You’ve developed a cool new additive for a broad spectrum of coatings – even those coatings outside your own “wheelhouse” coatings.  Happens a lot, right?  In order to maximize the return on your R&D investment bringing the additive to market, you begin licensing to others. You start negotiating a license to your intellectual property surrounding the use of this novel coating component. You have a patent covering some aspects, you have a trademark that delivers goodwill you have developed in the product, and you even have some copyrighted software that can be used to predict formulating mixtures.  Integrating all of this disparate collection of intellectual property is a lot of know-how, show-how and generalized trade secret information.

You’d like to extract maximal value out of the hard-won trade secret portfolio, so you suggest to the other party that you manufacture the coating component, and that they agree to buy it from you as a sole source (since you’re the only one that has access to the trade secret treasure chest).  You might think licensing your trade secrets would be just like licensing your other intellectual property (e.g., patents, trademarks, copyrights, etc.).  But, there are some potholes along the road that may prevent you from hauling your licensing royalties to the bank.

Linking IP with products or with other types of intellectual property is done all the time.  You may be offering licenses that cover multiple patents or copyrighted materials or you may connect (tie) the sale of two distinct patented goods.  Or you might license or good covered only by trade secret with another patented good.

A classic “contractual” patent tying occurs when the tying product (e.g., a vapor deposition machine for coating electrical devices) is patented, but the tied product is not patented. Rather, it is a raw material used as an input for the tying product (specialized coatings that are vapor deposited), and the sale of the patented product (machine) is conditioned on the purchase of the unpatented product (coating). A “technological tie” on the other hand is one where the tying and the tied product get bundled together physically or they are co-produced so that are only useable with each one another. The infamous U.S. government suit against Microsoft involved both the contractual and technological bundling of the Internet Explorer web browser (in this case, the tied product) with MicroSoft’s Windows operating system (the tying product). 

Multiple intellectual property rights may be legally combined into bundles or packages. But, it has to be done right.  There has been considerable judicial talent thrown at trying to come up with bright line per se guidelines making prediction possible.  There are some bright lines.  For instance, illegal mandatory package licensing occurs when a patent owner refuses to license a particular patent unless a licensee accepts an entire package (or where the patent owner’s royalty scale has the same result). It would be helpful if courts had taken a consistent analytical approach to tying and bundling cases involving intellectual property. But, they have not (employment insurance for lawyers).

This has been the underlying impetus for the FTC’s laying out a “rule of reason” approach to intellectual property bundling as is reflected in its Antitrust Guidelines for the Licensing of Intellectual Property (“Antitrust-IP Guidelines”). The Antitrust-IP Guidelines recognize that “[c]onditioning the ability of a licensee to license one or more items of intellectual property on the licensee’s purchase of another item of intellectual property or a good or a service has been held in some cases to constitute illegal tying.” 

But, it also states that “[a]lthough tying arrangements may result in anticompetitive effects, such arrangements can . . . result in significant efficiencies and procompetitive benefits.”  In other words, if there is a good reason (i.e., considering the totality of the facts, commerce and free trade are promoted), courts can allow an otherwise illegal connections of separate pieces of IP.  Is your head hurting yet?

Pursuant to the Antitrust-IP Guidelines, a court can consider both the anticompetitive effects and the efficiencies attributable to a tie. The Feds are likely to challenge a tying arrangement if: “(1) the seller has market power in the tying product, [which the Feds will not presume necessarily just because the license involves a patent, copyright, or trade secret]; (2) the arrangement has an adverse effect on competition in the relevant market for the tied product; and (3) efficiency justifications for the arrangement do not outweigh the anticompetitive effects.”  If a package license is found to constitute tying, the Feds will evaluate it using the same rule of reason principles they use to analyze tying arrangements that do not involve IP.

Whether the legal analysis applied to intellectual property bundling is some form of the per se rule or the more expansive rule of reason, it will be incumbent upon a plaintiff to establish that a defendant has market power in the tying product. Market power is not gonna be presumed merely from the existence of a patent.

Basically, the Feds will take this approach.  Although the intellectual property right (let’s say your patent) confers the power to exclude with respect to a specific product, there will often be sufficient actual or potential close substitutes that prevent the exercise of market power. So, the Feds will investigate the relevant market to determine whether the intellectual property at issue grants any market power in dollars and cents. Even if such market power is found, the Feds will further investigate whether the business practice under scrutiny is likely to be anticompetitive on balance. Though some would say that the risk of litigation is fairly small (that the Feds or an individual plaintiff will come after you for anti-trust), the state of the law today makes risky contracts a bit too dangerous.  Be advised that if you decide to sue upon the basis of a patent that has been licensed in a bundling arrangement, it may trigger an antitrust counterclaim.

One way to [offer] package licenses and not get immediately hauled into court is to make sure there’s an alternative to the tied product that is readily available. This approach does not provide a complete out-of-harm’s way, the difficulty of proving that the pricing bundle is sufficiently coercive and the expense of bringing an antitrust case may give you some measure of comfort. However, when the Feds do identify anticompetitive situations, they will usually pursue them.

I know. Where the hell does this leave the C-suite trying to license a package of IP? It tells us that we need to seek out an anti-trust expert BEFORE negotiations get too far down the pike.  But, maybe overarching all of this, is that it tells us that the nuisance of doing so better be worth the trouble.