DETAILED ANALYSIS OF ANTITRUST LEGISLATIVE REFORMS PROPOSED BY THE DEPARTMENT OF JUSTICE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85M00363R001002200010-0
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 41
• Document Creation Date: December 20, 2016
• Document Release Date: September 11, 2007
• Sequence Number: 10
• Publication Date: March 1, 1983
• Content Type: REPORT

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DETAILED ANALYSIS OF
ANTITRUST LEGISLATIVE REFORMS
PROPOSED BY THE DEPARTMENT OF JUSTICE
March, 1983
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Research Joint Ventures and Other Potentially.
Procompetitive Activities--Eliminating Treble
Damage Disincentives
The Need for Legislation
Treble Damage Awards
A unique feature of antitrust law enforcement is the private
treble damage action. Under Section 4 of the Clayton Act, anyone
injured by an antitrust violation and possessing adequate standing
may recover damages, which are automatically trebled. l/ While
the precise rationale for adoption of the mandatory trebling
provision cannot be identified authoritatively from legislative
history, several rationales have since been provided. Mandatory
trebling provides an incentive for "private attorneys general" to
challenge anticompetitive conduct, thus supplementing. the enforce-
ment resources of the government agencies. Mandatory trebling
also serves both general and specific deterrence goals. However,
1/
Section 4 of the Clayton Act provides in pertinent part:
Any person who shall be injured in his
business or property by reason of anything
forbidden in the antitrust laws may sue
therefor . . . and shall recover threefold
the damages by him sustained and the cost of
suit, including a reasonable attorney's fee.
Section 4C of the Clayton Act, permitting state attorney
general suits on behalf of natural persons within the state, also
provides for treble damage awards.
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long experience with the private treble damage action has shown
that mandatory trebling may be having other, less desirable
effects. 2/ These effects point to a need for legislation that
would reform antitrust damage remedies to provide treble damages
in per se cases and compensatory damages in rule of reason cases.
The earliest-antitrust rulings by the courts differentiated
between business conduct that was so likely to injure competition
that it could be deemed illegal without inquiry into competitive
effect in every specific case (the per se violation), and conduct
that had sufficient procompetitive potential that it could be
condemned only after consideration of its overall purposes and
effects in the particular circumstances presented. Thus, minimum
price-fixing among direct competitors is per se illegal, while
joint ventures are not unlawful unless shown to be anticompetitive
in the situations in which they are challenged.
This distinction between per se and other offenses has been
reinforced by subsequent judicial interpretation, and by the
policies of the Department of Justice. With rare exception, the
2/ The mandatory treble damage rule has often been the subject
of study and concern. For example, there have been proposals to
allow single damages only in event of "inadvertent" violation
(see, e.g., H.R. 4597, 83d Cong., 1st Sess. (1953)), or to make
trebling discretionary in the trial court (see, e.g., U.S. Attorney
General's National Committee to Study the Antitrust Laws, Report
at 379 (1955); 2 P. Areeda & D. Turner, Antitrust Law, 11'331b,
at 150 (1978)).
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criminal sanction has been invoked only to, condemn per se viola-
tions. Both the case-by-case evolution of the category of per se
offenses and this long-standing criminal enforcement policy have
been guided by perceived differences in the basic nature of the
conduct falling into these categories. Per se offenses, because
they are thought so rarely to have any effect beyond the suppres-
sion of competition, have come to be regarded as serious offenses
against the public. The use of the criminal sanction to punish
such offenses has emerged from and has in turn reinforced this
perception. On the other hand, it is recognized that business
behavior judged under the rule of reason can benefit consumers
by reducing prices and by increasing product output, quality and
variety. Such behavior cannot be regarded as inherently repre-
hensible or properly the subject of punitive sanctions, criminal
or civil. Again, the near-universal tendency of public prosecu-
tors to avoid use of the criminal sanction in the rule of reason
category both follows from and contributes to this view of
culpability.
Regardless of the culpability of the defendant, however,
the consequence of a judgment of civil liability is the imposition
of treble damages. This inflexibility is objectionable for
several reasons. First, mandatory imposition of treble damages
in all cases violates notions of fundamental fairness. Where a
generally worded law such as the Sherman Act proscribes conduct
that is clearly illegal, e.g., bid rigging by competitors, and
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seeks to punish as well as to deter such conduct by imposing what
amount to civil fines or punitive damages, then that law ought
clearly to distinguish such conduct from-business behavior whose
legality can be determined only after close analysis of its actual
competitive effects. To punish businesses to the same degree
and in the same fashion for both per se and rule of reason
violations, as the damage law does now, is offensive to basic
notions of fair play. 3/
Second, mandatory treble damages probably overdeter desir-
able, procompetitive conduct. The rationale for the existence
of a "rule of reason" category is that some business behavior
has ambiguous competitive effects. Yet such behavior is sub-
jected to damages of the same severity as the most pernicious
.
cartel violation. Behavior that has no redeeming features can-
not, of course, be overdeterred. But behavior that can improve
productivity and benefit consumers will be overdeterred if there
is substantial risk that the severe sanction of treble'damages
will be imposed. The enforcement agencies have no control of
3/ Generally speaking, per se cases involve conduct that is
concealed, collusive activity, while rule of reason cases involve
conduct that is open and notorious, e.g., distribution agreements.
Some commentators have viewed, as one of the justifications for
the treble-damages awarded in per se cases, the fact that the wrong-
doer's conduct may not be discovered and adequately punished. In
this sense, the treble-damage award provides a kind of rough
justice for the violator. See, e.g., R. Posner, Antitrust Law,
223-227 (1976) .
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this sanction. Accordingly, it is very likely that socially
beneficial conduct is deterred by the mandatory nature of the
treble damage remedy.
Joint research efforts, for example, may produce important
advances in technology, lower costs, and higher employment and
growth. They can enable smaller businesses to stay competitive
in new or technologically-evolving marketplaces, and they may
stimulate productivity growth that will enable the United States
to maintain leadership in world trade. Antitrust should encourage,
rather than retard, such efforts.
