On 8 August 1994 the antitrust division of the Department of Justice (DOJ) released draft antitrust guidelines for the licensing and acquisition of intellectual property ('the guidelines').

These guidelines are likely soon to be issued in final form.

While the new guidelines simply restate many existing antitrust principles, they also amplify some recent enforcement policies and attempt to provide a greater measure of certainty for licensing arrangements within defined 'safety zones'.It is impossible to reach a definitive conclusion concerning the impact the draft guidelines will have on antitrust enforcement actions.

However, the proposal to define 'innovation markets' and to use them as one vehicle to analyse the competitive impact of licensing arrangements has generated controversy in the public comments on the draft guidelines.The application of US antitrust laws to intellectual property has varied over the past two decades.

During the early 1970s, the US antitrust agencies viewed intellectual property licensing restrictions sceptically and brought a number of challenges against intellectual property owners.The pendulum swung towards a more benign view of licensing arrangements in the mid-1980s, epitomised by the intellectual property provisions of the DOJ's 1988 guidelines for international operations, which reflected a view that most licensing practices were procompetitive and that virtually all should be judged under the rule of reason.With the change in administration in 1993 and the appointment of Anne Bingaman as assistant attorney-general in charge of the antitrust division, the DOJ has begun to undertake more enforcement activity and to question some past enforcement policies.

During Ms Bingaman's tenure the DOJ has withdrawn or replaced a number of existing antitrust guidelines in order to make its written guidance consistent with its current enforcement philosophy.The DOJ's new intellectual property guidelines are part of this revision process, and they will replace the intellectual property provisions of the 1988 international guidelines (which will otherwise be superseded by proposed 1994 international guidelines).According to the DOJ, the new intellectual property guidelines represent an attempt to encourage technological innovation and to promote predictability of antitrust enforcement by recognising that intellectual property rights often facilitate procompetitive ends.

The DOJ states that three principles underli e the guidelines: (1) intellectual property licensing can be valuable and procompetitive; (2) intellectual property will be treated under the same antitrust principles as other forms of property; and (3) intellectual property owners will not be presumed to have market power.

Although these principles have not previously been articulated in precisely this manner, they are not significantly different in substance from the DOJ's enforcement philosophy during the last decade with respect to intellectual property.The guidelines recognise that intellectual property is typically one component among many in a production process and therefore derives value from its combination with other components.

Because licensing, cross-licensing and other transfers of intellectual property can facilitate such integration, the guidelines acknowledge that intellectual property licensing arrangements are often procompetitive.

The guidelines also recognise that there can be procompetitive benefits from certain restrictive licensing practices, such as field-of-use, territorial, andThe guidelines recognise that intellectual property is typically one component among many other limitations which may be necessary to allow a licensor to exercise its rights as efficiently and effectively as possible.The guidelines state, however, that intellectual property licensing agreements may have antitrust implications if they impede competition that would have been likely to have taken place in the absence of the licence.

Examples of such impediments to competition include restrictions on goods or technologies other than the licensed technology, penalties upon licensees for seeking alternate technologies, or acquisitions of intellectual property rights that lessen competition in a relevant antitrust market.A framework for evaluating whether licensing arrangements impermissibly impede competition is established by the guidelines.

The first determination that the DOJ will make in evaluating restraints in licensing agreements (eg territorial or field of use restrictions), is whether to apply the per se rule, and thereby to challenge the restraints as illegal on their face, or the rule of reason, which involves a balancing of the procompetitive and anticompetitive effects of the restraints.

While the rule of reason will be applied to the vast majority of restraints contained in licensing agreements, the per se rule will be applied if the restraint at issue is of a type ordinarily given per se treatment, for example, price fixing or market allocations, and which does not create an efficiency producing integration of economic activity.If a restraint is one that would ordinarily be subject to per se analysis, the guidelines warn that the DOJ will not readily accept a claim that per se treatment should not be applied because of the presence of efficiency producing integration.

Instead, if a 'quick look' at claims of efficiency producing integration reveals that the restraint is not reasonably necessary to achieve those efficiencies, the restraint will likely be challenged without further inquiry.As an example of such a 'quick look', the guidelines describe a hypothetical licence for process technology that gives each licensee an exclusive territory in which to sell the product manufactured with that technology and forbids each licensee from selling the product, whether or not manufactured with that technology, outside its designated territory.The focus of the inquiry is whether the inclusion within the territorial restraint of products manufactured with other processes has sufficient procompetitive potential to justify review under the rule of reason.

