Ladas & Parry - Transfers of Intellectual Property

IP As Property / IP Rights Transfers / Transfers of Intellectual Property

ANTITRUST

Parties to a merger or acquisition would be ill-advised to ignore antitrust concerns in the context of obtaining intellectual property assets. In fact, the Justice Department has been taking an ever-increasing interest in the acquisition of intellectual property rights from an antitrust perspective. The intellectual property rights component of a commercial merger or acquisition is increasingly the prominent focus of the Justice Department or Federal Trade Commission's premerger examination of the proposed combination. [37]

The Hart-Scott-Rodino Act imposes a premerger notification requirement upon parties to a commercial merger or acquisition, if the two parties are of sufficient size (i.e., $100 million and $10 million in sales or assets), and the transaction in question involves at least 15 percent of the sellers' assets, or has a value greater than $15 million. [38] The necessary documentation must be submitted to the Federal Trade Commission and the Assistant Attorney General of the Antitrust Division of the Justice Department, and the waiting period is 30 days from receipt thereof, not including extensions and requests for further information and documentation. [39] Failure to comply with these notification requirements can result in a civil penalty of no more than $10,000 for each day in which there is noncompliance. [40] As such, great care should be taken with respect to valuation of the intellectual property rights to determine whether compliance with the notification provisions of the Hart-Scott-Rodino Act is required. [41]

The 1992 Merger Guidelines of the Department of Justice and Federal Trade Commission would apply the HHI index "to assess the potentially combined market shares represented by the intellectual property being transferred, and depending on the degree of concentration, an initial assessment could be made of the likelihood of challenge by the Department of Justice or Federal Trade Commission." [42] The 1995 Federal Antitrust Guidelines for the Licensing of Intellectual Property make specific reference to the 1992 Horizontal Merger Guidelines in its treatment of acquisition of intellectual property rights from an antitrust perspective. [43] Section 7 of the Clayton Act is particularly relevant to intellectual property transfers concerning antitrust. [44] Section 7 prohibits those acquisitions of stock or assets where "the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly. [45] As is frequently the case, Section 7 antitrust concerns can be cured by granting licenses to competitors to ensure vibrant competition in a particular industry. [46]

However, it is not unusual for companies to be reluctant to license their intellectual property rights. For example, in Image Technical Services Inc. v. Eastman Kodak Co., the court concluded that Kodak's refusal to license was a matter of jury interpretation to determine whether such refusal was merely a pretext invoking possible antitrust violations. [47] The jury found Kodak liable and assessed damages in the amount of $23.8 million, which was trebled under Federal law. [48] However, in CSU L.L. C. v. Xerox Corp., this rational was rejected by the court, who concluded that the owner retained the right to refuse to deal. [49] This line of cases demonstrates the ever-increasing scrutiny imposed by the relevant governmental authorities in connection with the convergence of intellectual property and antitrust laws and the divergent state of the case law pertaining thereto.

In fact, U.S. antitrust authorities are already beginning to rethink the treatment of mergers and acquisitions from a policy perspective. In view of the volume and scope of merger activity in the late 1990s, the Federal Trade Commission is expected to outline its evolving approach to these mega-mergers. Stemming from uneasiness on the part of government officials due to the aforementioned mega-mergers are proposed policy changes expected to yield a tougher approach. [50] This expected get-tough policy is slated to be a response to changes in the marketplace from settlement proposals from merging parties intending to use any means necessary to make certain a merger passes governmental antitrust scrutiny. [51] The grant of licenses to ease governmental oversight regarding intellectual property may not work as effectively as in the past.