A related problem created by mandatory trebling involves the
evolution of'both the substantive standards of liability under
the antitrust laws, and equally important procedural and juris-
dictional attributes of antitrust enforcement. Upon lieing sued,
an antitrust defendant is forced into a cost-benefit analysis
of whether and how to defend itself. The potential cost of a
treble-damage award may often far exceed the benefits that might
be derived from successfully defending the case. In that situa-
tion, sound business judgment may force the abandonment of
desirable, procompetitive business practices, and acceptance of
a settlement of the case without judicial examination of the
competitive aspects of the challenged practices. If damages were
merely compensatory, businesses might be more willing to seek
vindication of such practices under the rule of reason. Better
law, an open judicial process, and more rational business decision-
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making may therefore result from elimination of the mandatory
trebling requirement in rule of reason cases. 4/
Compensatory Prejudgmen.t Interest
As its name suggests, prejudgment interest is interest on
the damages awarded a successful plaintiff that would accrue
before entry of the judgment--normally, the period from the date
on which the litigation was commenced to the date on which judg-
ment was entered. Until 1980, neither statute nor case law
provided clear authority for awards of prejudgment interest in
antitrust cases. Prejudgment interest is now available to a
very limited extent in antitrust cases, under conditions which,
with one exception, 5/ take no account of the need to assure
that plaintiffs are fully compensated for their injuries, but
instead require demonstrations of bad faith, dilatory behavior,
or delaying tactics by the defendant.
The merits of these limitations may be debated under the
present statutory scheme, which requires the trebling of damages
in all antitrust cases. However, if, as suggested above, legis-
lation is passed to limit recoveries to actual damages in "rule
of reason" cases, it will be necessary to award prejudgment
4/ See, generally, W. Schwartz, An Overview of the Economics
of Antitrust Enforcement, 68 Georgetown L.J. 1075 (1980).
5/ The one exception occurs in suits by the United States,
where compensation is to be a factor in prejudgment interest
awards.
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interest as a matter of course in such cases if the plaintiff is
to be made whole. 6/ Moreover, if the compensatory and deterrent
goals of private damage actions are to be more clearly differen-
tiated and pursued through legislation that would require the
trebling of damages in a discrete, identifiable category of
cases, there is no reason why prejudgment interest should not be
awarded in such cases as well. Of course, in such cases, prejudg-
ment interest should be awarded only on actual damages, in keeping
with its compensatory purposes.
Finally, since plaintiff's damage theory and conduct during
litigation can influence the amount of prejudgment interest that
should be awarded, courts should be empowered to adjust such
awards if circumstances indicate that normal assumptions as to
the need for compensatory prejudgment interest would lead to
unjust results.
Proposed Legislation-Amendments to Clayton Act ?? 4, 4A,'and 4C
Section 4 of the Clayton Act, 15 U.S.C. ? 15, should be
amended to read as follows (material to be deleted is bracketed,
material to be added is underlined):
6/ Prejudgment interest is awarded in admiralty cases, for
example. In Sea-Land Service, Inc. v. Eagle Terminal Tankers,
Inc., 443 F. Supp. 532 (W.D. Wash. 1977), the court expressly
recognized that the policies behind awarding prejudgment interest
are based upon the desire that the injured party be fully and
fairly compensated for his loss.
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"Any person who shall be injured in his business
or property by reason of anything forbidden in the
antitrust laws may sue therefor in any district court
of the United States in the district in which the
defendant resides or is found or has an agent, without
respect to the amount in controversy, and shall recover
[threefold the] actual damages by him sustained, simple
interest on actual damages for the period beginning on
the date of service of such person's pleading setting
forth a claim under the antitrust laws and ending on
the date of judgment, such interest to be adjusted by
the court if it finds that the award of all or part of
such interest is unjust in the. circumstances, and'the
cost of suit, including a reasonable attorney's fee;
provided, that damages attributable to agreements or
practices the nature or necessary effect of which is
so plainly anticompetitve that they are deemed unrea-
sonable and therefore illegal without elaborate study
in each individual case as to the precise harm they
have caused or the business justification for their use
shall be trebled.
[The court may award under this section, pursuant to
a motion by such person promptly made, simple interest
on actual damages for the period beginning on the
date of service of such person's pleading setting
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forth a claim under the antitrust laws and ending on
the date of judgment, or for any shorter period therein,
if the court finds that the award of such interest
for such period is just in the circumstances.
determining whether an award of interest under this
section for any period is just in the circumstances,
the court shall consider only--
(1) whether such person or the opposing party,
or either party's representative, made motions or
asserted claims or defenses so lacking in merit as to
show that such party or representative acted inten-
tionally for delay; or otherwise acted in bad faith;
(2) whether, in the course of the action involved,
such person or the opposing party, or either party's
representative, violated any applicable rule, statute,
or court order providing for sanctions for dilatory
behavior-or otherwise providing for expeditious pro-
ceedings; and
(3) whether such person or the opposing party,
or either party's representative, engaged in conduct
primarily for the purpose of delaying the litigation
or increasing the cost thereof.]"
Section 4A of the Clayton Act, 15 U.S.C. ? 15a, should be
amended to read as follows (material to be deleted is bracketed,
material to be added is underlined):
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"Whenever the United States is hereafter injured
in its business or property by reason of anything
forbidden in the antitrust laws it may sue therefor
in the United States district court for the district
in which the defendant resides or is found or has an
agent, without respect to the amount in controversy,
and shall recover actual damages by it sustained,
simple interest on actual damages for the period
beginning on the date of service of the pleading of
the United States setting forth a claim under the
antitrust laws and ending on the date of judgment, such
interest to be adjusted by the court if it finds that
the award of all or part of such interest is unjust in
the circumstances, and the cost of suit. [The court
may award under this section, pursuant to a motion by
the United States promptly made, simple interest on
actual damages for the period beginning on the date of
service of the pleading of the United States setting
forth a claim under the antitrust laws and ending on
the date of judgment, or for any shorter period therein,
if the court finds that the award of such interest for
such period is just in the circumstances. In deter-
mining whether an award of interest under this section
for any period is just in the circumstances, the
court shall consider only--
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r??
