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Antitrust Analyses of Patent Acquisitions - Quid Novi?

David M. Maiorana, Geoffrey D. Oliver and Ausra O. Deluard, Jones Day Publications, May 2012

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The acquisition and enforcement of intellectual property rights have been evolving in recent years as companies have come to rely to an increasing extent on the acquisition of externally-developed intellectual property rights for both defensive and offensive purposes. As was noted in this newsletter last year, antitrust agencies have been exploring what impact these developments may have with respect to the application of antitrust laws to practices involving intellectual property. [1] Recently, significant, high-profile patent acquisitions were the subject of antitrust review in both the United States and Europe. Both reviewing agencies took the opportunity to issue public statements that shed light on the method of analysis they applied.

In February of this year, the Antitrust Division of the U.S. Department of Justice (“DOJ”) announced that it was closing its investigations of three high-profile acquisitions of substantial patent portfolios: Google Inc.’s acquisition of Motorola Mobility Holdings, Inc. (with its portfolio of about 17,000 patents and almost 7,000 patent applications), the acquisitions by Apple Inc., Microsoft Corp., and Research In Motion Ltd. (“RIM”) of about 6,000 patents and patent applications of Nortel Networks Corporation, and the acquisition by Apple of certain patents of Novell Inc. [2]. On the same day, the Commission of the European Union (the “EU Commission”) issued its decision to approve Google’s acquisition of Motorola Mobility Holdings under the EU merger control regime. [3] In evaluating how these acquisitions might affect competition, both the DOJ and the EU Commission analyzed the ability and incentives of the acquiring firms to use the acquired patents to foreclose competitors’ access to, or raise competitors’ costs of licensing, patents necessary to practice industry standards. Both the DOJ and the EU Commission concluded that the acquisitions they analyzed were unlikely to materially change competitive conditions. The reasoning of the DOJ statement and the EU Commission decision offer muchanticipated insight into how these two agencies are likely to analyze the potential competitive impact of acquisitions of sizeable patent portfolios containing patents essential to compete in high-tech industries.

Fundamentals of Antitrust Merger Analysis

An acquisition of patents is reviewed under U.S. antitrust laws in a manner similar to an acquisition of any other assets. In the United States, Section 7 of the Clayton Act governs acquisitions of assets. It prohibits mergers and acquisitions, including the acquisition of intellectual property rights, if “the effect of such acquisition may be substantially to lessen competition, or tend to create a monopoly.” [4] Depending on the industry affected, one of the two U.S. antitrust agencies, either the DOJ or the Federal Trade Commission (“FTC”), may review the proposed transaction to determine whether the transaction will “substantially lessen competition.” [5] In the European Union, pursuant to the Treaty on the Functioning of the European Union [6] and the European Merger Control Regulation, [7] the EU Commission mustdetermine whether an acquisition would “significantly impede effective competition” in the EU or a substantial part of it. [8]

If a purchaser of a patent portfolio is a practicing entity, the antitrust evaluation involves two distinct questions. First, the reviewing agency will consider whether the combination of patents already owned by the purchaser and the patents being acquired will permit the purchaser to demand higher prices for use of the patented technology. This is known as a “horizontal” analysis because it involves consideration of assets at the same level of the production cycle – the purchaser’s patents and the patents being acquired both apply to technology that is used as an input into a product or service. Second, the reviewing agency will evaluate whether the combination of the purchaser’s downstream business and the patents being acquired provide the purchaser with greater ability or incentive to exclude competitors in the downstream business from access to a technology, the effect of which would be to hinder the ability of the competitor to compete in the downstream business. This is referred to as a “vertical” analysis because it considers the combination of assets at two different levels of the production cycle: the patented technology, which is considered to be an upstream input into a product or service, and the downstream product or service in which the technology is used.

The DOJ statement and the EU Commission decision are interesting in that they focus exclusively on a vertical analysis. This is not surprising under the circumstances. But it does distinguish these patent acquisitions from the substantial majority of acquisitions reviewed by the DOJ, the FTC and the EU Commission. This also provides important guidance as to how these agencies are likely to review similar patent acquisitions in the future.