Before the transition to the Bush administration, the Clinton administration earmarked sharp increases in funding for both the U.S. Department of Justice's Antitrust Division and the Federal Trade Commission in its proposed budget for fiscal year 200l. [52] The proposed budget asks for a 22 percent hike to $134 million for the Justice Department and a 30 percent hike to $165 million for the Federal Trade Commission. [53] The budget supports increasing merger filing fees under the Hart-Scott-Rodino Act to pay for the increased funding. [54]

The combination of Time Warner and America Online, Inc., faced tough scrutiny from federal regulatory authorities. Sen. Orrin Hatch, Chairman of the Senate Judiciary Committee, issued an immediate warning about the proposed combination, asserting that the deal raises "profound public policy implications" and that "we need to proceed with a degree of caution to ensure that potential antitrust concerns, if any, are properly addressed." [55] Sen. Paul Wellstone addressed even deeper concerns, stating, "I am very concerned about the effects these massive mergers will have on the flow of information in our democracy." [56] Although these initial statements indicated that the merger would face tough scrutiny, the deal was ultimately consummated, despite the concessions that had to be made. Statements to this effect by influential legislators indicate an increasing uneasiness with such grand-scale mergers.

Patents. It is clear that a patent holder has the right to sell an exclusive interest in a patent without violating any provisions in the respective antitrust laws. [57] However, potential antitrust implications may arise under those limited circumstances, other than through governmental grant, in which patent acquisition occurs. For example, in SCM Corp. v. Xerox Corp., [58] the court concluded that when a dominant competitor in a particular industry or market acquires a particular patent or group of patents, which gives this dominant competitor monopoly power in that industry when added to those patents already owned, it is a violation of Section 2 of the Sherman Antitrust Act. [59] Section 2 provides that

Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $10,000,000.00 if a corporation, or, if any other person, $350,000.00, or by imprisonment not exceeding three years, or by both said punishments, in the discretion of the court. [60]

As such, the market power of the purchasing party is one of the overriding factors through which the acquisition of a patent or patents will result in an antitrust violation. [61] In addition, if the intent of the purchase is to eliminate competition within the field, the dominant purchaser will be left susceptible to antitrust violations. [62]

Copyrights. Although copyrights may be purchased in a manner similar to other tangible or intangible assets, no case law thus far has held that the mere acquisition and accumulation of copyrights violates any aspect of antitrust legislation. Conversely, case law directly on point confirms that no antitrust violation will be found simply by accumulating copyrights, or otherwise, in a particular industry. [63]

Trademarks. Thus far, the mere accumulation of trademarks has not given rise to liability under either the Sherman or Clayton Acts. [64] However, aggressive accumulation of trademarks can potentially create some form of antitrust liability, [65] because trademarks have been held to constitute assets within the meaning of Section 7 of the Clayton Act. [66]

Grant-backs. The 1995 Federal Antitrust Guidelines for the Licensing of Intellectual Property define a grant-back as "an arrangement under which a licensee agrees to extend to the licensor of intellectual property the right to use the licensee's improvements to the licensed technology." [67] The imposition of grant-back requirements in a licensing arrangement by a patent holder who already wields considerable market power may result in a violation of antitrust laws. [68] Furthermore, to commandeer a dominant position within a relevant market, under rule of reason analyses, courts have construed that the use of grant-back clauses are evidence of intent to commandeer a dominant position within a relevant market. [69] Generally, grant-back antitrust implications lend themselves to interpretation only concerning patents, because the nature of trademarks and copyrights does not give rise to grant-back analyses. [70]

Competition Law in the European Community. The rules governing competition laws in the European Community are set forth in Articles 81 and 82 of the European Economic Community Treaty. Relevant provisions of Article 81 provide:

• The following shall be prohibited as incompatible with the common market: all agreements between undertakings, decision by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the common market, and in particular those which
• Directly or indirectly fix purchase or selling prices or any other trading conditions;
• Limit or control production, markets, technical development, or investment;
• Share markets or sources of supply;
• Apply dissimilar conditions to equivalent transaction with other trading parties, thereby placing them at a competitive disadvantage;
• Make the conclusion of contract subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts;
• Any agreements or decisions prohibited pursuant to this Article shall be automatically void. [71]

Article 81(3) exempts certain transactions that would otherwise violate the previous rules, if they contribute to "improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit." [72]

Conduct that falls within the prohibitions set out under Article 81 can also violate Article 82, which covers the abuse of dominant positions. Relevant portions of Article 82 provide:

Any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market in so far as it may affect trade between Member States. Such abuse may, in particular, consist in:

(a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions;

(b) limiting production, markets or technical development to the prejudice of consumers;

(c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;

(d) making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.

