Top 5 Antitrust Issues Facing Companies in the U.S. Today:  #5 Intellectual Property

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Top 5 Antitrust Issues Facing Companies in the U.S. Today: #5 Intellectual Property

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Jacob K. Danziger

Decades ago, antitrust enforcement officials developed the “9 No-No’s” regarding patents and licenses. The days of antitrust hostility toward intellectual property are behind us, but renewed tension between antitrust and intellectual property policy seems to be growing. Patent holders, especially those with a patent essential to an industry standard, are facing more challenges from enforcement officials and private parties. And even a trademark owner is now facing Federal Trade Commission (FTC) allegations and private civil follow-on suits contending that a series of settlements of infringement matters was anti-competitive. Two ongoing cases illustrate these key points.

Standard-Essential Patents – FRAND Violation Without Evidence of Impact?
The FTC initiated a lawsuit earlier this year in the Northern District of California against Qualcomm Inc., under the FTC Act Section 5, alleging that Qualcomm had engaged in anticompetitive tactics in order to maintain a monopoly on the supply of a key semiconductor device used in cell phones and other consumer products. These alleged tactics include refusing to license standard-essential patents on fair, reasonable, and non-discriminatory (FRAND) terms. The FTC alleges that Qualcomm maintains a “no license, no chips” policy under which it supplies its baseband processors only if cell phone manufacturers agree to Qualcomm’s preferred license terms, which forces cell phone manufacturers to pay higher royalties to Qualcomm if they use one of Qualcomm’s rivals’ baseband processors. According to the FTC, this is akin to a “tax” that Qualcomm imposes on the use of its rivals’ processors.

Interestingly, Maureen Ohlhausen, then an FTC commissioner and now its chairman, issued a dissent from the vote to file the complaint, stating that the complaint failed to directly allege that Qualcomm charges “more than a reasonable royalty,” and was not supported by “robust economic evidence of exclusion and anticompetitive effects.” Ohlhausen also noted her prior dissent from the FTC’s 2015 Section 5 Policy Statement, arguing that the complaint against Qualcomm illustrates the lack of guidance for “stand alone” Section 5 cases (where the FTC does not allege a violation of the Sherman Act).

Qualcomm recently filed a motion to dismiss, arguing that the complaint “does not contain any factual allegations of anticompetitive harm to Qualcomm’s rivals;” that its standard-essential patents are licensed on FRAND terms and that even if they were not, a FRAND violation in and of itself is not an antitrust violation, absent a showing of exclusion, which Qualcomm argues was not plausibly alleged. Qualcomm describes the FTC’s “tax” theory of anticompetitive conduct as simply a “price squeeze” by another name, which it argues was rejected by the U.S. Supreme Court as a basis for antitrust liability in Pacific Bell Telephone Co. v. linkLine Communications, Inc., 555 U.S. 438 (2009).

The case is pending before Judge Lucy H. Koh, who recently issued a scheduling order setting a trial date in January 2019.

Trademark Litigation Settlements or Anticompetitive Conduct? On Trial
The FTC’s administrative proceeding against 1-800 Contacts, Inc., an online distributor of contact lenses, is now at trial in an administrative hearing before Chief Administrative Law Judge D. Michael Chappell. (For more details, see our previous alerts here and here.) The ongoing hearing, which is currently in its fifth week, has included testimony from multiple experts on behalf of each party.

At issue are a series of trademark litigation settlement agreements entered into by 1-800 Contacts and at least 14 other competing online contact lens retailers that had been sued by 1-800 Contacts for trademark infringement. The FTC’s pre-trial brief set out its case that the agreements suppressed competition in online search advertising auctions, and restricted truthful and non-misleading advertising to consumers, arguing that:

“The evidence will show that, through these Bidding Agreements, 1-800 Contacts effectively shut down its significant rivals’ search advertising against 1-800 Contacts’ trademarks, blocking relevant, valuable advertising that would have been displayed to consumers absent these agreements. Further, consumers suffer direct pecuniary harm, because the eliminated advertising would inform consumers that identical products are available at lower prices from 1-800 Contacts’ online competitors.”

1-800 Contacts’ pre-trial brief argued that it resolved bona fide trademark infringement claims “with commonplace non-use agreements,” rather than reverse payments or other extraordinary terms, and “took less than if it had prevailed and defendant gave up more than if it had won.” 1-800 Contacts therefore contended that such arms-length settlements should be presumed to be pro-competitive under Clorox Co. v. Sterling Winthrop, Inc., 117 F.3d 50, 60 (2d Cir. 1997), and FTC v. Actavis, Inc., 133 S.Ct. 2223 (2013), which made clear that only “unusual” settlements warrant antitrust scrutiny. The brief also argued that the FTC will be unable to meet its burden to prove that the challenged settlement agreements harmed competition:

“The settlements did not affect in any way the vast majority of advertising and competitive tools available to competitors; they restricted only using 1-800 Contacts’ trademarks to trigger presentation of another company’s paid advertisements. It is not surprising, therefore, that [the FTC] will not be offering any hard proof that the challenged settlements harmed consumers. They have no proof that the settlements reduced output of contact lenses and no quantitative support for their theory, speculated to by their experts, that the agreements enabled 1-800 Contacts to raise prices” (emphasis added).

Multiple civil follow-on suits, alleging the same conduct to be anticompetitive, have now been filed against 1-800 Contacts, and have been consolidated in the U.S. District Court for the District of Utah. These cases seek damages on behalf of consumer-plaintiffs who purchased contact lenses at allegedly inflated prices due to the settlement agreements.

So while the days of the “9 No-No’s” might be behind us, owners of valuable intellectual property still must recognize the types of antitrust allegations that can be raised, including when negotiating licenses or settlement agreements with competitors.