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Will Modern Antitrust Enforcement Swallow Up Intellectual Property Rights?

Intellectual Property Practice Group Newsletter - Volume 2, Issue 3, Winter 1998

Following are excerpts from a panel discussion entitled "Will Modem Antitrust Enforcement Swallow Up Intellectual Property Rights?" which was part of a seminar concerning the Microsoft antitrust case. The seminar took place on September 23, 1998, in Washington, D.C. The first excerpt is from Mr. Joseph Kattan, a partner with the Washington law firm of Gibson, Dunn and Crutcher. Prior to entering private practice in 1993, Mr. Kattan headed the office of policy and evaluation at the Federal Trade Commission's Bureau of Competition. He currently serves as the chair of the Intellectual Property Committee of the American Bar Association's Antitrust Section.

Mr. Kattan: . . . The question is whether intellectual property is going to be swallowed up by antitrust enforcement, and it's certainly my fervent hope that it won't be. One of the reasons for that is that . . . the intellectual property guidelines that . . . were adopted by both the Justice Department and the FTC, really put in place an analytical framework for analyzing intellectual property issues under the antitrust laws in a way that recognized the pro-competitive nature of intellectual property [and] licensing arrangements, [and] did away or walked away from conventional wisdom [to] which the Supreme Court had subscribed very recently - [that] the mere existence of intellectual property creates market power - [and] affirmed the fact that even [when] intellectual property creates market power, [that] does not create an obligation on the part of the owner of intellectual property to license its IP or to share its IP with anybody else.

The basic framework of those IP guidelines is that intellectual property arrangements do not create any kind of antitrust concerns unless they result in a diminution of competition in a relevant market among companies that would have been competitors in the absence of the arrangements. . . .

So, it is certainly true that today we are dealing in an enforcement environment in which the government agencies are dealing under guidelines that recognize the proper role of intellectual property and the precompetitive aspect of intellectual property arrangements. One unfortunate effect of the IP guidelines is that IP licensing and IP issues become almost the issue du jour or the theory du jour, and [have] spawned a lot of IP antitrust cases. . . .

. . . . [D]id the guidelines . . . create . . . a lot of cases that have been brought that are . . . questionable? I want to spend the balance of my time talking about one such case . . . I'm very personally and intimately involved in this case, which is the FTC's case against Intel. And if the question of the day is will antitrust enforcement swallow up intellectual property, this is certainly the one case that poses [that] risk. . . . What the FTC is challenging is Intel's refusal to license some of its intellectual property to companies that have refused to license their intellectual property to Intel. Indeed, these are companies that have sued Intel for patent infringement. The basic fact pattern involves three companies that were customers of Intel -- Compaq, Digital Equipment or DEC and Intergraph - and two of those companies, DEC and Intergraph, not only sued Intel for patent infringement, but sought an injunction that would have prohibited Intel from shipping the microprocessors that account for the overwhelming share of its revenues. Now, these plaintiffs happen to be companies that were favored by Intel with advanced access to Intel intellectual property that most companies in the industry did not get. That intellectual property took the form of samples of future microprocessors that are protected by literally hundreds of patents, and copyrighted information embodying incredibly sensitive trade secrets relating to these future microprocessors that have not been publically announced.

Now, Compaq and DEC and Intergraph, have a perfect right under the IP laws to deny Intel the right to use their IP to the extent that they have valid intellectual property rights, and to the extent that those rights are infringed by Intel. That's the basic right that the law gives to every IP holder. But this is also an entitlement that Intel shares, and it's something that, at the moment, the Federal Trade Commission does not seem to recognize.

Intel also has a right to license its intellectual property, and to deny license [s] to its intellectual property. In this particular case, the company concluded that it was prepared to license its intellectual property on a value-for-value basis. But it would not provide access to patented future products and to very sensitive trade secrets to companies that are refusing to license their IP to it. And so, it withheld from these companies advanced samples of future microprocessors and trade secrets that relate to those microprocessors. This is what the FTC says violates the law; the FTC says that Intel did not have the basic right to withhold its intellectual property from parties that are withholding their intellectual property from it. . . . . The assault on intellectual property lies in the FTC's contention that Intel, because it has been successful, does not have the right as an IP owner to choose the parties to whom it will license the intellectual property. The FTC says, Intel has an obligation to license its intellectual property to the three companies that have sued it, has an obligation to license its IP to companies that will deny their IP to it.

Indeed, it must make disclosures about future microprocessors to companies that are seeking to enjoin it from shipping its microprocessors. It has to make disclosures about the very microprocessors that the injunction would stop them from shipping. And this is all under an Aspen [Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985)] kind of theory that basically says, you once went on a first date, you're married for life. You once made a disclosure of confidential information to these parties, you just can't stop.

