What DOJ's shifting stance on IP means for SEPs mergers
28 March 2022
We have a new intellectual property sheriff in town. U.S. Department of Justice (DOJ) Antitrust Division chief Jonathan Kanter has quickly changed the direction of the division on intellectual property issues since he was confirmed to head the agency last November, shifting the weight of the federal government in two key areas in which IP assets are concerned.
The first was to scrap his predecessor's policy on the licensing of standards-related IP. The second was to join the Federal Trade Commission in a plan to rewrite the federal agencies' merger review guidelines, with special attention given to new standards for mergers that involve IP and innovation.
The DOJ's twin announcements on standard-essential patents and mergers signal that the DOJ under Kanter is likely to focus more on IP issues in the contexts of standard setting and M&A review.
The pendulum swings in favor of compulsory ‘fair, reasonable and non-discriminatory’ (FRAND) licensing of patents essential to implement industry standards.
Early into his tenure, Kanter staked a position 180 degrees apart from his predecessor on the need for compulsory licensing by patent holders when industry standards are involved, reversing a 2019 policy. The effect is to shift the weight of the DOJ against injunctive relief for patent holders in favor of a license on fair, reasonable and nondiscriminatory terms.
That 2019 policy made clear that participation in standard-setting activity should not result in a "unique set of legal rules" that would limit patent holders' rights and that holders of standard-essential patents should be free to pursue all remedies for infringement, including injunctive relief in district court and exclusion orders at the U.S. International Trade Commission.
One month in Kanter's tenure, the Antitrust Division announced on December 6, 2021, that it had drafted a new standard essential patent (SEP) policy to replace the 2019 policy, which it issued jointly with the U.S. Patent and Trademark Office and the National Institute for Standards and Technology.
The draft largely returns antitrust policy to where it was under then-President Barack Obama in favor of compulsory licensing on FRAND terms. It rejects the prior administration's view of injunctive relief as an unencumbered option in district court litigation.
The new draft policy states that "monetary remedies will usually be adequate to fully compensate a SEP holder for infringement" and strongly suggests that injunctive relief should only be available if "an implementer is unwilling or unable...to pay what has been determined by a court or another neutral decision maker to be a F/RAND royalty." Absent that, the policy states, "seeking injunctive relief in lieu of good-faith negotiation is inconsistent with the goals of the F/RAND commitment."
Uncertainties remain for SEP disputes and IP licensing.
The reversal of DOJ policy under Kanter most certainly will mean an end to the Antitrust Division's intervening to advance a policy in favor of patent holder rights.
It remains to be seen whether Kanter will be as aggressive as his predecessor in intervening in private patent and license disputes, and whether the pendulum will swing further in favor of implementers with the division stepping into cases and siding with patent infringement defendants.
For businesses litigating patent disputes, this new policy raises two major questions.
First, despite the strong language in favor of compulsory licensing, the draft policy avoids staking out a clear position on an SEP holder's recourse to remedies in the International Trade Commission (ITC). While urging good faith negotiations between SEP holders and licensees on one hand, it also acknowledges that the only remedy in the ITC is an exclusion order. The draft policy otherwise avoids mentioning the ITC altogether.
Second, the draft policy avoids wading into important questions of what it means to be FRAND. The draft policy, instead, reflects a hands-off approach, limiting itself to a suggested series of steps to facilitate negotiation and, failing agreement, then arbitration or judicial determination of what it means to be FRAND in a given licensing context.
These questions leave companies in a noticeably wide gray area. The decision to have the draft policy focus on process over substance reflects a cautious and uncertain view of the role of antitrust agency in policing standards-based IP policies. In this void, companies should be mindful that risk remains for both SEP holders and those who are involved in crafting standards-based IP policies.
On a fundamental level, the new approach by the DOJ should provide some comfort because it does confirm that it's ok for organizations to participate in standards-setting-based discussions about IP licensing, something that the prior administration questioned. While the draft policy stops short of articulating any specific antitrust safe harbor, the draft policy is clear that the division under Kanter views a multilateral commitment to FRAND as legitimate and enforceable.
Less clear is the Antitrust Division's views of multilateral efforts to ex ante define FRAND, what should be excluded from FRAND, whether parties can agree on FRAND-Zero—zero license fees but fair, reasonable and nondiscriminatory terms—to spur standards adoption and reduce litigation, and whether antitrust remedies are appropriate for a breach of a FRAND commitment.
New framework for IP and merger review
Kanter's Antitrust Division has also begun working with the FTC to remake merger review. Central to that effort is articulating a revised or new framework for assessing merger effects involving innovation and IP.
The agencies recently signaled what those changes may look like in announcing their plan to rewrite the agencies' merger guidelines. That would very likely include revisions to the horizontal merger guidelines for mergers involving rivals and the vertical merger guidelines for mergers involving parties in a vertical relationship or that offer complements.
Innovation and IP will have a prominent place in the agencies' joint review of their guidelines. In announcing the effort, the agencies issued a request for information, or RFI, on merger enforcement, identifying a number of areas for public comment.
The RFI flags in particular three areas to watch for in planning for a merger review.
First, the effort to rewrite the merger review guidelines is likely to elevate theories of harm related to horizontal and vertical licensing. For example, the RFI calls for comment on how the agencies should evaluate "whether technologies subject to a license" would "compete with or complement the licensee's or acquirer's own technologies."
A related issue with tech platforms is whether there is competition in making content or tools available for license, and whether a merger or other transaction may alter incentives to work with such third parties. Kanter's responses to questions during his Senate confirmation reveal both greater awareness of these theories of harm and an openness to antitrust remedies that would compel licensing.
Second, the RFI highlights a potential for concern over deals that involve the aggregation of patents. There has been a renewed interest in patent thickets as a competition issue, and this is evident in the RFI, as well. Among the issues to be addressed is the framework for reviewing a transaction where the "parties own or license many patents related to the same categories of products."
With rare exceptions, the antitrust agencies have not focused on the acquisition of patent portfolios. Kanter, however, is certainly aware of the Antitrust Division's investigation 10 years ago into the acquisition of large patent portfolios by Apple Inc., Google LLC, Microsoft Corp. and RIM. Those investigations did not lead to any enforcement action, but Kanter identified the investigations as having a central role in the growing consensus on the need for antitrust rules for SEPs.
Third, and relatedly, companies can expect increased scrutiny of licenses in merger review, and even in the absence of a merger. In 2013, the agencies finalized a rule that would require prior notification under the Hart-Scott-Rodino Act for certain exclusive pharmaceutical licenses, effectively treating these licenses as akin to M&A deals subject to Hart-Scott Rodino scrutiny.
That change, however, has yet to lead to a significant enforcement action. The renewed interest in licenses reflected in the DOJ-FTC request for information suggests specific interest in licensing as a type of deal that may generate antitrust interest on par with a merger or acquisition.
The antitrust agencies issue guidelines to provide guidance. But the latest announcement of the agencies' intentions in rewriting the guidelines, and the questions that they are focusing on addressing, suggests a departure from that norm. The commentary coming out of the two agencies reflects an intent to issue new guidelines meant to be more advocacy than guidance.
An expanded focus into IP portfolios and licensing is likely to mean increased burdens in an already unwieldy and untethered merger review process. Merging parties can expect to expend significant time and resources explaining their patent portfolios and how they relate to innovation, technology licensing and product competition. Equally important, doing so will inject significantly more uncertainty as this would greatly expand the scope of modern merger review.
Originally published on law360, this article has been reproduced with approval from Portfolio Media Inc.