Horizontal Analysis

As explained above, a “horizontal” analysis involves evaluation of the competitive impact of the combination of the purchaser’s existing patent portfolio and the patent portfolio being acquired. When reviewing an acquisition involving potentially competing assets, the agencies investigate whether the transaction may eliminate a competitor that had constrained the firm’s ability to increase prices or impose less favorable non-price terms and conditions in a manner that adversely affects customers. [9] With respect to an acquisition of patents, this depends on whether any of the patents to be acquired are direct substitutes for any patents owned by the purchaser and, if so, how many other practical alternative technologies are available to potential licensees. The reviewing agency would then conduct a detailed examination of the alternatives to determine whether, by gaining control over two substitute or alternative technologies, the purchaser is likely to have the ability to increase the price of either or both of the technologies to future licensees or to preclude access altogether to a technology important to competition in the downstream market.

This analysis is illustrated by the FTC’s review over a decade ago of the combination of certain polypropylene assets, including intellectual property, of Shell Oil Co. and Montedison S.p.A. [10] Construction and operation of a polypropylene plant requires use of both polypropylene technology and polypropylene catalyst technology. In the mid-1990’s, a joint venture between Montedison and Mitsui Petrochemical Industries Ltd. was the largest licensor of polypropylene and catalyst technology. From 1990 to 1995, approximately 45 percent of all completed or projected new polypropylene capacity was built under technology licenses from Montedison and Mitsui. A joint venture between Shell and Union Carbide Corp. was the second largest licensor of polypropylene and catalyst technology. Approximately 25 percent of all completed or projected new polypropylene capacity from 1990 to 1995 was built under technology licenses from Shell and Union Carbide.

Subsequently, Montedison and Shell proposed to enter into a joint venture to merge their respective polyolefins businesses. The FTC concluded that the combination of Montedison’s and Shell’s interests in their respective polypropylenerelated technologies would give the combined entity control over both of the leading technologies used in the manufacture of polypropylene, and therefore was likely to substantially lessen competition in the market for licensing of polypropylene and polypropylene catalyst technologies. The matter was resolved by a consent decree pursuant to which Shell agreed to divest various assets, including all its tangible and intangible assets relating to polypropylene and polypropylene catalyst technologies. [11]

As noted above, neither the DOJ’s statement nor the EU Commission decision closing its investigation mentioned horizontal issues. Although it appears highly unlikely that either agency did a patent-by-patent review of the thousands of patents being acquired to determine whether there were horizontal overlaps with the acquirers’ existing patent portfolios, it is unlikely that the agencies ignored potential horizontal issues altogether. Rather, it appears likely that the agencies relied significantly on third parties to alert them to potential horizontal issues.

Vertical Analysis

As explained above, a licensorlicensee relationship is treated as “vertical.” The competitive effect of the combination of the patent portfolio to be acquired with the purchaser’s downstream business is analyzed in a manner similar to that of the acquisition of a supplier of components by one of its customers. In effect, the technology being licensed is treated as an input into or component of a downstream product. When a proposed transaction combines firms that have or could have a customer-supplier relationship, the agencies generally will examine whether the transaction would give the merged firm the ability and incentive to raise its rivals’ costs by increasing prices of, or otherwise restrict access to, an essential input, thereby creating a significant impediment to effective downstream competition. [12] A vertically integrated firm may have the ability to raise prices or reduce output but it may or may not have the incentive to do so depending on whether it would be profit-maximizing to raise input prices to downstream competitors in hopes of gaining a competitive advantage in the downstream market. The potential for competitive harm from a vertical transaction arises in limited circumstances – typically only where the merged entity has upstream market power and a sufficient share of the downstream market to benefit significantly through downstream sales at the expense of its foreclosed downstream rivals.

In contrast to a horizontal analysis, the anticompetitive effect of a merger under a vertical foreclosure theory is the harm to downstream competition. A vertical foreclosure theory postulates that the merged firm can eliminate a horizontal competitive constraint at the downstream level by weakening, and perhaps even removing, its competitors through control of essential inputs. If an agency sought to challenge a purchaser’s acquisition of patents under a vertical theory, it would likely base its challenge on the likelihood of harm in a downstream product market due to potential foreclosure of competitors from, or the raising of their costs to obtain, inputs (licenses to patents) necessary to compete in that downstream market.