(1) whether the United States or the opposing
party, or either party's representative, made motions
or asserted claims or defenses so lacking in merit as
to show that such party or representative acted inten-
tionally for delay or otherwise acted in bad faith;
(2) whether, in the course of the action involved,
the United States or the opposing party, or either
party's representative, violated any applicable rule,
statute, or court order providing for sanctions for
dilatory behavior or otherwise providing for expeditious
proceedings;
(3) whether the United States or the opposing
party, or either party's representative, engaged in
conduct primarily for the purpose of delaying the
litigation or increasing the cost thereof; and
(4) whether the award of such interest is neces-
sary to compensate the United States adequately for
the injury sustained by the United States.]"
Subsection (a)(2) of Section 4C of the Clayton Act,
15:U.S.C. ? l5c(a)(2), should be amended to read as follows
(material to be deleted is bracketed, material to be added
is underlined) :
"(2) The court shall award the State as monetary
relief [threefold] the total damage sustained as
described in paragraph (1) of this subsection, simple
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......
interest on the total damage for the period beginning
on the date of service of such state's pleading setting
forth a claim under the antitrust laws and ending on
the date of judgment, such interest to be adjusted by
the court if it finds that the award of all or part
of such interest is unjust in the circumstances, and
the cost of suit, including a reasonable attorney's
fee; provided, that damages attributable to agreements
or practices the nature or necessary effect of which is
so plainly anticompetitive that they are deemed unrea-
sonable and therefore illegal without elaborate study
in each individual case as to the precise harm they
have caused or the business justification for their
use shall be trebled. [The court may award under
this paragraph, pursuant to a motion by such State
promptly made, simple interest on the total damage
for the period beginning on the date of service of
such State's pleading setting forth a claim under the
antitrust laws and ending on the date of judgment, or
for any shorter period therein, if the court finds
that the award of such interest for such period is
just in the circumstances. In determining whether an
award of interest under this paragraph for any period
is just in the circumstances, the court shall consider
only--
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(A) whether such State or the opposing party, or
either party's representative, made motions or asserted
claims or defenses so lacking in merit as to show
that such party or representative acted intentionally
for delay or otherwise acted in bad faith;
(B) whether in the course of the action involved,
such State or the opposing party, or either party's
representative, violated any applicable rule, statute,
or court order providing for sanctions for dilatory
behavior or otherwise providing for expeditious pro-
ceedings; and
(C) whether such State or the opposing party,
or either party's representative, engaged in conduct
primarily for the purpose of-delaying the litigation
or increasing the cost thereof.]"
Explanation of Proposed Amendments to Clayton Act ?? 4,
4A, and 4C--Trebling of Damages and Prejudgment Interest
The proposed amendments to Section 4 of the Clayton Act
would delete the requirement that plaintiffs' damages be trebled
in all actions brought under that section. Rather than trebling
in all cases, the amendments would require trebling of damages
attributable to "agreements or practices the nature or necessary
effect of which is so plainly anticompetitive that they are
deemed unreasonable and therefore illegal without elaborate study
in each individual case as to the precise harm they have caused
or the business justification for their use." These agreements
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or practices are the so-called "per se" antitrust violations.
They include, for example, price fixing and bid rigging among
competitors. These are classic cartel activities that serve no
purpose other than to suppress competition and adversely affect
consumers. Their deterrence is unambiguously beneficial.
The proposed statutory standard for trebling is derived
from the Supreme Court's descriptions of per se offenses in
National Society of Professional Engineers v. United States,
435 U.S. 679, 692 (1978), and Northern Pacific Railway Co. v.
United States, 356 U.S. 1, 5 (1958). The phraseology of the
standard is familiar to and well understood by the legal
community, and the practices it describes are universally
recognized as antitrust violations by the business community.
It is an appropriate "bright line" to draw between clear viola-
tions that warrant multiple damage remedies and violations that
are found on the basis of competitively ambiguous behavior that
warrants the payment of compensatory damages only. Importantly,
it'is a "living" standard that will follow the evolution of
antitrust law with respect to per se rules.
The proposed amendments to Section 4 of the Clayton Act also
would allow a person injured by an antitrust violation to recover
"simple interest on actual damages for the period beginning on
the date of service of such person's pleading setting forth a
claim under the antitrust laws and ending on the date of judg-
ment, such interest to be adjusted by the court if it finds that
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the award of all or part of such interest is unjust in the
circumstances." Provisions of present law, which allow an injured
person to recover prejudgment interest only upon a showing of
conduct by the defendant during litigation that demonstrates
intentional delay, bad faith, or dilatory tactics, would be
deleted.
The award of prejudgment interest is necessary to fully
compensate the victim of an antitrust violation for his loss in
any case in which damages are not to be trebled. Under this
proposal, such interest would be awarded as a matter of course
unless the court finds that all or part of it is unjust in the
circumstances, e.g., where the plaintiff's'damage theory is
inconsistent with the award of prejudgment interest or where
the plaintiff has engaged in dilatory or delaying tactics during
the litigation.
Prejudgment interest on actual damages also would be
available in cases in which the per se nature of the violation
leads to trebled damages. Opponents of prejudgment interest in
treble damage cases in recent years have urged that the trebling
of damages more than makes up for the unavailability of prejudg-
ment interest. This may be so if one's focus is limited to
compensating the plaintiff for his loss, but the proposed amend-
ments are intended to draw clear distinctions between cases in
which damages are designed primarily to make injured parties
whole, and cases in which damages are designed both to compensate
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injured parties and to encourage private enforcement and deter
clear violations. The trebling of damages under the proposed
scheme serves distinct purposes other than compensation and
there is no reason why defendants who commit per se antitrust
violations should be excused from the compensatory remedy of
prejudgment interest.
