(Second Edition)

Kenneth L. Port,  Jay Dratler, Jr.,  Faye M. Hammersley, Esq.,  Terence P. McElwee,
Charles R. McManis, and Barbara A. Wrigley

On-Line Problem Supplement
Copyright © 2005   Carolina Academic Press.   For permission, see CMI.

Chapter 9

Exercise 3:  Antitrust Exposure in Licensing

For each exercise below:

A.  Classify the risk of the parties' antitrust exposure as "low," "moderate," or "high" and explain your classification in one sentence.  In making this classification, consider the risk of a successful antitrust action against any and all of the parties to the licensing arrangement.  If you think different parties have different levels of risk, so state and briefly explain why.

B.  Identify any anticompetitive effect of the parties' behavior described in the problem, and explain why it is anticompetitive.  Similarly, identify and explain any procompetitive effect.  State and explain whether Sherman Act § 1 or § 2 (or both) would be the most important source of antitrust exposure, and whether a court would be most likely to identify the behavior as illegal per se or to apply the rule of reason.  Be sure to cite relevant sections of the Antitrust Guidelines for the Licensing of Intellectual Property, as appropriate, and to identify any relevant Examples.

C.  If you conclude that the risk of antitrust exposure is "moderate" or "high," describe and explain any steps that you would advise the parties to take to reduce their antitrust exposure, while at the same attempting to satisfy the same business interests that apparently underlie the parties' behavior described in the problem.  Identify the level of risk ("low" or "moderate") that you think would result if the parties implemented your suggestions.  Be sure to identify the parties' business interests that you are addressing and explain (briefly) how the steps you recommend would satisfy those interests while reducing their antitrust exposure.

D.  Do not assume any facts not specifically stated in the question.

1.  Ten independent companies make and sell refrigerators for home use in the United States.  This refrigerator market is fairly competitive.  All the rival manufacturers compete on price and other features, such as size, accessories (ice-makers, etc.), noise and vibration, conservation of electricity, ease of maintenance, color schemes, marketing, etc.  Marketing surveys have consistently shown that none of these features individually is decisive in influencing consumers' decisions to buy.  Allbright Co. and Baker Co. are the largest firms in the industry, with market shares of 25% and 15%, respectively.  The other eight companies are smaller.

Researchers at Allbright discover a method of reducing the noise and vibration that its refrigerators produce by 20%.  The method is very clever, costs little to implement and requires only minor adjustments to manufacturing equipment and procedures.  Allbright files a patent application claiming the method and maintains it as a trade secret while the patent is pending.

While Allbright's patent is pending, Allbright grants Baker a nonexclusive license to use the technology throughout the United States.  The agreed royalty is 0.5% of the wholesale price of refrigerators sold by Baker using the technology, but the rate increases to 2% if and after the patent issues.  The license agreement requires Baker not to sell any refrigerator using the licensed technology for a price less than $500.

2.  Biogene is a small, start-up biotechnology research boutique.  It recently received a large amount of venture capital based upon a business plan in which it promised to hire world-class researchers to attack the most important and difficult problems of human health care worldwide.  The business plan stated that Biogene will remain a research boutique and will license the results of its research to other companies for testing and commercial exploitation.  

Biogene's researchers discover and patent a revolutionary new method for treating cancer in humans.  Small-scale human trials suggest that the patented method is safe, astonishingly effective, and inexpensive.  Biogene has neither the money nor the expertise to take the method through the large-scale human trials needed to secure FDA approval (which are estimated to cost $350 million), or to commercialize the technology.

A large, multinational pharmaceutical company called Pharmex hears of the patented method and seeks a license.  Biogene offers Pharmex a nonexclusive license, but Pharmex refuses, insisting on exclusivity.  After some discussion, Biogene agrees to grant Pharmex a worldwide, exclusive license for the life of the patent, for any application involving human health care.  The license precludes Biogene from commercializing the technology itself or from granting any other licenses to do so.  In exchange for this exclusive license, Pharmex agrees to give Biogene a large up-front cash payment, to bear all the cost of the large-scale trials and commercialization of the patented method, and to use its best efforts to complete those trials and (if the test results so suggest) begin commercialization as quickly as possible.

3.  Lisa Scribner is a TV screenwriter and a television addict.  After years of watching various situation comedies on TV, she gets a unique idea for a situation comedy of her own.  The idea involves Martians, in the form of cat-like creatures with supernatural powers, coming to Earth to observe the foibles of human beings and, on occasion, to help them out of humorous jams of their own making.

Lisa writes a so-called "treatment" (comprehensive but brief concept description) for a series of situation comedies based upon this theme.  She also writes a complete script for two episodes of the proposed series.  Lisa registers her copyright in all three works.  Through her agent, Lisa then seeks to market her works to televisions studios.

Unfortunately, four of the major cable networks all have situation comedies.  Though based upon other themes, all their situation-comedy series are currently running that season.  Lisa, however, is able to cut a deal with the new Wolf Network, an upstart cable television network with a promising future.

In her deal, Lisa grants Wolf Network an exclusive license to all three works (the treatment and two episodes), as well as to any further episodes or sequels of the same show that Lisa may write during the next two years.  In exchange, Lisa is to receive a prominent credit to her name for originating the series and for writing any episodes that she provides, as well as lucrative financial terms.  The agreement also requires Lisa to give Wolf Network exclusive rights to anything that she may write for television during the next five years.

4.  Starlet Co. and Power Co. are bitter rivals in the highly competitive lawn-mower industry.  Each makes and sells lawn mowers for home use, and each has approximately a 30% share of the U.S. market for such lawn mowers.

For five years, the two firms have been struggling for industry dominance.  (The other six firms in the industry are much smaller.)  Each of the two firms has a sizeable portfolio of patents on mower motors, controls, and accessories.  Until 2002, however, neither had sued anyone for infringement of its patents.

In early 2002, Starlet decided to wage litigation "war" against Power.  It sued Power for infringing nearly every patent in its extensive patent portfolio.  Power answered the complaint and filed a number of counterclaims.  Power's counterclaims, inter alia, charged Starlet with infringing nearly all of the patents in Power's portfolio.  In addition, Power filed a counterclaim alleging that Starlet, by filing its legal actions, inter alia, had attempted to monopolize the home lawn mower market in the United States, in violation of Section 2 of the Sherman Act.

Secretly, Starlet and Power each sought independent legal advice to evaluate its legal position and its prospects in this litigation war.  After a month of evaluation, separate outside counsel for each firm advised each that: (1) the outcome of the litigation was hard to predict; (2) the expense of full-scale litigation (on each side) would likely exceed $10,000,000; and (3) damages for infringement, if awarded, might be catastrophic for either firm.

Shortly after receiving separate and secret legal advice to this effect, Starlet and Power entered into a comprehensive settlement agreement, settling all outstanding claims and counterclaims in their litigation.  No money changed hands in the settlement.  The settlement's chief feature was a cost-free, royalty-free cross license.

Under this cross-license, each firm licensed the other to use all patents in the licensing firm's patent portfolio without charge.  The cross license also included—again without charge—any patents that either firm might acquire in the future, whether by assignment or internal development, to the extent the patent might be useful in making or improving lawn mowers for home use.  By its terms, the cross-license prohibited either firm from granting any licenses under the licensed patents to any third party, but it allowed pre-existing licenses granted to third parties to continue in force.  In fact there were no such pre-existing licenses.
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