The guidelines conclude that if the patented process is an advance over prior technology and will in fact be used by the licensees, then the restraint may have the procompetitive effect of promoting the use of the licensed technology.However, if it is assumed instead that the licensed process is not a technological advance and is not likely to be used, even though it is licensed, the guidelines conclude that there would be no procompetitive benefits from the restriction on use of other processes and that the licence would likely be challenged as a per se unlawful agreement to allocate territories.If the licensing restraint is not challenged as per se unlawful following a quick look analysis and does not fall within the 'safety zone' described below, the DOJ will undertake a two-step enforcement appraisal under the rule of reason.First, the DOJ will determine whether the restraint has anticompetitive effects by examining the structure of the market, including: (1) the possibility that the arrangement will facilitate anticompetitive co-ordination; (2) the effect of any exclusivity conferred in the arrangement; (3) the possibility of a reduction of competition that likely would have occurred absent the licence; and (4) other factors, such as a history of rivalry and a rapid pace of innovation.If the DOJ concludes that the restraint does have anticompetitive effects, it will then determine: (1) whether the restraint's procompetitive consequences outweigh such anticompetitive effects; and (2) whether the restraint is 'reasonably necessary' to produce those procompetitive benefits.To determine whether a restraint is 'reasonably necessary', the proposed guidelines state that the existence of practical and significantly less restrictive alternatives is important to the determination.

The guidelines note that the DOJ will not seek the 'theoretically least restrictive alternative' but will instead focus on 'the practical prospective business situation faced by the parties'.

This comment may give rise to uncertainty in attempting to predict how the DOJ will evaluate a particular restraint because it appears at least to some extent to involve a subjective assessment of the parties' negotiating positions.

It could even become a factor in shaping the very negotiations to which it is intended to be applied, as parties attempt to position themselves to argue subsequently that they agreed to the least restrictive alternative that they were capable of negotiating.

The guidelines also note that the duration of a restraint can be an important factor in determining whether it is reasonably necessary to achieve the claimed procompetitive effects.The proposed guidelines state that the DOJ will not presume that an intellectual property owner necessarily holds market power, ie the ability profitably to maintain prices above, or output below, competitive levels for a significant period of time.

Even though an intellectual property right confers the power to exclude others with respect to the specific product, process or work in question, there will often be sufficient substitutes to prevent the exercise of market power.

Although a given intellectual property grant may confer market power, no antitrust offence necessarily results if the grant was lawfully acquired and maintained.

Moreover, the guidelines note that the possession of such market power does not obligate an intellectual property owner to license the technology to others.Perhaps the most significant new provision of the guidelines is the establishment of a safety zone for certain restraints.

For licensing restraints subject to the rule of reason under the proposed guidelines, the DOJ will first determine whether a licensor and its licensees collectively account for no more than 20% of each relevant market affected by the restraint.

If so, then the DOJ will not challenge the restraint absent in the as yet undefined extraordinary circumstances.This newly created safe harbour has been proposed 'to address widespread concern that small businesses and innovators are hampered by antitrust uncertainty', according to deputy assistant attorney-general Richard Gilbert, who chaired the antitrust division task force which drafted the guidelines.The guidelines identify three different types of markets that may be analysed in reviewing an intellectual property arrangement: goods markets, technology markets and innovation markets.

The guidelines state that in defining a safety zone the DOJ will focus primarily on the goods and technology markets affected by a licensing provision, and will examine innovation market shares only if the assets required to compete in research and development are specialised and identifiable.

To determine market shares for purposes of assessing whether a licensing arrangement is within the safety zone, the DOJ will apply the 1992 horizontal merger guidelines.Under those guidelines, market shares for goods markets may be expressed in terms of dollar sales, shipments, or production, or in physical terms measuring sales, shipments, production, capacity or reserves.

Market shares in technology markets are determined by looking at the licensed intellectual property at issue and all technologies that are close substitutes.

For entities using a new technology, the DOJ generally will forecast market acceptance over a two-year period to determine market share.

Where it is impossible to delineate a distinct technology market in which the licensed technology competes, the DOJ will focus on the relevant market for the associated goods.The safety zone is intended to provide an element of certainty for parties entering into qualifying agreements.

However, the proposed guidelines make clear that it is not intended to discourage agreements falling outside the protection of the safety zone; those agreements will be evaluated as described above.The DOJ has emphasised that no presumption of illegality or heightened scrutiny occurs if an arrangement is outside the safety zone and therefore is evaluated fully under the rule of reason.As discussed above, the DOJ has identified 'innovation markets' as one of the types of markets in which it will evaluate a licensing arrangement.

