars like Justin Bieber and 1D, colluded to offer online shoppers the same prices for products and co-ordinate price changes. 

Although the CMA accepts that online pricing tools can “help sellers compete better, for the benefit of consumers”, thereby benefiting competition, in this instance, the parties applied these tools to illegally fix prices at an artificially high level.  The CMA fined Trod £163,371, reflecting a 20% discount for Trod’s admission of liability and co-operation during the investigation.  GB eye, however, obtained 100% immunity for ‘whistle-blowing’, reflecting the CMA’s continued support for companies who come forward first.  

The CMA opened its investigation last year following a dawn raid at Trod’s premises and the home of one of its directors.  The CMA’s searches were co-ordinated with searches carried out by the British police on behalf of the US Department of Justice who were investigating the same conduct for sales through Amazon’s US Marketplace.  Following the dawn raid, the DoJ prosecuted both Trod and its director for price-fixing.  Trod accepted liability in the US as well, pleading guilty a few days ago (the DoJ has not yet provided details of any sanctions), but the director is still awaiting trial.  This provides an important reminder of the wider ramifications that anticompetitive behaviour can have, resulting in criminal sentences as well as civil fines and/or director disqualification.  

The CMA's investigation is yet another example of the authorities’ focus on digital markets, complementing the Commission’s e-commerce sector inquiry (see here and here).  The case follows in the footsteps of the CJEU’s Eturas decision which established the potential for liability for participants in a platform which fail to distance themselves from automated pricing updates (see here).  While the price-fixing agreement itself is hardly novel, the use of software to implement the agreement is more ‘innovative’ – and will doubtless not be the last such case to come before the competition authorities. 

This summer’s (not so) light reading – the CMA’s published Paroxetine decision (GSK/generics)

Some 6 months after issuing its infringement decision against GSK and a number of generic companies, the CMA has released a non-confidential version.  This comes in at a weighty 717 pages.  

Other than the grounds of appeal (on which we reported in the final paragraphs of this post), this is the first chance for companies and their advisors who weren’t involved in the proceedings to see the approach the CMA has taken, and to compare it with the current Commission approach.  First impressions are that the CMA has closely aligned itself with the Commission’s patent settlement decisions, such as Lundbeck**. The CMA and the parties will therefore be particularly keen to see the General Court’s forthcoming judgment in that case – indeed, the case management directions set down by the Competition Appeal Tribunal in the appeal proceedings against the CMA’s decision require the parties to prepare submissions on the relevance of the GC’s judgment to the case.

For those who aren’t keen on such weighty holiday reading, but can’t stand the suspense, below are a few pointers to the parts of the CMA’s legal reasoning which may be worth dipping into:

  • Paragraphs 1.3  1.20: A high level summary of the decision for those who only have an appetite for some light reading.
  • Paragraphs 3.65 – 3.84: The CMA’s view of patents, expanded upon at paragraphs 6.19-6.22.  The Windsurfing case law on the ‘public interest’ in removing ‘invalid patents’ is key: patents are treated as ‘probabilistic’ (although the term isn’t used) and are not guaranteed to be valid. Like the Commission, the CMA treats legal challenges to patent validity as part of the competitive process, and argues that the market is ‘in principle’ open to generic entry after expiry of patent protection over an API.  
  • Paragraphs 4.17 – 4.26: Overview of the market definition section which finds that, while other antidepressants may be substitutable for paroxetine, consumption patterns suggest that the actual competitive constraint is limited.  For market definition geeks, the full analysis is at paragraphs 4.29 – 4.97.  It is notable that paroxetine’s position within the ATC features only briefly, with the focus being on actual competitive constraints, including a ‘natural events’ analysis to look at the relative impact of generic entry in relation to the candidate competitor molecules (such as citalopram – the subject of the Lundbeck decision), and entry by generics of paroxetine itself (see para 4.73 in particular).
  • Once the narrow market definition is established, there isn’t much suspense as to the dénouement of the dominance ‘chapter’ (paragraphs 4.98 – 4.127).  In this context, the section on why the PPRS does not constrain pharmaceutical companies’ dominance is again unsurprising, but perhaps worth a read (paragraphs 4.124 – 4.126).
  • Paragraphs 6.1 – 6.9 and 6.204 – 6.206 contain a summary and the conclusion of the ‘object assessment’ under Article 101/Chapter I: while generally Lundbeck-esque, the reference to “the effective transfer from GSK [to GUK/Alpharma] of profit margins” strikes me as a novel way of expressing an old idea.
  • Paragraphs 7.1 – 7.3, 7.61 – 7.62 and 7.114 – 7.115 contain the summary and conclusions of the effects assessment under Article 101/Chapter I.  Even though the agreements were actually operated in the market, the CMA has confined itself to looking at their ‘likely’ effects – presumably to try to account for the fact that the outcome of the discontinued litigation is unknowable. It also concludes that the agreements assisted GSK to “preserve its market power” (paragraphs 7.63 – 7.64 and 7.116 – 7.117).
  • Leading on from that conclusion, paragraphs 8.1 – 8.3 summarise the case on abuse of a dominant position.  Central to the abuse case is the concept of inducement by GSK.  The allegations span not only the agreements in respect of which fines are issued under Article 101, but also an agreement with IVAX (for those with time on their hands, Annex M seeks to explain the discrepancy). GSK raised a number of objective justification arguments, notably around its right legitimately to defend its patent rights and to defend the company’s commercial position.  Paragraphs 8.61 – 8.67 reject these arguments, in particular on the basis that the conduct was not ‘competition on the merits’ (as per AstraZeneca) and that the conduct “went beyond the legitimate exercise of its patent rights to oppose alleged infringements”.  
  • Finally, and again for the more technically minded, at paragraphs 10.43 – 10.53, the relevance of the Vertical Agreements Block Exemption is dismissed, on the basis that the agreements were between potential competitors rather than being true ‘vertical’ arrangements.  At paragraphs 10.54 – 10.97, the parties’ Article 101(3) exemption arguments are also dismissed (spoiler alert: the exemption criteria are not found to have been fulfilled).  One curiosity is the lack of an infringement decision in relation to the agreement between GSK and IVAX.  This was held to benefit from the (now repealed) UK-specific Competition Act 1998 (Land and Vertical Agreements Exclusion) Order 2000 (now repealed).  In other words, that agreement is treated as vertical, unlike those between GSK and each of the other generic companies, even though the decision recites that IVAX did have plans to launch its own paroxetine generic.  The difference appears to be based on the context in which the agreements were reached: whereas the agreements with GUK and Alpharma related to the settlement (deferral) of litigation, that was not the case for the supply deal agreed with IVAX.  This is addressed at paragraphs 10.36 – 10.47 and in Annex M.
The paragraphs listed above focus on the legal analysis.  Those who prefer their reading less dry will want to look also at the descriptions of the agreements, and will note in particular that the ‘settlements’ considered in the decision did not finally resolve the litigation, but rather deferred it for the duration of the agreements entered into by GSK and the generic companies. Those who like tales of retribution will wish to read about the calculation of fines in section 11 – note that GSK received separate fines in relation to each of the agreements and the abuse of dominance.

The appeal hearing before the CAT is due to start next February, and to last for around a month.  By that time, the General Court will have issued its rulings in the various appeals against the Commission’s Lundbeck decision – which will doubtless be another weighty 
read for the Autumn.

** For more on Lundbeck, please see here (the abridged version) or here (the full analysis).  

Competition policy v IP: striking a balance is a tricky exercise

In this article in Competition Law Insight we consider how intellectual property rights and competition law can appear to be at odds: the former grants temporary monopolies and the latter protects and encourages market competition.  We go on to discuss how this potentially difficult relationship has been increasingly at the heart of competition policy.