At bottom, what they're doing is extending, or attempting to extend the antitrust laws to try to take away the most fundamental right that IP owners have, which is the right to exclude another from using the IP, by refusing to license the IP. Let me just tell you what the Supreme Court has said. The Supreme Court has said that the right to exclude others from profiting by the patented invention is the very essence of the patent. With respect to copyright, the court has said that "a copyright owner has the capacity arbitrarily to refuse to license one who seeks to exploit the work." [Stewart v. Abend, 494 U.S. 207, 229 (1990)].

And of course, Congress amended the patent statute in 1988 to provide that a patent owner cannot be guilty of misuse or illegal extension of patent by reason of having refused to license the intellectual property. [35 U.S.C. § 271(d) (1994)]. And on this score the IP guidelines that the Justice Department, together with the FTC, issued, also make clear that no matter . . . how strong a position in the marketplace [a company] has by virtue of its intellectual property, that does not create an obligation to license that intellectual property.

So what we have here is a clash between intellectual property and a notion of antitrust, that itself . . . conflicts with the modern understanding of antitrust - the modern understanding that puts upon the government the onus of showing competitive harm resulting from the conduct. But, even if you accept the notion that a party that had a business relationship must justify the termination or a change in the course of that business relationship, you run headlong into the intellectual property right - the core intellectual property right that every IP owner owns . . . the right to deny others the use of its IP.

This is not a case about tying, it's not a case about exclusive dealing, it's not a case that arises under some of the doctrines where the courts might have recognized that the fact that IP is being used does not immunize the conduct from antitrust scrutiny. This is a case about exercising the most basic right that an intellectual property owner has, and that is the right to say, no I will not license you my intellectual property, or I will license you my intellectual property, but guess what, I wish to be compensated for my IP, just as you wish to be compensated for your IP.

This is a case where if the FTC position is vindicated - and I'm quite confident that it will not - be successful companies . . . will be subject to mandatory licensing with regard to any companies to whom they have chosen in the past to license their intellectual property. That is a very, very dangerous proposition.

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The next excerpt is from Professor Carl Shapiro, the transAmerica professor of business strategy at the University of California at Berkeley. Professor Shapiro also served as a deputy assistant attorney general for economics in the antitrust division from 1995 to 1996, and has recently co-authored a book with Hal. R. Varian and Carol Shapiro entitled Information Rules: A Strategic Guide to the Network Economy (Harvard Business School Press 1998).

Professor Shapiro: . . . . What I want to do is go through three cases that I've been intimately involved in, two of which you've heard about already. . . . The Kodak case, in which I served as an expert witness for Kodak. The U.S. case versus Microsoft, which I had some involvement in as well at the Justice Department and as a consultant, and the FTC's current action against Intel, where I've been working on behalf of Intel. . . . Let me start by saying, to the extent one is worried about antitrust swallowing up intellectual property, the Kodak case, I think, is the most worrisome or troubling precedent out there. We've got a situation where Kodak entered the copier business . . . as a vertically integrated company, so they were going to service the machines as well as sell them. And they put in place a whole service organization . . . . to do that [T]he big question in Kodak really is . . . whether you have a right to keep your patented products, in this case parts, to yourself if you choose to do so.

I should point out, many of you will probably think of the Kodak case as a tie-in case, since that's the stance in which it appeared at the Supreme Court, evaluating a summary judgment motion in 1992. [See Eastman Kodak Co. v. Image Tech. Servs., Inc., 504 U.S. 451 (1992)]. The tie-in claims were completely dropped when the case actually went to trial, and it was brought strictly on a unilateral refusal to sell the parts.

The key jury instruction in this case was that if you find that Kodak engaged in monopolization or attempted monopolization by misused of its alleged parts monopoly, then the fact that some of the replacement parts are patented or copyrighted does not provide Kodak with a defense against any of those antitrust claims.

Kodak instead wanted the instructions to basically say, exercising lawful patents would not be in itself an exclusionary act. The court rejected Kodak's attempt to include that language. The court noted - I should say now the appeals court, the Ninth Circuit, noted that the right to license a patent exclusively or otherwise, or to refuse to license at all, is the untrammeled right of the patentee. [See Image Tech. Servs., Inc. v. Eastman Kodak Co., 125 F.3d 1195 (9th Cir. 1997), cert. denied, 118 S. Ct. 1560 (1998)]. The court stated that it found no reported case in which a court has imposed . . . antitrust liability for a unilateral refusal to sell or license a patent or copyright. . . . The court also said that the effect of claims based upon unilateral conduct on the value of intellectual property rights is a cause for serious concern. I agree with that.