Examples of abusing a dominant position include exploitation, conduct that oppresses buyers and sellers dealing with a dominant firm, excessive pricing, underpayment, restricting production or markets, and discrimination against firms with the practical effect of reducing their ability to compete. [73] Both Articles 81 and 82 are enforced by the Commission under Regulation 17 and the national courts of the Member Nations. [74] Council Regulation 17 enables the Commission to enforce Articles 81 and 82. However, for purposes of merger and acquisition activity, Article 81 is the controlling provision for interpretation of EC competition law.

In Continental Can, the Community Court held that Article 86 (now Article 82) prohibits the acquisition of a substantial majority of the shares in a potential competitor by a dominant firm in the product dominated if this would substantially reduce competition. [75] However, the Commission doubted whether Article 82 granted the power to restrain such a merger and did not adopt, until December 21, 1989, Regulation 4064/89, which requires pre-notification procedures through which the Commission would be able to prohibit a proposed combination. [76] Concentrations that have a community dimension in which "(a) the aggregate worldwide turnover of all the undertakings concerned is more than ECU 500 million, and (b) the aggregate Community-wide turnover of each of at least two of the undertakings concerned is more than ECU 250 million." [77]

As such, a concentration that exceeds this threshold will be subject to review in order to determine whether the proposed combination is compatible with the common market. Articles 2(2) and 2(3) of Regulation 4064/89 set forth the standard for which a combination will be deemed incompatible with the goals of the common market. This key article provides that, "a concentration ... creates or strengthens a dominant position as a result of which effective competition would be significantly impeded in the common market or in a substantial part of it." [78] In making its determination of whether a dominant position is created or strengthened, the Commission will take into account such factors as the need to preserve effective competition, the market position of the newly created entity, opportunities available to supplier and users, legal barriers to entry into a relevant market, and the interests of consumers. [79]

[37] Robert A. McTamaney, N.Y.L.J., (Feb. 2, 1998), 5.

[38] See 15 U.S.C. §18a..

[39] See 15 U.S.C. §18a(b)(1)(A).

[40] See U.S.C. §18a(g)(1).

[41] See McTamaney, Antitrust and lntellectual Property Rights: The Devil is in the Details, 5.

[42] Ibid. The Herfindahl-Hirschman Index (HHI) is a mathematical formula utilized by the Department of Justice to determine a company's market share in a particular industry.

[43] See The 1995 Federal Antitrust Guidelines for the Licensing of Intellectual Property, §5.7, which provides that:

Certain transfers of intellectual property rights are most appropriately analyzed by applying the principles and standards used to analyze mergers, particularly those in the 1992 Horizontal Merger Guidelines. The Agencies will apply a merger analysis to an outright sale by an intellectual property owner of all of its rights to that intellectual property and to a transaction in which a person obtains through grant, sale, or other transfer an exclusive license for intellectual property (i.e., a license that precludes all other persons, including the licensor, from using the licensed intellectual property). Such transactions may be assessed under Section 7 of the Clayton Act, Sections 1 and 2 of the Sherman Act, and Section 5 of the Federal Trade Commission Act.

[44] See 15 U.S.C. §18. [45] Ibid.

[46] See McTamaney, 6.

[47] See 125 F.2d 1195 (9th Cir. 1997). See also John E. Daniel, Antitrust Law, N.Y.L.J., (Aug. 3, 1998), 1.

