March 29, 2016
Grantbacks are a relatively common licensing provision in which patent holders require a licensee to “grant back” certain rights to improvements or subsequently developed technology.1 They are not inherently problematic from an antitrust perspective, and they often provide procompetitive benefits through increased innovation and dissemination of technology. However, grantbacks have the potential to run afoul of the Sherman Act and foreign competition laws if they reduce companies’ incentives to innovate and to develop new technologies. Courts therefore apply the “rule of reason” analysis to assess the competitive implications of these provisions, which means their legality turns on whether they create a substantial anticompetitive effect in a relevant market. Generally, grantbacks are unlikely to be anticompetitive unless particularly burdensome on the licensee and/or are combined with other conduct that violates the Sherman Act.
Grantbacks Are Generally Permissible and Often Procompetitive
The Supreme Court held that grantbacks are not inherently illegal as early as 1947.2 In Transparent-Wrap Machine Corp. v. Stokes & Smith Co., the Supreme Court evaluated an exclusive grantback requiring the licensee to assign all improvement patents on the original technology back to the licensor.3 Even though the licensee only received a non-exclusive, royalty-free license on its own subsequent developments, the court concluded that the provision was not inherently anticompetitive.4
Following the Supreme Court’s decision, lower courts have applied the “rule of reason” analysis to assess grantbacks. Courts have particularly focused on the following factors: (1) whether the arrangement is exclusive; (2) whether the right is assigned and/or whether the licensee can use the improvement; (3) the ability of the licensor to grant sublicenses; (4) the scope of the grantback and its relation to the original patent; (5) the duration of the grantback; (6) royalty fee arrangements; (7) the level of competition between the parties; and finally, (8) the market power of the original patent holder.5
Courts have generally applied these factors to find grantbacks legal absent some additional anticompetitive behavior or overarching conduct.6 In Santa Fe-Pomeroy, Inc. v. P&Z Company, Inc., for example, the Ninth Circuit assessed a grantback related to improvements on a construction process.7 Plaintiffs claimed not only that they were coerced into accepting the grantback as a condition for accessing certain essential technology, but also that the grantback could stifle innovation.8 The Ninth Circuit concluded that the grantback did not cause any competitive harm due to the availability of competitive alternatives, the limited duration and subject matter of the arrangement, and the lack of evidence that innovation was suppressed.9
The Department of Justice and Federal Trade Commission (together, the “Agencies”) have adopted a similarly permissive approach to grantbacks, recognizing the potential for procompetitive benefits. First, grantbacks encourage patent holders to license technology without the concern that a licensee may develop an improvement and ultimately exclude the licensor from using this proprietary technology built upon its own patent.10 Second, grantbacks promote innovation through the dissemination of patented technology. The Antitrust Guidelines for the Licensing of Intellectual Property explain:
“Such arrangements provide a means for the licensee and the licensor to share risks and reward the licensor for making possible further innovation based on or informed by the licensed technology, and both promote innovation in the first place and promote the subsequent licensing of the results of the innovation.”11
Courts and the Agencies therefore balance these procompetitive effects when assessing the legality of a grantback provision.
Grantbacks Can Result in Anticompetitive Effects
Despite the typical procompetitive nature of grantbacks, courts and the Agencies have recognized the potential for competitive harm. While the Supreme Court found that grantbacks were not per seillegal, it acknowledged the “possibilities of abuse.”12 The Antitrust-IP Guidelines elaborate on this possibility, explaining that “[g]rantbacks may adversely affect competition, however, if they substantially reduce the licensee’s incentives to engage in research and development and thereby limit rivalry in innovation markets.”13
Certain factors increase the likelihood that a grantback will raise antitrust concerns. Exclusivity, scope, and duration all have the potential to stifle innovation and development by reducing the appeal and potential gains of the licensee. Exclusive grantbacks typically allow the licensee to use the improved technology it has developed on the original patent, but only the original patentee—and not the developing licensee—can license it to third parties.14 The reduction in potential gains therefore reduces the incentives of the licensee to improve upon the patent at all. Relatedly, grantbacks can extend beyond the scope of the original patent and apply to unrelated patents of the licensee.15 As the scope and duration of the grantback increases, the licensee’s incentive to innovate may further decrease.16
Courts and the Agencies also carefully consider the patentee’s market power because it may increase the likelihood of competitive harm.17 This factor is particularly relevant in the standard setting context. Choosing a patented technology as the standard reduces the number of substitutes for that technology, increasing the patentee’s bargaining ability.18 Grantbacks therefore have increased potential to violate the antitrust laws when included in a license for essential patents, which typically confer market power. However, a grantback in exchange for a license under an essential patent is not necessarily anticompetitive. In a February 2015 business review letter, the DOJ approved such a non-exclusive grantback policy, explaining that the limited nature of the grantback alleviated concerns about coercive licensing and diminished incentives to innovate.19 The Agencies have thus found limited grantbacks permissible even with essential patents.