Although in practice the DOJ has been evaluating the competitive implications of intellectual property licensing arrangements in 'innovation markets' for some time, the new guidelines mark an attempt to articulate more fully this emerging focus of DOJ enforcement activity.

Other than the newly defined safety zone, this description of DOJ policy may be the most significant and controversial aspect of the proposed guidelines.An innovation market involves highly specialised research and development (R&D) that could be affected substantially by the licensing restraint under examination.

The guidelines define innovation markets as those in which 'the capacity for research and development activity that likely will produce innovation in technology is scarce and can be associated with identifiable specialised assets or characteristics of specific firms'.

Where t he DOJ can identify only a few R&D firms that possess the necessary assets or characteristics to effect innovation in a given technology, the DOJ may consider those firms a distinct innovation market.

By definition, this would be a proper market only if the participants could increase their profits by co-ordinated behaviour that frustrated technological innovation.The DOJ will evaluate a participant's competitive significance in an innovation market based on various factors, including each market participant's share of assets upon which innovation depends, of R&D expenditures, and of the related product market, and the anticompetitive effects of eliminating alternative research paths balanced against any efficiency benefits from the integration of complementary R&D programmes.The draft guidelines provide an example of the DOJ's approach in evaluating potential competitive effects in innovation markets.

In example two of the guidelines, two companies enter into an agreement to cross-licence future patents relating to The new intellectual property guidelines represent an attempt to encourage technological innovation development of a component for aircraft jet turbines.

The example assumes that innovation in this area necessitates the ability to work with very high tensile strength material.

The licensing arrangement in question raises the possibility that competition in R&D will be reduced in the development of the subject component and possibly related components.In deciding whether to consider competitive effects in an innovation market, the DOJ must first determine whether such a market can be defined.

If the DOJ 'cannot reasonably identify the firms with the required capability, it will not attempt to define an innovation market'.If, however, the firms that have the capability to work with very high tensile strength materials can be reasonably identified, then an innovation market may be defined.

The number of firms in this defined innovation market is crucial.

If the number is very large, the DOJ will conclude that the market is competitive.

If the number is small, the DOJ may evaluate the competitive effects of the licensing arrangement within that innovation market itself, or as it affects related technology and goods markets.

The discussion of the particular example explains that in an analysis of competitive effects in an innovation market, the DOJ will take into account the specific nature of the restraint, the likelihood that other firms may in the future acquire the requisite capability, other competitive factors, and any efficiency justifications for the licensing arrangement.The DOJ's attempt to clarify this relatively new area of focus was met by substantial criticism in the public comments submitted in response to the proposed guidelines.

A number of the comments noted that the ambiguity inherent in the innovation market concept not only makes it difficult to gauge how a market will be defined in a particular instance, but also undermines the usefulness of the safety zone.

Because it is necessary to define a relevant market in order to determine whether a licensing arrangement is within the safety zone, ambiguity in the criteria used to define the market arguably eliminates much of the certainty that was to be provided through this safe harbour.Public comments also questioned whether markets for R&D, independent of their effects in technology or goods markets, are within the reach of the antitrust laws, which address only restraints of trade.

Because R&D itself is not a product that can be bought or sold in a market, commentators argued, it does not constitute 'trade'.

To date, when the DOJ has considered innovation markets in its enforcement proceedings, there have been effects in relevant goods and technology markets sufficient to support the actions brought.

It is thus unclear whether the DOJ will actually challenge licensing agreements that tend to restrain only pure research and development, but not the output created by such innovation.Despite the passage of several months since they were proposed, the guidelines have not yet been issued in final form.

The single most significant reason for the DOJ's delay in issuing the final guidelines appears to be the decision to attempt first to obtain the concurrence of the Federal Trade Commission - which shares responsibility for enforcement of US antitrust laws with the DOJ but which did not participate in the preparation of the draft guidelines - so that the final guidelines can be issued jointly by the two agencies.In addition, according to recent remarks by DOJ officials, there will be some substantive changes in the final guidelines - although none will change the basic approach set forth in the draft guidelines and discussed in this article.Among the changes that are anticipated is a clarification that innovation markets and technology markets will be used to analyse a licensing arrangement only when the competitive effects of the arrangement cannot be adequately evaluated in the context of a more traditional market for goods.The DOJ has also indicated that the final guidelines will give more specific guidance about the technology market concept, including the estimation of market share in such a market.

Finally, the guidelines will reportedly make more explicit that a non-exclusive licence will rarely be viewed as a competitive problem if it does not restrain the competitive conduct of the licensor or the licensee.