Antitrust & Competition Newsletter - September 2012

Top Story, United States

Patent Licensing in the Cloud: Antitrust Issues

Posted on September 17, 2012

by Richard Rinkema and David Smutny

It is well established in the United States that a patent holder generally has broad discretion to determine how it uses or licenses it patents. The U.S. Supreme Court's bottom-line principle expressed in Trinko—that companies are free to refuse to deal with anyone—applies to intellectual property as is does to other property rights.1 As the U.S. DOJ and FTC have expressed, "the unilateral right to refuse to grant a patent license is a core part of the patent grant."2 And as patent holders generally are free to refuse to license their patents, they also generally are free to impose any restrictions they wish on licenses that they do grant.3

This general rule holds as well in the rapidly growing and changing cloud computing industry. Nevertheless, the antitrust laws do impose some limits on a patent holder's rights, and as a result patent licensing and litigation have become significant competitive issues in the technology industry in recent years. Companies licensing patents in the cloud should be aware that certain licensing practices in the cloud might have anti-competitive effects that could trigger antitrust concerns. This article reviews, at a high level, whether the nature of cloud computing raises special antitrust risks, and if so, when a company should consider further review of its licensing practices.

1. An Overview of Cloud Computing

   Cloud computing is the provision of data or applications on demand, over the web, to remote users. The cloud can best be viewed as a "stack" consisting of five layers—hardware, virtualization, infrastructure as a service ("IaaS"), platform as a service ("PaaS"), and software as a service ("SaaS"):

   Each layer depends on interface and protocol interoperability to those above and below it for the cloud to work properly. For example, when a user opens a photograph in her Facebook account on her smartphone, she is using a SaaS application (the Facebook app) to retrieve data (the digital photograph file) stored in remote hardware (the Facebook servers) that are collectively managed by virtualization software and an operating system. If the remote hardware fails, then neither the SaaS application nor the data can be retrieved, and the user experience collapses.

   Within each broad layer is an abundance of potential product and technology markets that are similarly codependent: servers and mainframes with connected storage devices and networking gear; server, mainframe, and cloud operating systems; video compression and streaming software; search engines; webmail; online advertising; and others. Surrounding these is an overlapping series of products (and potential markets) such as smartphones, tablet computers, PCs, set-top boxes, and game consoles. Many, and likely most, of the underlying technologies in these markets are subject to intellectual property protections.

   To recoup investments and obtain cost predictability, players at all levels in the cloud rely on patent licensing, frequently in the form of cross-licenses and portfolio licenses that provide a form of "patent peace" to the parties. The licensing practices are particularly important to the heavyweight patent holders that compete across multiple markets in the cloud. One player that competes in several cloud-related markets, IBM, perennially has been one of the top two patent holders in the world. Apple, Microsoft, Amazon, Hewlett-Packard, and Oracle/Sun also possess significant patent portfolios and compete with one another within the cloud industry. And recently, Google appears to be scrambling to catch up.

2. Antitrust Risks in the Cloud Cloud computing represents a disruptive "paradigm shift" potentially comparable to the emergence of the Internet and the personal computer. As such, the cloud presents opportunities for companies to leverage rapid technology change to challenge previously dominant competitors in once-unassailable markets. And like the Internet and the PC before it, the cloud promises tremendous potential efficiency and innovation benefits for consumers and the economy. This virtually guarantees that competition authorities around the world will closely watch cloud-related markets for potential antitrust violations. For patent licensors, some of the most important antitrust risks include: (1) market power and tipping points; (2) tying and package licenses; and (3) standards setting and patent pools.

   (1) Market Power and Tipping Points

   As described above, the cloud consists of multiple intersecting and overlapping markets. As a result, cloud computing may present scenarios where a company that has market power in one cloud market can use that market power to foreclose competition in adjacent markets. This is especially the case because of the need for interoperability between technologies in the cloud. A company that holds patents covering protocols and other links between a monopoly product and products in another market can expect greater scrutiny of its licensing practices. This is especially the case in jurisdictions, such as the European Union, where monopoly leveraging is a more viable claim than in the United States).

   Like other technology industries, the cloud also presents risks of tipping points, where one company's product becomes an accepted standard. This potential for market tipping can be exacerbated by the presence of network effects or high barriers to entry, just as in more mature technology markets. Providers that operate across multiple cloud markets—and especially providers that are dominant in one or more markets—therefore should carefully review licensing practices to avoid being accused of leveraging market power in one area of the cloud into another area of the cloud.4

   (2) Tying and Package Licenses

   Another, related risk arising from the multiple layers of cloud markets is that of anti-competitive tying or bundling. Generally, a distinction exists between patent-to-product tying and patent-to-patent tying. In patent-to-product tying, the patent owner "uses the market power conferred by the patent to compel customers to purchase a product in a separate market that the customer might otherwise purchase from a competitor." U.S. Philips Corp. v. Int'l Trade Comm'n, 424 F.3d 1179, 1189-90 (Fed. Cir. 2005). Courts have found such licenses to constitute antitrust violations or patent misuse, and companies should be wary of any such conditions in patent licenses. See, e.g., United States v. U.S. Gypsum Co., 333 U.S. 364, 400 (1948); Int'l Salt v. United States, 332 U.S. 392, 395 (1947); Virginia Panel Corp. v. MAC Panel Co., 133 F.3d 860, 868-69 (Fed. Cir. 1997).

   By contrast, in most cases, companies may offer a license to a portfolio (or package) of patents without undue concern about potential antitrust risk. See Philips, 424 F.3d at 1190-91. However, package licenses can raise antitrust issues if a company that owns rights to essential patents forces licensees take a license to non-essential patents, and that coercion forecloses competition from commercially viable alternative technology. Id. at 1194. Therefore, patent holders who offer...