Comparable amendments are proposed to Sections 4A and 4C
of the Clayton Act. Section 4A, which provides a single damage
remedy for the United States whenever it is injured by an anti-
trust violation, would be amended to track Section 4 with respect
to awards of prejudgment interest for compensatory purposes.
Section 4C, which allows state attorneys general to bring treble
damage actions as parens patriae on behalf of citizens injured
by antitrust violations, would be amended to track Section 4
with respect to_both compensatory prejudgment interest and the
trebling of damages.
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Intellectual Property Licensing
and the Antitrust Laws
The Need for Legislation
There is no disagreement concerning the urgent need to
increase the ability of U.S. industries to develop and adopt new
technology. Innovation plays a key role in our economic system,
producing growth, employment, new products and processes, and
more efficient means of producing and distributing existing
products. Innovation is also the key to effective American
competition in the evolving worldwide markets for technologically-
advanced products. In this context,. it is crucial that this
country's laws not unnecessarily interfere with the innovation
process. However, current court interpretations of the antitrust
laws in the area of exploitation of intellectual property unneces-
sarily deter innovation.
The protection of intellectual property is vital to main-
taining an atmosphere conducive to innovation. The willingness
to invest heavily in research and development aimed at producing
new technology depends upon the perceived rewards from the invest-
ment. If protection of proprietary technology is weak, the
private sector cannot be expected to devote capital to R&D. The
recognition of proprietary rights in intellectual property is
directed at this problem. For example, the patent grant permits
the patent owner to exclude all competitors from practicing the
patented invention. By so doing, the patent grant increases the
rewards for R&D and thereby encourages invention.
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The ability to license proprietary technology is another
important component of a legal system conducive to innovation.
Licensing permits the patentee to match its own knowledge and
other advantages with those of its licensees, who may possess
superior production, distribution, or marketing facilities or
skills. Licensing can result in products getting to the market-
place more quickly or at lower cost than would be possible through
reliance only upon the patentee's own resources. Licensing can
therefore be important in allowing domestic patent owners to
compete more effectively with foreign and domestic firms that
sell competing goods. Equally important, by allowing the patentee
to utilize its patent in the way it deems most effective, licensing
increases the value of the patent grant, and hence increases the
perceived rewards and the incentive :to innovate.
The same benefits that result from granting exclusive licen-
sable rights in patents also result from granting or allowing
licensable proprietary rights in other forms of intellectual
property, including copyrights, trademarks, and trade secrets.
In each of these areas there are analogous "free rider" problems
that would undermine the creation of the intellectual property if
proprietary rights did not exist, and in each area there are
analogous potential efficiencies from licensing of these rights.
Despite these efficiencies, and despite the critical role of
intellectual property, courts have sometimes condemned licensing
practices under the antitrust laws without sufficient sensitivity
to their basic procompetitive nature and purpose. This precedent
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impairs efficient exploitation of intellectual property and
impedes innovation. Legislation should be enacted to rectify
this situation.
The need for such legislation can be illustrated by looking
at the antitrust treatment of patent licensing. In evaluating
the conduct of patentees under the antitrust laws, the courts
have relied upon Supreme Court decisions which depict the patent
system as inherently in conflict with antitrust goals. The
Supreme-Court has depicted the patent grant as a "monopoly" 1/
the limits of which are to be "narrowly and strictly confined," 2/
so as to avoid the "evils of an expansion of the patent monopoly
by private engagements." 3/ This view of the patent grant has
been adopted by the lower courts. One court stated in a recent
decision: 4/
[The patent] grant is in inevitable tension with the
general hostility against monopoly expressed in the
antitrust laws, 15 U.S.C. S 1 et seq. Therefore,
courts normally construe patent rights narrowly in
deference to the public interest in competition.
1/ United States v. Line Material, Inc., 333 U.S. 287 (1948);
Mercoid Corp. v. Mid-Continent Co., 320 U.S. 661 (1944); Ethyl
Corp. v.
United
States, 309 U.S.
436
(1940); Carbice Corp. v.
American
Patent
Development Co.,
283
U.S. 27 (1931); Motion
Picture
Patents
Co. v. Universal
Film
Mfg. Co., 243 U.S. 502
(1917).
2/ Mercoid Corp. v. Mid-Continent Co., supra, at 665.
3/ Id. at 666.
4/ United States v. Studiengesellschaft Kohle, m.b.H.,-670
F.2d 1122, 1127 (D.C. Cir. 1981).
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This approach is undermined by the observation that the patent
owner's monopoly encourages competition between and among differ-
ent technologies. Rather than being inherently at odds with a
competitive economic system, the-patent system is an important
part of that system.
Based in part upon the misleading view of an inherent
patent/antitrust conflict, courts have occasionally condemned as
per se unlawful certain patent license practices under the anti-
trust laws. 5/ Even application of the rule of reason approach
has been clouded in the patent context by the more fundamental
judicial animosity towards the patent grant.
A per se approach is potentially very damaging to the inno-
vation process. Under a per se approach courts condemn licensing
conduct without considering its economic justifications or its
actual economic effects. Thus, the-per.se doctrine undermines
the ability of owners of proprietary technology to exploit their
rights in the most efficient way possible. The doctrine thereby
undermines the procompetitive objectives of the patent grant.
5/ See, e.g., International Salt Co. v. United States, 332 U.S.
392 (1947); United States v. Studiengesellschaft Kohle, m.b.H.,
426 F. Supp. 143, 149 (D.D.C. 1976), 1978-2 Trade Cas. 11 62,291
(D.D.C. 1978), rev'd, 670 F.2d 1122 (D.C. Cir. 1981); United
States v. Glaxo Group Ltd, 302 F. Supp. 1 (D.D.C. 1969), rev'd
on other grounds, 410 U.S. 552 (1973); cf. United States v.