- Grantbacks are not inherently problematic under the antitrust laws and often provide procompetitive benefits.
- Grantbacks have the ability to cause anticompetitive effects, however, if they reduce parties’ incentives to innovate and to develop new technologies.
- Courts and the Agencies therefore assess grantbacks under the rule of reason and generally find them permissible unless overly burdensome or combined with other conduct that violates the Sherman Act.
- Herbert Hovenkamp, Antitrust and the Patent System: A Reexamination, 76:3 Ohio State L.J. 467, 537 (2015).↵
- Transparent-Wrap Machine Corp. v. Stokes & Smith Co., 329 U.S. 637 (1947), 646-48.↵
- See, e.g., Santa Fe-Pomeroy, Inc. v. P&Z Company, Inc. 569 F.2d 1084, 1101-03 (9th Cir. 1978) (discussing factors including the limited scope and duration of the grantback, absence of market power, and royalty-free rights); Well Surveys, Inc. v. McCullough Tool Co., 199 F. Supp. 374, 395 (N.D. Okla. 1961) (noting that the grantback was non-exclusive, limited in scope, and permitted the original licensor to sublicense the improvements), aff’d, 343 F.2d 381 (10th Cir. 1965); United States v. E.I. duPont de Nemours & Co., 118 F. Supp. 41, 224 (D. Del. 1953) (discussing the limited scope of the grantback and how it did not enhance the licensor’s market power), aff’d on other grounds, 351 U.S. 377 (1956).↵
- Hovenkamp, supra note 1, at 537 (“When assessed under the rule of reason, grantbacks are seldom found to be anticompetitive, although harm is possible in a few situations.”).↵
- Santa Fe-Pomeroy, 569 F.2d at 1100-01.↵
- Id. at 1101.↵
- Id. at 1101-02.↵
- Hovenkamp, supra note 1, at 536.↵
- U.S. Dep’t of Justice & Fed. Trade Comm’n, Antitrust Guidelines for the Licensing of Intellectual Property §5.6 (1995) [hereinafter Antitrust-IP Guidelines], available at http://www.justice.gov/atr/antitrust-guidelines-licensing-intellectual-property.↵
- Transparent-Wrap, 329 U.S at 466.↵
- Hovenkamp, supra note 1, at 537. Conversely, a “non-exclusive” arrangement requires the licensee to grant back certain rights, but it does not prohibit the licensee from licensing to third parties. Courts have generally found non-exclusive grantbacks unlikely to violate the antitrust laws. Antitrust-IP Guidelines, supra note 11, at §5.6 (“Compared with an exclusive grantback, a non-exclusive grantback, which leaves the licensee free to license improvements technology to others, is less likely to have anticompetitive effects.”). See, e.g., Wells Surveys, 199 F. Supp. at 395 (holding that a limited, non-exclusive license “did not have an anti-competitive effect, but tended to bring about a wider distribution of the use of new inventions”).↵
- Notably, a court has yet to find a grantback illegal when limited in scope to the licensed patent unless combined with a broader anticompetitive scheme. See, e.g., Duplan Corp. v. Deering Milliken, Inc., 444 F. Supp. 648, 700 (D.S.C. 1977) (“Had the grant-back clauses limited the scope of the improvements required to be assigned . . ., in all probability they would have satisfied the test in Transparent Wrap. . . .”), aff’d in part & rev’d in part, 594 F.2d 979 (4th Cir. 1979).↵
- Dep’t of Justice & Fed. Trade Comm’n, Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition 92 (April 2007) [hereinafter Antitrust-IP Report].↵
- Antitrust-IP Guidelines, supra note 11, at §5.6 (“An important factor in the Agencies’ analysis of a grantback will be whether the licensor has market power in a relevant technology or innovation market.”). Courts have found certain grantbacks legal due to the absence of market power. See, e.g., Santa Fe, 569 F.2d at 1102 (“Although the [construction] process has been widely accepted, it by no means has a monopoly on wall construction.”).↵
- Antitrust-IP Report, supra note 16, at 38. The agencies’ 2007 Antitrust-IP Report acknowledges this phenomenon, explaining that after a standard has been adopted, a patent holder could potentially force the licensee “to choose between two unpleasant options” of not making the standard or acceding to the patent holder’s demands. Id. at 37-38.↵
- Renata B. Hesse, U.S. Dept. of Justice, Business Review Letter to Michael A. Lindsey, 15 (Feb. 2, 2015) (“The Update prohibits licensors from demanding licenses to applicants’ patents that are not essential to the same standard as part of their licensing terms and from forcing an applicant to take a license to patent claims that are not essential to the referenced standard.”).↵