Tuesday, May 20, 2014

Licensing Notes - introduction to the essential facilities doctrine

In this note, we prepare for our coverage of the Trinko case with an introduction to the essential facilities doctrine.

Let’s start will two fairly clear propositions about patent and copyright law in the United States. The first is that the proprietor of a patent or a copyright controls the extent to which she exploits her intellectual property. She need never manufacture or publish; there is no working requirement in U.S. law. And the proprietor may assign all or part of her IP rights to others. But there is no obligation to do so. A patent or copyright holder need not share her IP with anyone. To use the language of antitrust, there is no duty to deal, no duty to license.

Now the second proposition. A proprietor of a patent or copyright who chooses to exploit her intellectual property right -- whether directly or by means of a license to another -- may charge ‘what the market will bear.’ There are no limits -- imposed by either intellectual property law or antitrust law -- on the amount of license royalties that can be demanded.

Both of these propositions -- the freedom to license (or not) and the freedom to set royalties -- are seen to flow naturally from the very monopolies that patent and copyright law establish. A patent or copyright generates a set of exclusive rights. To require the proprietor to license to another is inconsistent with those exclusivities and undercuts the monopoly the intellectual property creates. A limit on royalties reduces the economic reward conferred by Congress on authors and inventors.
There are, however, circumstances where a duty to license might be found. U.S. antitrust decisions establish the ‘essential facilities’ doctrine. Under this theory, the proprietor of an ‘essential facility’ may be required to deal with another. The essential facilities doctrine has not been applied to a patent or copyright in the United States, but it is easy to see how it could be. And the application of the essential facilities doctrine to intellectual property has taken root in other jurisdictions -- notably in the European Union. What then is the ‘essential facilities doctrine’ in U.S. antitrust law? Two cases will give us a better idea.

The first case is Terminal Railroad Association of St. Louis, a 1912 decision of the U.S. Supreme Court. The case was brought by the United States under Section 1 of the Sherman Act against a group of railroads that controlled access to the Mississippi River crossings at St. Louis. Recall that Section 1 of the Sherman Act declares unlawful any contract, combination or conspiracy in restraint of commerce; Section 1 addresses concerted actions.

There were -- at the time of the case -- only three ways for railroads to cross the river at St. Louis: two bridges and a ferry. A group of railroads jointly controlled access to all three routes. There were no alternate means of crossing the river -- only by using the ‘essential facility’ controlled by these railroads were the non-participating railroads able to reach the other side. The controlling railroads permitted their rivals to use the essential facilities - Terminal Railroad Association did not involve an absolute refusal to deal. The controlling railroads, however, subjected the non-participating railroads to harsh economic terms.
The Court found the controlling railroads to have violated Section 1 of the Sherman Act by gaining control of the river crossing bottleneck and ordered them to permit the other railroads to use the facilities -- the access to the river crossings -- on “just and reasonable terms” and on a non-discriminatory basis.

The second case is Aspen Skiing, decided by the Supreme Court in 1985. Unlike Terminal Railroad Association, Aspen Skiing is a Section 2 case involving unilateral conduct. The plaintiff, a ski lift operator, brought an action against a rival who discontinued cooperation in an all-Aspen joint ticketing scheme. The plaintiff controlled one of the four ski areas at Aspen; the defendant owned the other three. Continued participation in an all-Aspen joint ticketing scheme was the arguable ‘essential facility’ denied to the plaintiff; customers desired the convenience of an all-Aspen ticket and would be less likely to buy a separate ticket to ski the plaintiff’s area.

The Supreme Court upheld the Section 2 liability of the defendant. The Court noted that the defendant had refused to resume cooperation with its rival, even when offered its usual retail prices. Aspen Skiing as such involved the unilateral termination of a business relationship, and not a simple refusal to deal. This element may restrict the reach of Aspen Skiing.

The Supreme Court revisited Aspen Skiing in its 2004 Trinko decision and cast some doubt as to the continuing viability of the essential facilities doctrine. “We have never recognized such a doctrine,” the Court stated in Trinko, adding that it found no need to either recognize it or repudiate it.

If the essential facilities doctrine does exist in U.S. antitrust law, how might it apply with regard to an asserted ‘duty to license?’ The antitrust plaintiff - asserting an actionable refusal to license - would have to establish that access to a particular item of intellectual property controlled by the defendant is ‘essential;’ substitutes cannot exist. The defendant must have denied access to the essential intellectual property - that is, refused to license - and the licensing of the patent or copyright must be feasible.

And where a duty to license arises, Terminal Railroad Association, the St. Louis bridges case, suggests that any license must be on a just, reasonable and non-discriminatory basis. We can find the roots of FRAND in the Supreme Court’s 1912 Terminal Railroad Association decision.

Taglines: Antitrust, FRAND, Intellectual Property, Licensing

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