Loew's, 332 U.S. 392 (1947) [copyright licensing]; United States
v. Paramount Pictures, Inc., 334 U.S. 131 (1948) [copyright
licensing].
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The rationale of the Supreme Court decision in Continental-
TV, 6/ which abandoned the per se approach to vertical arrange-
ments, is equally applicable to licensing. However, Continental-
TV did not explicitly involve patents, and the risk therefore
continues to exist that courts will use a per se approach in
certain cases involving patent exploitation. Removing this risk
legislatively would encourage innovation by assuring inventors
that licensing practices cannot be declared unlawful under the
antitrust laws without consideration of their procompetitive
effects. Accordingly, it is appropriate to amend the antitrust
laws to assure that a per se approach is not employed in the
patents or intellectual property context.
Proposed Legislation--Amendment of the Clayton Act
The Clayton Act should be amended by adding the following
new section: -
Agreements to develop, or to convey rights to use,
practice or sublicense, patented inventions, copyrights,
trade secrets, trademarks, know-how, or other intellectual
property, shall not be deemed unlawful per se in actions
under the antitrust laws.
6/ Continental TV, Inc. v. GTE Sylvania, Inc., 433 U.S. 36
(1977).
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Explanation of Proposed Legislation--
Amendment of the_Clayton Act
The proposed new section of the Clayton Act would prevent
courts from treating intellectual property license arrangements
as per se illegal under the antitrust laws. By so doing, it
would- force courts to assess the lawfulness of these arrangements
under the antitrust laws through use of a rule of reason analysis.
It is also intended.to signal courts that the rule of reason
analysis should not be given mere lip service when intellectual
property licensing is involved, and that under such analysis, the
I
efficiencies and other procompetitive benefits involved in the
particular licensing arrangement, as well as the procompetitive
benefits of intellectual property protection and licensing in
general, must be weighed against any-argued anticompetitive
effects.
It should be stressed that the proposed amendment will not
result in anticompetitive behavior being found lawful under the
antitrust laws. Proscription of a per se approach merely obliges
the courts to hear evidence on the actual economic effects of the
licensing arrangement. Anticompetitive conduct, be it in a
vertical or horizontal context, will remain illegal and should be
so found under a rule of reason analysis.
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Patent and Copyright Misuse--Standards
for Finding Competitive Harm
The Need for Legislation
Economic reward is the motive for most investment in the
development of new technology. The patent laws are intended to
ensure that inventors earn that reward by granting them exclusive
rights to make, use, and sell their inventions. Patent owners
then secure their reward through infringement actions brought
against those who make, use, or sell the inventions without per-
mission, or by enforcing bargains made with those to whom they
have given such permission. In circumstances where a patentee's
behavior is said to be a "misuse" of the patent right, courts
have refused to enforce the inventor's exclusive rights, thus
-allowing free use of the invention and destroying the value
of the patent.
There are two types of cases defining the circumstances in
which misuse may be said to occur. The first involves patent
licenses that affect commerce outside the scope of the patent
claims. The courts have held that it is patent misuse for the
patent owner to require a licensee to: (1) purchase unpatented
products from a particular source (tie-in); 1/ (2) refrain from
dealing in products that compete with the patented product (tie-out
1/ See, e.g., Morton Salt Co. v. G.S. Suppiger Co., 314 U.S.
488 (1942).
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or exclusive dealing); 2/ (3) license additional patents in
order to obtain a license of a particular patent (compulsory
package licensing); 3/ or (4) pay royalties under the patent
based in whole or part on the sales of an unpatented product
(total sales royalties). 4/
The second major line of patent misuse cases involves deci-
sions of the patent owner as to whether to license a particular
party and, if so, at what royalty. The courts have found misuse
where the patent owner licensed one licensee at a rate that
differed from the rate charged other licensees, 5/ refused to
license a patent that it licensed to others, 6/ and even where
the patent owner charged rates that were deemed exorbitant and
oppressive. 7/
Both lines of cases are based on assumptions that the prac-
tices classified as misuse are necessarily anticompetitive, and
2/ _ National Lockwasher Co. v. George K. Garrett Co., 137'F.2d
255 (3d Cir. 1943); McCullough v. Kammerer Corp., 166 F.2d 759
(9th Cir.), cert. denied, 335 U.S. 813 (1948).
3/ Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S.
100, on remand, 418 F.2d 21 (7th Cir. 1969), rev'd, 401 U.S.
321 (1971).
5/ Laitram Corp. v. King Crab Inc., 244 F. Supp. 9, modifica-
tion denied, 245 F. Supp. 1019 (D. Alaska 1965).
6/ Allied Research Products, Inc. v. Heatbath Corp., 300 F.
Supp. 656 (N.D. Iii. 1969).
7/ American Photocopy Equipment Co. v. Rovico, Inc., '359 F.2d
745 (7th Cir. 1966).
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beyond the rights afforded patentees by the patent system.
These assumptions are incorrect. Some existing patent misuse
precedent is unsound because it condemns certain conduct as
economically contrary to public policy without going through the
analysis necessary to determine whether such conduct is in fact
anticompetitive.
One example will illustrate the way in which misuse doctrine
has given rise to an unnecessary tension between patent protec-
tion and competitive policy. A "tie-in" is a practice by which
the owner of a patent requires purchasers or licensees of the
invention to also purchase their requirements of some other item
from the patentee. When courts first confronted this practice,
its anticompetitive effects seemed so self-evident, and its pos-
sible procompetitive justifications-so remote, that the practice
was condemned, both as an antitrust violation and as a patent
misuse.
However, years of experience,'observation, and analysis by
economic and legal commentators have shown that this practice may
have important procompetitive benefits for the innovative process.