The DOJ’s statement reflects application of these principles to the patent acquisitions in question. The DOJ analyzed the “ability and incentives” of the acquiring firms to use the acquired patents to foreclose downstream competition or raise downstream rivals’ costs. [13] The DOJ focused in particular on patents considered essential to practice standards in the wireless communications industry that Motorola Mobility and Nortel, through their participation in standard-setting organizations, had committed to license to industry participants. The DOJ considered whether an acquiring firm could have the “incentive and ability to exploit ambiguities” in FRAND commitments to demand “supracompetitive” licensing rates, compel a prospective licensee to grant the acquiring firm a license to the licensee’s differentiating technology, charge a licensee the “entire portfolio royalty rate when licensing only a small subset” of the patents in the portfolio, or seek to exclude standardcompliant products from the market altogether. [14]

The DOJ concluded that Microsoft’s low market share in mobile platforms would make a strategy to harm rivals unprofitable. The DOJ also noted that Microsoft has cross-licenses in place with the majority of its Android-based OEM competitors, making a strategy to harm rivals “even less plausible.” [15]

The DOJ noted that the respective shares of Google and Apple in mobile platforms made a strategy of holding up rivals “more likely,” but in context not likely to harm competition. The DOJ acknowledged that its concern about the potential anticompetitive use of the acquired essential patents “was lessened by the clear commitments by Apple…to license [the acquired essential patents] on fair, reasonable and non-discriminatory terms…[and] not to seek injunctions in disputes involving [those patents.]” [16] The DOJ concluded that Google’s licensing commitments “were more ambiguous and do not provide the same direct confirmation of its…licensing policies.” [17] However, the DOJ also noted that Motorola Mobility has “a long and aggressive history of seeking to capitalize” on its patents, and determined that Google’s acquisition of Motorola Mobility “is unlikely to materially alter that policy.” [18] Thus, the DOJ determined that Google’s acquisition of Motorola Mobility’s patents does not substantially lessen competition. The DOJ cautioned, however, that how Google may exercise its patents in the future “remains a significant concern” and stated that it would continue to monitor the use of patents essential to standards in the wireless industry. [19]

The EU Commission also focused on vertical issues in its decision to approve Google’s acquisition of Motorola Mobility. It stated that the transaction “does not itself raise competition issues.” The EU Commission stated that it had coordinated its investigation with the DOJ. It reached its decision “mainly because [the acquisition] would not significantly modify the market situation in respect of operating systems and patents” for mobile devices. [20] The EU Commission highlighted in particular that Google’s acquisition of Motorola Mobility’s patents essential to the practice of the 3G and 4G/Long Term Evolution wireless telecommunications standards would not impede competitors’ access to those patents. The EU Commission Vice President responsible for competition policy also announced, however, that the EU Commission would “continue to keep a close eye on the behavior of all market players in the sector, particularly the increasingly strategic use of patents.” [21]

The EU Commission’s analysis of Google’s acquisition of Motorola Mobility mirrors the DOJ statement in many respects. Like the DOJ, the EU Commission focused on patents essential to the practice of industry standards that would be acquired. [22] Both the EU Commission and the DOJ examined whether the acquiring firm would have the “incentive and ability to . . . hold up rivals,” particularly through the threat of an injunction, thus “preventing or inhibiting innovation and competition.” [23] According to both agencies, that “hold up” could include imposing supracompetitive licensing rates on downstream competitors, compelling downstream competitors to grant cross-licenses on terms they otherwise would not have agreed to, and/or excluding competitors’ products from the market altogether.

Likewise, both agencies took into account the public statements made by the acquiring companies regarding their licensing commitments and Motorola’s “aggressive history of seeking to capitalize on its intellectual property” to assess what change the transaction at issue would bring to the current state of competition. [24]

Likely Remedies for Challenged Patent Acquisitions

Patent acquisitions differ from acquisitions of tangible assets in one other important respect. With respect to acquisitions of tangible assets, the U.S. agencies have generally favored structural remedies, such as divestitures, over conduct remedies. The agencies are particularly wary of conduct remedies that require them to police prices as they are viewed as “highly regulatory, difficult to enforce, and likely to distort the normal functioning of the market.” [25] The U.S. agencies, however, often view licensing remedies as equivalent to structural remedies. Thus, the U.S. agencies sometimes resolve both horizontal and vertical antitrust concerns raised by patent acquisitions by requiring parties to forego enforcement of patents or to offer favorable licenses to third parties. [26] For example, to resolve concerns raised by the CIBA-Geigy/Sandoz merger, the parties accepted an FTC consent order to nonexclusively license a set of patents to allow other companies to develop gene therapy products to replace the competition lost due to the merger while not disrupting the parties’ ongoing research. [27] The FTC believed that “licensing, rather than divestiture of assets, is sufficient because access to certain key intellectual property rights held by the merged firm is a crucial component of successful commercialization of many potential gene therapy products.” The FTC recognized that “if there is to be a compulsory license, there must be a price,” so the FTC set the royalty rate at a level that was “commensurate with similar kinds of licenses negotiated in similar situations in the free market.” [28] Parties have also accepted licensing remedies to resolve a number of recent DOJ investigations including Google/ITA, Comcast/NBCU, and Tickemaster/LiveNation. [29]