Now, where did they come out, though? And there's this question, what the record showed was, they asked the Kodak guy, why did you not sell these parts? They said, well, we were trying to protect our investment. We spent a lot of money developing this copier and all these parts, and we had this whole service infrastructure, and so we were trying to return our investment, and that's what we had in mind. He said, well, was it the patents you were trying to protect? He says, no, I wasn't thinking about patents.

So, now we've got a rule of law here that says, if Kodak had said at the time, it's the patents, it's the intellectual property, it's the legal piece of paper, the patent, that is driving us, that would be okay. But if they were simply protecting the investment which happened to generate these patents, and enforcing the patents, that would not be okay. That would be pretextural. We've got a very strange situation here. I don't know where it's going to go. Unfortunately, the Supreme Court denied certiorari in the case.

The reason I'm concerned about this is, we're not talking about exclusionary contracts with customers, or all sorts of tying related to intellectual property . . . we're talking about simply the decision, I choose not to sell you my patented part, or license it to you. And you've got to have a good reason for that. . . . So, what constitutes a good reason? . . . . [Consider, for example,] Boeing . . . inching up from whatever they are now, 65 or 60 percent towards 90 percent. Airbus is on the ropes. They say, you know, your planes, we can't compete with you, your wing is too good. Everybody wants to buy your plane. But, the fact is, you're leveraging your patent from the wing into the whole airplane. That's not fair. We want a license to the wing, or we want to buy the wings from you to put on our planes. Can Boeing deny that? Can they turn that down? It's not clear under this precedent. You could think of lots of examples I should think. The fact is, the major way which companies receive their award for their innovation is not just by selling narrowly that product, but by offering services that go with it, by putting it into another product, by putting a part into a large machine. ALL those things that are on there are potentially subject to attack under this. So, I'm quite concerned about Kodak, and we're going to have to wait and see how much damage it will do.

Let me go to Microsoft. I think for all the hoopla, actually, I don't see the Microsoft case as nearly as significant a threat to intellectual property rights. It seems to me more conventional. However you may come down on the facts, there's an exclusive dealing claim that Microsoft's arrangements with ISPs and OEMs and all sorts of other three-letter entities were somehow excluding Netscape from distributing their browser. . . . So that will be tried. That is, I think, traditional. That's not a direct assault on their intellectual property rights. . . . [T]he tie-in piece, the bundling . . . [also] is pretty conventional.... I just don't see how that is really a threat to intellectual property either....

Now, on Intel, I think we're back into more of a danger zone in terms of overreaching by antitrust authorities. It is more of a pure intellectual property case in that the conduct in question is Intel's desire not to make its intellectual property in the form of trade secrets, proprietary information, available to certain customers/competitors. So, again, the core question, simply the refusal or the desire not to make intellectual property available to another party harkens back to Kodak, not really the case in Microsoft.

. . . . It seems to me there are conditions if a company has been engaged in the course of dealing where they may have a duty to continue to deal . . . . And I also don't think you can attach any old condition you want on your licenses if you've got a patent, . . . an exclusive dealing provision could be a problem. But what is going on here is, basically Intel dealing with its customers and saying, well, we would like to trade our IP for your IP, and if you want to get the confidential information in advance, certain favorable treatment, we would like patent peace. We would like a cross-license from you or at least that you're not suing us to shutdown our main product line, our microprocessors.

So, to me, it lines up between Intel's approach of saying, we will license to you and we want some cross-license or intellectual property back in exchange. Cross-licenses are extremely beneficial in the microprocessor business, and a lot of the computer industry generally, by clearing out a lot of blocking intellectual property rights, and kind of a thicket of patents, and allowing companies to go forward with design freedom. So, you combine that complex of business justifications, if you will, for seeking to trade IP for IP with no evidence I'm aware of, of harm to competition, where's the threat? What's the effect on microprocessor competition in Intel's approach? There's a hell of a lot of innovation out there in microprocessors. I've looked at that, and I don't see it. And I don't know what the FTC is going to try to point to. So, attacking the core of intellectual property rights, the ability to retain your patents or trade secrets to yourself, or to exchange them for other IP without a showing of real anticompetitive effects, and without really considering the business justifications, that adds up to a troublesome mix to me in the Intel case. . . . [T]hese moves to extend the reach of antitrust limits to erode intellectual property rights through the Kodak case, and Intel, I hope those will not go further.