If, for example, the potential purchasers of a new invention are
uncertain as to the use to which it might be put, they might be
unwilling to pay a high initial price for that invention. If, on
the other hand, the patentee could sell the invention at a low
price, and charge a higher-than-market price for some item used
in conjunction with the invention, then the patentee and the pur-
chaser could, in effect, share the risk that the purchaser might
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.....
not use the invention intensively. If, for example, the invention
is a punch-card reader, a tie of the reader to the punch cards
used in the reader could serve this procompetitive purpose. If
the purchaser uses the reader intensively, a large number of cards
will be purchased, and the patentee will receive a greater reward
for the invention. If, on the other hand, the purchaser finds no
use for the machine, no cards will be purchased and only the low
initial price of the reader is paid.
There are numerous other
may have important beneficial
innovative process, but which
under the misuse doctrine.
Overly inclusive
petitive effects, and
important part of the
new products and more
existing products. Innovation
of American firms to keep pace
technologically-evolving worldwide industries. The patent grant
is intended to foster innovation by granting the patentee exclu-
sive rights in his invention. To the extent that patent misuse
doctrine unnecessarily and unreasonably interferes with the
manner in which patentees choose to license it decreases the
perceived value of patents and thus retards innovation.
Congress should pass legislation to bring patent misuse doc-
trine within appropriate boundaries. Patent licensing practices
examples of similar practices which
effects for competition and the
have been the subject of condemnation
misuse doctrines can have serious anticom-
can retard innovation.
competitive process, since it results in
efficient means of producing and distributing
is also a key factor in the ability
with their foreign competitors in
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that have alleged anticompetitive effects should not be condemned
out of hand. Such practices should be scrutinized in the cir-
cumstances in which they occur, in full recognition of the
exclusive rights granted to patentees under patent law, in order
to determine whether they are substantially likely to reduce
competition. Only after such a finding should a patentee be
found to have misused his patent. Such legislation would not
prohibit courts from exercising their equitable jurisdiction and
refusing to enforce valid patents in circumstances involving
fraud or other inequitable conduct. However, it would force
courts to use sound economic analysis before condemning on com-
petitive grounds patent licensing practices previously classified
The copyright laws should be amended in a similar manner.
The doctrine of misuse has been developing in copyright infringe-
ment actions, although not nearly as extensively as in the patent
area. 8/ While some courts have refused to apply the defense of
copyright misuse, 9/ it has been applied in a number of cases. 10/
As in the area of patent misuse the courts have sometimes found
8/ See generally 3 Nimmer on Copyright, ? 13.09(A) (1982).
9/ Id. at 13-112.2 n.3, 6. See also Foreign Car Parts, Inc.
oT New England v. Auto World, Inc., 366 F. Supp. 977 (M.D. Pa.
1973); Harms, Inc. v. Sansom House Enterprises, Inc., 162 F.
Supp. 129 (E.D. Pa. 1958).
10/ Id. at 13-112.3 n.5. See also F.E.L. Publications, Ltd. v.
Catholic Bishop of Chicago, 1982-1 Trade Cas. V 64,632 (7th Cir.
1982), petition for cert. filed, July 1982.
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copyright misuse on competitive grounds without sound economic
analysis. Consequently, amendment of the patent laws to address
the misuse problem should be'accompanied by corresponding amend-
ment of the copyright laws.
Proposed Legislation--Amendments to
35 U.S.C. ? 271 and 17 U.S.C. ? 501
Subsections (c) and (d) of 35 U.S.C. ? 271 should be rede-
signated as subsections (c)(1) and (c)(2), respectively, and the
following should be added as new section 271(d):
(d) No patent owner otherwise entitled to relief
for infringement or contributory infringement of a
patent shall be denied relief or deemed guilty of
misuse or illegal extension of the patent right by
reason of his having done one or more of the follow-
ing, unless such conduct, in view of the commercial
circumstances in which it is employed, is likely
substantially to lessen competition: (1) licensed
the patent under terms that affect commerce outside
the scope of the patent's claims, (2) restricted a
licensee of the patent in the sale of the patented
product or in the sale of a product made under a
patented process, (3) obligated a licensee of the
patent to pay royalties that differ from those paid
by another licensee or are allegedly excessive, (4)
obligated a licensee of the patent to pay royalties
in amounts not related to the licensee's sales of
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the patented product or the product made by the
patented process, (5) refused to license the patent to
any person, or (6) otherwise used the patent allegedly
to suppress competition.
The present law on copyright infringement, 17 U.S.C. ? 501(a),
should be amended to read as follows (material to be added is
underlined):
Anyone who violates any of the exclusive rights
of the copyright owner as provided.by sections 106
through 108, or who imports phonorecords into the
United States in violation of section 602, is an
infringer of the copyright. No copyright owner
otherwise entitled to relief for infringement of a
copyright under this title shall be denied relief
or deemed guilty of misuse or illegal extension of
the copyright by reason of his having done one or
more of the following, unless such conduct, in view
of the circumstances in which it is employed, is
likely substantially to lessen competition: (1)
licensed the copyright under terms that affect
commerce outside the scope of the copyright, (2)
restricted a licensee of the copyright in the sale
of the copyrighted work, (3) obligated a licensee of
the copyright to pay royalties that differ from those
paid by another licensee or are allegedly excessive,
(4) obligated a licensee of the copyright to pay
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royalties in amounts not related to the licensee's
sales or use of the copyrighted work, (5) refused to
license the copyright to any person, or (6) otherwise
used the copyright allegedly to suppress competition.