The DOJ’s closing statement is consistent with this approach. In its analysis, the DOJ took into account thepublic licensing commitments that Apple, Google and Motorola made during the investigation that would, if adhered to, “significantly reduce the possibility of a hold up or use of an injunction as a threat to inhibit or preclude innovation and competition.” [30]

Conclusion

The DOJ closing statement and the EU Commission decision provide an important indication of the issues that the U.S. antitrust and EU competition authorities are likely to consider determinative in analyzing future acquisitions of patent portfolios in the technology space. A company contemplating the acquisition of a patent portfolio should consider that:

• An acquisition by a company with a substantial presence in a product market of patents essential to implement industry-wide standards in that market is likely to attract close scrutiny from both the U.S. antitrust and EU competition authorities;

• The DOJ will evaluate the acquiror’s incentives, as well as its ability, to use the acquired patents to foreclose competition or raise rivals’ costs (although it is unclear whether courts would accept an analysis based only on the acquiror’s incentives);

• The DOJ also will consider whether the acquiror’s specific FRAND commitments (if any) may reduce the likelihood of anticompetitive use of the acquired patents.

These issues are likely to arise more frequently in the future as companies seek to align their intellectual property portfolios with their long-term strategic objectives.

Footnotes

[1See D. Maiorana & G. Oliver, Federal Trade Commission Issues Report on the Evolving Intellectual Property Marketplace, The AIPLA Antitrust News (May 2011) at 2.

[2Statement of the Department of Justice’s Antitrust Division On Its Decision to Close Its Investigations of Google Inc.’s Acquisition of Motorola Mobility Holdings Inc. and the Acquisitions of Certain Patents by Apple Inc., Microsoft Corp. and Research In Motion Ltd. (February 13, 2012) (“DOJ Closing Statement”), available at http://www.justice.gov/atr/public/press_releases/2012/280190.htm.

[3European Commission – Press Release, Mergers: Commission approves acquisition of Motorola Mobility by Google (February 13, 2012) (“EU Commission Press Release”), available at http://europa.eu/rapid/pressReleasesAction.do?reference=IP/12/129; see also Case COMP/M.6381 –Google/Motorola Mobility, O.J. (C) 75/01 (March 14, 2012).

[4Patents and copyrights are “assets” for the purpose of Section 7 of the Clayton Act. 15 U.S.C. §18; SCM Corp. v. Xerox Corp., 645 F.2d 1195, 1210 (2d Cir. 1981) (“Since a patent is a form of property, . . . and thus an asset, there seems little reason to exempt patent acquisitions from scrutiny under [Section 7 of the Clayton Act].”) (citation omitted); see also Philip E. Areeda & Herbert Hovenkamp, Antitrust Law §707 (2005) (“a patent is a productive asset, and acquisition of any productive asset can raise issues under § 7 of the Clayton Act, which may condemn such mergers even when the licensee is not a monopolist”).

[5Under the Hart-Scott-Rodino Antitrust Improvements Act, companies are generally required to notify federal antitrust authorities about proposed transactions, including acquisitions of intellectual property rights, valued over $68.2 million. Parties are not allowed to close the notified transaction until the Agencies have had a chance to investigate the potential antitrust consequences. 15 U.S.C. §18a.

[6Treaty on the Functioning of the European Union, Sept. 5, 2008, 2008 O.J. (C 115) 47, and reprinted in consolidated form at 2010 O.J. (C 83) 47.

[7Council Regulation (EC) No. 139/2004 on the Control of Concentrations Between Undertakings, OJ (L 24) 1.

[8Id., Article 2.2.

[9For a more detailed examination of horizontal merger analysis, see U.S. DEP’T OF JUSTICE & FED. TRADE COMM’N, HORIZONTAL MERGER GUIDELINES (2010) (“2010 MERGER GUIDELINES”), available at http://ftc.gov/os/2010/08/100819hmg.pdf.

