Feds Eyeing Bids In Historic High-Tech Auction

Antitrust concerns are causing the U.S. Department of Justice to eye an unprecedented auction of a mother lode of digital-communication technology warily.

Bankrupt telecom equipment maker Nortel Networks plans to auction off a treasure trove of more than 6,000 high-tech patents next week.  The patents cover vital parts of the new 4G LTE wireless protocol, wireless video, Wi-Fi, and many other wired and wireless communications technologies.

The Justice Department has expressed concern that the new owner of these patents could use them to create barriers to entry in digital communications.

The first company to announce a bid was Google, which began the public positioning for the auction with an $800 million “stalking horse” bid that others are expected to top.  The winning bid may easily exceed $1 billion.

While the Justice Department has approved Google’s bid, it is also reported to be investigating some others.  Apple, Intel, RIM, and Ericsson are expected to bid before the auction concludes next week.

According to the Justice Department’s guidelines on antitrust issues with intellectual property, a patent owner can generally license or refuse to license its patents to anyone, if it acts unilaterally.  Refusing to license a patent is considered an exercise of the rights inherent in a patent, to exclude others from using or selling an invention.  This rewards innovation and creates an incentive to disclose new inventions instead of keeping them secret.

On the other hand, licensing patents with conditions can harm competition outside the rights granted by the patent itself, and can violate the Sherman Act, according to the Justice Department’s guidelines.  While not per se illegal, patent licenses that require the licensee to license its own, unrelated patents to the original licensor, or to transfer any follow-on patents to the licensor, may diminish other companies’ potential to profit from their own inventions, which could suppress innovation in general.  Licenses that dictate the pricing of goods that use the patent are more likely to be found illegal.

One worry that some technology companies have expressed about the Nortel auction is that the winner could change the terms of their licenses to the patents going forward.  Where a patented technology is vital to a company’s business, demanding new terms when renewing a longstanding license in a way that would significantly raise their costs of doing business could possibly violate Section 2 of the Sherman Act, based on the Supreme Court’s decision in Aspen Skiing Co. v. Aspen Highlands Skiing Corp.

However, the Supreme Court has since said that Aspen Skiing represents the “high-water mark” of liability for refusing to deal with a competitor.  It may well be that no liability would arise for a licensing change, even with a long-term relationship between owner and licensee.

Given that the Justice Department has already cleared a major bid in the Nortel auction, the auction is likely to proceed without any formal antitrust challenges.  But the Justice Department’s positions on patent licensing – not to mention the courts’ – have certainly had an impact on the content of the bids and the conduct of the auction itself.

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