Explanation of Proposed Legislation--Amendments
to 35 U.S.C. ? 271 and 17 U.S.C. ? 501
The proposed amendment to ? 271 of Title 35 would redesig-
nate subsections (c) and (d) as new subsections (c)(1) and (c)(2),
respectively. Subsection (c) defines contributory infringement;
subsection (d) lists three activities that patentees may engage
in, primarily to combat contributory infringement, without being
found guilty of patent misuse or illegal extension of a patent. 11/
Redesignation will leave these provisions intact, and thus leave
unchanged existing law regarding the. extent to which and manner
in which a patentee may prohibit the sale by others of commodities
that have no substantial use other than use that would infringe
his patent. 12/
The proposed amendment also would replace redesignated sub-
section (d) with a new subsection (d), which would list several
patent licensing practices that could not provide the basis for a
11/ These activities are (1) deriving-revenue from acts which if
performed by another without his consent would constitute con-
tributory infringement, (2) licensing or authorizing another to
perform such acts, and (3) seeking to enforce his patent rights
against infringement or contributory infringement.
12/ See generally Dawson Chemical Co. v. Rohm & Haas Co., 448
U.S. 176 (1980).
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finding of misuse or illegal extension of a patent unless such
practices were found, in view of the circumstances in which they
were employed, likely to substantially lessen competition. These
practices include the following:
(1) licensing the patent under terms that affect commerce
outside the scope of the patent's claims (e.g., requiring a
licensee to purchase unpatented materials from the licensor,
requiring a licensee to assign to the patentee a patent that may
be issued to the licensee after the licensing arrangement is
executed, restricting a licensee's freedom to deal in products or
services outside the scope of the patent, requiring the licensee
to become a licensee of a second patent);
(2) restricting a licensee of-the patent in the sale of
the patented product or in the sale-of an unpatented product
made under the patented process;
(3) obligating a licensee of the patent to pay royalties
that differ from those paid by another licensee or are allegedly
excessive;
(4) obligating a licensee of the patent to pay royalties
in amounts that are not related to the licensee's sales of the
patented product or unpatented product made by the patented
process;
(5). refusing to license the patent to any person; or
(6) otherwise using the patent in a manner that allegedly
suppresses competition.
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Proposed new subsection 271(d) would carefully limit the
patent misuse doctrine but not eliminate it. Courts would still
have the discretion to refuse to enforce a valid, infringed
patent on grounds not related to competition (e.g., fraud on the
Patent Office) and on competitive grounds whenever any of the
practices specified in the amendment are likely to substan-
tially lessen competition. Thus, courts could classify conduct
as misuse on economic grounds only when an accurate economic
analysis, done in full recognition of a patentee's exclusive
rights, demonstrates that the patentee's conduct is truly anti-
competitive. This will give patentees greater flexibility in
realizing the full benefits of their patents, thereby further
encouraging firms to invest in research and development aimed at
discovery of new products and new processes. Competition in
the marketplace and the ability of American firms to keep pace
with their overseas counterparts will be benefitted.
The proposed amendment to 17 U.S.C. ? 501(a) will do for
copyright law what proposed new subsection 271(d) of Title 35
will do for patent law. Thus, under proposed section 501(a)
copyright owners will have greater flexibility in licensing their
copyrights, and further development of literary and artistic works
will be encouraged.
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Protecting Patent Owners From Importation'. Into
the United States of Unpatented Goods Made
Overseas by Use of Patented Processes
The Need For Legislation
The United States patent laws do not adequately protect the
legitimate interests of owners of process patents. Under existing
law, a patent is infringed only if the patented invention is
made, used, or sold in the United States. 35 U.S.C. ? 271. Where
a product patent is involved, a firm cannot avoid infringement by
manufacturing the product overseas and then importing it into the
United States because the use or sale of the product in the United
States would infringe the patent. In the case of a process
patent, however, there is no patent law that a patentee can use
r
to stop a firm from practicing the process patent overseas and
then selling the product made by that process in the United
States. In such a case, technically, no one has made, used, or
sold the patented process in the United States.
A patentee has two options to protect its patented process
from such use overseas. First, it can seek to obtain a patent in
as many overseas countries as possible and then sue for infringe-
ment of its foreign patents in foreign courts when the process is
carried out in those countries. This option is inadequate
because it is expensive and it is impossible to obtain adequate
protection in all of the countries in which the process might be
used.
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The other option available to a patentee is to seek relief
from the International Trade Commission for violation of 19 U.S.C.
? 1337. 1/ Damages are not available to a patentee in a ? 1337
proceeding. The patentee can seek a cease and desist order
against a particular firm, which may issue if the Commission
finds that the firm is violating or believed to be violating
? 1337. He also can seek an exclusion order that would bar the
importation of products made by his patented process if the
Commission finds that ? 1337 has been violated. However, these
options do not always adequately protect process patentees.
In order to obtain a cease and desist order or an exclusion
order, a patentee must show not only the importation of a product
made by his patented process, but also that the effect or tendency
of such importation is to destroy or substantially injure a U.S.
industry, or restrain or monopolize U.S. trade and commerce.
1/ Section 1337 provides that unfair methods of competition and
unfair acts in the importation of articles into the United States,
the effect or tendency of. which is to destroy or substantially
injure an industry, efficiently and economically operated, in the
United States, or to prevent the establishment of such an industry,
or to restrain or monopolize trade and commerce in the United
States, are unlawful. Section 1337a provides that the importation
of a product made under a patented process shall have the same
status under ? 1337 as the importation of a patented product.
Since the case law has established the importation of patented
products as unfair acts under ? 1337, ? 1337a in effect means
that the importation of an unpatented product made by a patented
process also may be unfair under ? 1337. See Herrington, U.S.
International Trade Commission: Imported Articles Made By Patented
Processes, 14 J. World Trade L. 549 (1980); Kaye, Developments In
Unfair Trade Practices In International Trade: A Review Of The
Third And Fourth Years Under Section 1337 As Amended By The Trade
Act Of 1974, 61 J.P.O.S. 115 (1979).
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Moreover, cease and desist orders against particular firms may
not be effective where importation of offending products can
easily find alternative channels.- And enforcement of exclusion
orders by customs officials can be difficult because of the
difficulty of differentiating products made by patented pro-
cesses from those that were not. 2/ Thus, it is quite difficult
for a process patentee to obtain effective protection under
1337 where his patented invention is practiced overseas and the
resulting product sold in the United States.
