Antitrust Alert: DOJ Declines to State Enforcement Intentions Regarding Financial Exchange for Patent Licenses
The Department of Justice ("DOJ") has released a business review letter in response to the Intellectual Property Exchange International, Inc.'s ("IPXI") proposed financial exchange for licensing and trading intellectual property rights. In its analysis, the DOJ highlighted procompetitive benefits of the IPXI proposal, such as increased price transparency and efficiencies, as well as potential competitive harms that may result from patent pooling and the sharing of competitively sensitive information. Nevertheless, the DOJ ultimately declined to state its present enforcement intentions, citing "inherent uncertainties and potential competitive concerns associated with IPXI's novel business model."
This unusual letter – the DOJ rarely issues negative Business Review Letters – serves as a useful reminder of the benefits and drawbacks of the business review letter process and, perhaps, a cautionary note on group patent licensing activities. Under the DOJ business review letter procedure (28 C.F.R. § 50.6), parties concerned about the legality of proposed business conduct under antitrust laws may request a statement of the DOJ's enforcement intentions with respect to that conduct in the form of a business review letter. The DOJ may (and often does) request additional information or documents before issuing an opinion. Although it endeavors to give responses within 60-90 days, the process can take several months for more complicated requests. Negative letters, such as the one issued to IPXI, are relatively rare, because a party may withdraw its request and often will do so if it is clear that the DOJ is disinclined to issue an unqualifiedly favorable ruling.
IPXI was founded by twenty corporate, university and laboratory members and has grown to include 47 entities. In November 2012, IPXI requested a business review letter from the DOJ regarding its proposal to create a financial exchange for patent licenses. The proposed exchange theoretically would facilitate patent licensing in that IPXI would receive offers to license patents; evaluate validity, infringement and other legal issues regarding the patents; determine the level of interest among potential licensees to license the patents; and offer "Unit License Rights" ("ULRs"), which are essentially standardized licenses for defined sets of patents and uses under terms and conditions set jointly with the patent holders. The proposed framework would involve offering each ULR in three tranches, with the first two discounted relative to the third to increase early purchases. A secondary trading market would become available after the first tranche of a ULR sold out.
Following eight months of review (which apparently began before IPXI submitted its formal request), Assistant Attorney General Bill Baer issued a letter to IPXI's counsel stating that IPXI's proposed exchange could encourage innovation through increased transparency, licensing efficiency, and sublicense transferability. The letter noted that IPXI's model could create transactional efficiencies by obviating the need for costly bilateral negotiations between parties and reducing asymmetries of information. While aggregation and dissemination of competitively sensitive information can raise competitive concerns, the DOJ concluded that IPXI's proposed rules would adequately limit firms' access to competitively sensitive information.
On the other hand, the DOJ letter said, IPXI's proposal to pool patents from multiple patent holders and list similar, competing ULRs has the potential to cause competitive harm. While pools of complementary patents generally may be procompetitive, pools that include substitute (i.e., competing) patents may raise competitive concerns by reducing competition among the patented technologies.
Ultimately, the DOJ declined to issue a favorable business review letter regarding its enforcement intentions, in part because "the scope and importance of any particular restriction on IPXI's licensed field of use will vary for each ULR and each technology." Thus, while the DOJ recognized many procompetitive aspects to the proposed exchange, the uncertainties about IPXI's activities with respect to diverse and unidentified technologies led to a qualified response.
The DOJ used the IPXI business review letter as an opportunity to emphasize several concerns about the rapidly changing field of patent licensing. This letter thus proves a useful reminder on several fronts:
First, while a business review letter can prove a useful tool, there is no guarantee that the DOJ will issue a favorable opinion, nor that the DOJ will refrain from taking enforcement action at a later date. Potential applicants must consider carefully whether requesting a business review letter fits within its overall strategic needs and must be prepared to deal with the potential adverse impacts of an unfavorable or highly qualified opinion. While IPXI has announced its intention to proceed with its venture, other companies might make a different decision.
Second, the opinion can be understood as part of the DOJ's and Federal Trade Commission's increasing focus on the antitrust implications of patent licensing, especially in the context of group activity (patent pools) and standard setting. This latest pronouncement is but one of many developments in recent months indicating a change in the landscape of IP licensing, both with respect to IP owners and potential licensees. See Jones Day White Paper, Standards-Essential Patents and Injunctive Relief (April 2013).
Third, patent pools are complicated and it is critical to ensure they are structured properly, in light of antitrust precedents and stated government enforcement intentions.
For more information, please contact your principal Jones Day representative or either of the lawyers listed below.
William F. Dolan
Geoffrey D. Oliver
Jones Day prepares summaries of significant antitrust enforcement, litigation, and policy events as a service to clients and interested readers, to provide timely insight on antitrust and competition law developments relevant to business, but not as legal advice on any specific matter. Please visit our Publication Request form to add your name to our distribution list.