[10Montedison S.p.A. et al., FTC Docket No. C-3580 (consent order issued, May 25, 1995), 60 Fed. Reg. 31469 (June 15, 1995).

[11Id.

[12See William J. Kolasky, Dep’y Ass’t Att’y Gen., Antitrust Div., Conglomerate Mergers and Range Effects: It’s a Long Way from Chicago to Brussels, Remarks Before the George Mason University Symposium (Nov. 9, 2001) (citing See, e.g., Final Judgment filed in United States v. Premdor Inc., No. 1:01CV01696 (D.D.C. 2001)). See generally Michael H. Riordan & Steven C. Salop, Evaluating Vertical Mergers: A Post-Chicago Approach, 63 Antitrust L.J. 513 (1995).

[13The agencies’ consideration of the purchaser’s incentives is arguably inconsistent with the approach taken by at least some courts. In Eastman Kodak v. Goodyear, 114 F. 3d 1547, 1557-1558 (Fed. Cir. 1997), for example, Goodyear alleged that Kodak had violated Section 7 of the Clayton Act by acquiring the right to enforce, and subsequently enforcing, a patent that the prior owner had never enforced. The Federal Circuit held that injuries stemming from the enforcement of the patent does not constitute antitrust injury. The court ruled that Goodyear would have suffered the same injuries regardless of who had acquired and enforced the patent against it. The court held that the cause of Goodyear’s injuries was not that Kodak acquired and asserted the patent against it, but that the patent was enforced at all. The court stated that antitrust injury occurs only if the harm in question results from a “competition-reducing aspect or effect of the defendant’s behavior.” Id. (quoting Atlantic Richfield Co. v. USA Petroleum Co., 495 U.S. 328, 344 (1990)).

[14DOJ Closing Statement, supra note 2, at 4.

[15Id.

[16Id. at. 1.

[17Id.

[18Id. at. 4.

[19Id. at. 5.

[20EU Commission Press Release, supra note 3, at 1.

[21Id.

[22The EC focused on patents essential to the practice of industry standards rather than the entire patent portfolio to be acquired because “given the size of Motorola Mobility’s overall patent portfolio compared to the size of the overall patent portfolios of other market participants, including Google’s major competitors, the mere size of the acquired overall patent portfolio of Motorola Mobility does not give rise to any particular competition concern. Google’s overall patent portfolio will remain smaller than that of other market participants in the IT industry such as Microsoft, Oracle, HP and Sony.” See EU Commission, Article 6(1)(b) Non-Opposition Decision, Case No. COMP/M.6381 – Google/Motorola Mobility (Feb. 13, 2012) (“EU Commission Decision”) at ¶ 110.

[23DOJ Closing Statement, supra note 2, at 4; see also EU Commission Decision, supra note 22, at ¶¶ 108-109.

[24DOJ Closing Statement, supra note 2, at 4; see also EU Commission Decision, supra note 22, at ¶ 152.

[25Statement by Commissioner Mary L. Azcuenaga, Concurring In Part and Dissenting in Part, In re Ciba-Geigy, FTC Docket No. C-3725 (March 24, 1997).

[26See e.g., Flow Int’l Corp., 73 Fed. Reg. 42,349 (FTC July 21, 2008) (aid to public comment), 2008 FTC LEXIS 82 (FTC 2008) (decision and order) (requiring acquiring firm to grant to any competitor royalty-free licenses for two patents related to production of relevant product).

[27Statement by Chairman Pitofsky and Commissioners Steiger, Starek and Varney, In re Ciba-Geigy, FTC Docket No. C-3725 (March 24, 1997).

[28Id.

[29United States v. Google and ITA, Civil Case No. 11-cv-00688 (D.D.C. 2011) (Google required to continue licensing ITA’s QPX on substantially similar terms or FRAND); United States v. Ticketmaster Entm’t, Inc., 2010 U.S. Dist. LEXIS 88626 (D.D.C. 2010) (Ticketmaster required to license its ticketing software to two different companies); United States v. Comcast Corp., Civil Case No. 11-106 (D.D.C. 2011) (Comcast/NBCU required to license programming content to online video distributors on terms “economically equivalent” to those given to other video programming distributors).

[30DOJ Closing Statement, supra note 2, at 5.

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