Relevant patent law should be amended to allow holders of
U.S. process patents to realize the full benefits of their inven-
tions in the United States. Creating new and more efficient
ways to produce the needs of society is becoming increasingly
important; such innovation depends on adequate protection of the
required investment. Importation and sale in the United States
of products produced by patented processes severely undercuts
the value of such patents, and should be effectively countered
by changes in the patent laws to protect the legitimate interests
of U.S. inventors.
2/ In one proceeding, the exclusion order applied to the product
regardless of the method used to make it but allowed an importer
to institute new proceedings to show that the product it wished
to import was made by an unpatented method. Certain Multicellular
Plastic Film, Inv. No. 337-TA-54, USITC Pub. No. 987 (June 1979).
The utility of this procedure across-the-board is an open ques-
tion.
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Proposed Legislation
1. 35 U.S.C. ? 154 should be amended to read as follows
(material to be added is underlined):
Every patent shall contain a short title of the
invention and a grant to the patentee, his heirs or
assigns, for the term of seventeen years, subject to
the payment of issue fees as provided for in this title,
of the right to exclude others from making, using, or
selling the invention, and if the invention is a process
of the right to exclude others from using or selling
products produced thereby, throughout the United States,
referring to the specification for the particulars thereof.
A copy of the specification and drawings shall be annexed
to the patent and be a. part thereof.
2. 35 U.S.C. ? 271 should be amended by redesignating
existing subsection (a) as (a)(1), and by inserting the fol-
lowing as new subsection. (a)(2):
(a)(2) If the patented invention is a process,
whoever without authority uses or sells in the United
States during the term of the patent therefor a
product produced by such process infringes the patent.
3. Title 35, United States Code, should be amended by adding
the following new ? 294:
? 294. Presumption: Product Produced by Patented Process.
In actions alleging infringement of a process patent
based on use or sale of a product produced by the patented
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process, if the court finds (1) that 'a substantial like-
lihood exists that the product was produced,by the
patented process and (2) that the claimant has exhausted
all reasonably available means through discovery or
otherwise to determine the process actually used
in the production of the product and was unable so
to determine, the product shall be presumed to have
been so produced, and the burden of establishing that
the product was not produced by the process shall be
on the party asserting that it was not so produced.
Explanation Of Proposed Legislation
The proposed amendments to 35 U.S.C. ?? 154 and 271 in effect
extend the exclusive rights of the.holder of a process patent to
products made by the patented process. The amendment to ? 154
would grant to process patentees the right to exclude others from
using or selling such products; the complementary amendment to
? 271 would make the use or sale of such products infringement.
This general approach to the scope of process patents has been
adopted in many foreign countries.
Under the amendments, use or sale of products made by patented
processes would constitute infringement regardless of where such
products were made. However, their primary effect would be on
foreign manufacturing, since a process patentee can prevent the
use of his patented process by domestic manufacturers directly.
The amendment would not prevent foreign manufacturers from using
patented processes abroad, so long as'the products they made
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thereby were sold and used abroad. But the amendments would
prevent circumvention of a U.S. process patentee's legitimate
domestic rights through manufacture abroad and subsequent impor-
tation into the United States of products made by his patented
process.
Providing process patentees with infringement remedies
against users or sellers of products made by their patented
processes may not, however, be sufficient to protect their rights
against the threat of foreign manufacture and importation.
Proof of infringement would require proof that the patented
process was actually used in the manufacture of the product in
question, and a patentee may be unable to provide such proof
where the foreign manufacturer is not subject to service of
process in the United States. To remedy this problem, new ? 294
would be added to Title 35, to establish, in carefully defined
circumstances, a rebuttable presumption that a product that
could have been made by use of a patented process was in fact so
made. The burden of overcoming this presumption would be on the
defendant in an infringement suit, regardless of whether it is a
foreign manufacturer, an importer, or a subsequent purchaser.
While the defendant may not necessarily have in its possession
the means necessary to rebut the presumption, it is likely to be
in a far better position than the patentee to obtain it. Importers,
for example, because of their relationships with foreign manu-
facturers, may be able to exert pressure on such manufacturers
to produce the necessary information. Purchasers from importers
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may in turn be able to exert similar pressure on those importers,
which would be transmitted to foreign manufacturers.
Presumptions of manufacture by a patented process, however,
should not be casually established. Importers and subsequent
purchasers may be unable to obtain the information needed to
overcome such presumptions, even where the products.in question
were in fact not made by the patented process. At a minimum, the
presumption would subject any party who uses or sells any product
that might have been made by a patented process to increased
litigation risks. Indeed, there is some risk that such a
presumption could induce frivolous litigation intended to dis-
courage firms from carrying products that compete with the paten-
tee's product. To minimize these possibilities, the proposed
legislation requires two conditions to be satisfied before a
product will be presumed to have been made by a patented process.
First, the patentee must demonstrate on the basis of the
evidence that is available that a "substantial likelihood" exists
that the product was made by the patented process. Such evidence
could include indications or "marks" on the product itself, as
well as expert testimony regarding known methods of production
at costs that would justify sale of the product at the prices
being charged. Exactly how much evidence will be needed in
particular situations to satisfy the "substantial likelihood"
condition would develop in case law. A patentee's burden obvi-
ously should be somewhat less than that of proving successfully
at trial that a product-in question was in fact made by the
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patented process. On the other hand, a patentee would have to
establish more than a slight, even if reasonable, possibility
that the product was so made. Second, the patentee must show
that he has exhausted all reasonably available. means through
discovery and otherwise to determine what process was used in
the manufacture of the product in question and was unable to do
so. Thus, patentees must make initial, good faith efforts to
prove this key element in their infringement cases. Patentees
will have to use normal discovery channels, as well as other
good faith methods, as courts deem appropriate. This burden
should help eliminate frivolous or unsound suits.
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