[48] Ibid., 2.

[49] See 986 F.Supp. 1131 (D.Kan.1997). Although the CSU and Kodak cases were not refusals to deal after a merger or acquisition, questionable antitrust violations for refusal to deal have the potential for impacting such transactions.

[50] See John R. Wilke, "FTC Weighs Stricter Policy on Mergers," The Wall Street Journal, (Jan. 12, 2000), A3.

[51] Ibid.

[52] See Karen Donovan, Fee Hikes Sought to Fund Antitrust Regulators, N.YL.J., (Feb. 17, 2000), 1.

[53] Ibid.

[54] Ibid., 1. The filing fees for mergers valued at $100 million or less would remain at $45,000.00; $100,000.00 for mergers valued between $100 million and $200 million, and $200,000.00 for mergers valued above $200 million.

[55] See Jaret Seiberg, Regulators Eye AOL Warner Deal, N.YL.J., (Jan. 11, 2000), 1.

[56] See Seiberg, Regulators Eye AOL Warner Deal, 1.

[57] See United States v. Gypsum Co., 333 U.S. 264 (1948).

[58] 645 F.2d 1195 (2d Cir. 1981), cert. denied, 445 U.S. 1016 (1982). Additional cases with similar holdings include Kobe, Inc. v. Dempsey Pump Co., 198 F.2d 416 (10th Cir.), cert. denied, 344 U.S. 837 (1952); U.S. v. Besser Mfg. Co., 96 F.Supp. 304 (E.D. Mich. 1951, aff'd, 343 U.S. 444 (1952). See also Von Kalinkowski on Antitrust, §73.01(2).

[59] 15 U.S.C. § 2.

[60] Ibid., § 2.

[61] See Von Kalinkowski on Antitrust, § 73.01[2].

[62] See United States v. Parker Rust-Pro of Co., 61 F.Supp. 805 (E.D. Mich. 1945).

[63] See Lawlor v. National Screen Service Corp., 270 F.2d 146 (3d Cir. 1959), cert. denied, 362 U.S. 922 (1960).

[64] See, e.g., FleerCorp. v. Topps Chewing Gum, Inc., 658 F.2d 139 (3d Cir. 1981), cert. denied, 455 U.S. 1019 (1982); Oak Distributing Co. v. Miller Brewing Co., 270 F.Supp. 889 (E.D. Mich. 1973).

[65] See L.G. Balfour Co. v. Federal Trade Commission, 442 F.2d 1 (7th Cir. 1971).

[66] See United States v. Lever Bros. Co., 216 F.Supp. 887 (S.D.N.Y 1963). See also Von Kalinkowski, § 73.01[2].

[67] See 1995 Intellectual Property Guidelines, §5.6.

[68] See U.S. v. Aluminum Co. of America, 91 F.Supp. 333 (S.D.N.Y. 1950); U.S. v. General Elec. Co., 82 F.Supp. 752 (D.N.J. 1940).

[69] See General Elec. Co., 80 F.Supp. 989 (S.D.N.Y 1948).

[70] See Von Kalinkowski, § 73.01 [3][b].

[71] See Art. 81(1)-(2).

[72] See Article 8 1(3), which further provides that these exemptions only exist if the resulting benefits do not "(a) impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives; (b) afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question."

[73] See Valentine Korah, An Introductory Guide to EC Competition Law and Practice (Oxford: Hart Publishing, 1997), 4.

[74] Council Regulation 17 enables the Commission to enforce Articles 81 and 82.

[75] See (6/72) [19731 E.C.R. 215.

[76] See Regulation 4064/89, O.J. 1990, L257 14 [1990] 4 C.M.L.R. 286

[77] Ibid.

[78] See Article 2, Regulation 4064/89 O.J. 1990, L257 14 [1990] 4. C.M.L.R. 286

[79] See Regulation 4064/89 at Article 2(1).

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