The Reagan administration is teaming up with business to try to give owners of innovative technology new freedom in squeezing profits out of their know-how. Judges are being won over, but ironically, those very victories seem to be cooling the chances of getting more permanent reform through Congress.
At hearings recently on a bill introduced by Sen. Patrick J. Leahy (D-Vt.) to give inventors more leeway in writing licenses for using their inventions, little opposition surfaced. But neither did much enthusiasm for making a major push to move the bill out of committee and into the lawbooks.
Many lawyers have long seen a basic conflict between the patent laws, which confer a legal monopoly on the use of certain knowledge, and the antitrust laws, designed to combat monopoly.
The courts have responded by being very suspicious of how a company uses a patent, throwing out as unlawful, for instance, licenses that tie the use of the patented technology to the license-holder buying other products from the patent owner.
Leahy insists that this judicial approach stems from a misunderstanding of what monopoly is. He argues that the exclusive right to use a certain process or product seldom gives a company a hammerlock on a market, because other companies are competing with other ways to do the same task. Makers of the proverbial better mousetrap compete not only with makers of old-fashioned (and probably cheaper) mousetraps, but also with exterminators and sellers of mouse-proofing techniques.
Leahy's measure, like a similar one introduced in the House by Rep. Hamilton Fish Jr. (R-N.Y.), would tell judges never to find that provisions of a patent or know-how license are automatically unlawful. In a suit, judges would weigh the pluses and minuses of the contract, and rule against only those that leave consumers worse off. And even in those cases, plaintiffs would win only actual damages, not the treble damages that are routine in all other kinds of antitrust litigation.
Without the change, Leahy says, companies may back off from research spending, because they will be constrained in promoting any breakthroughs they make. At the Senate hearings, a representative of Digital Equipment Corp. agreed with that conclusion, saying that under current rules companies are afraid to license their new technology and therefore can earn less from it, and that reduces management's willingness to gamble money on developing the technology in the first place.
And the American Bar Association said that giving a company more licensing freedom will lead to productivity innovations and, ultimately, an improvement in the balance of payments.
Antitrust chief Charles F. Rule submitted written testimony to the Senate hearings in which he argued that licensing freedom may actually stimulate the economy because small companies that often are on the cutting edge of new technology also often lack the manufacturing and distribution clout to bring their inventions to the mass market.
But at the same time that Rule was making his point that the old restrains on patent licensing were ill-suited to modern business reality, he was undercutting his argument that Congress had to act to alter the situation.
Less than a week after the Senate hearings, Rule filed papers in U.S. District Ccourt arguing that companies were widely using just the kind of licensing provisions that the Leahy and Fish bills are meant to allow. And in the papers, he called attention to court approvals of such provisions.
Here's what happened. Years ago, Hercules Inc. took out a license to use in the United States a German technique for making aluminum trialkyls, a basic ingredient in polyethylene and biodegradable detergents. Hercules and Stauffer Chemical Co. formed a joint venture to make the compounds under the new process and to sell them to other chemical companies. Part of the deal with the German inventor was that licenses granted to other U.S. companies to use the process would limit the license holders to making aluminum trialkyls only for their own use, with sales to other forbidden.
The Justice Department in 1970 called that ban on outside sales an unlawful curb on competition and sued. By 1977, the U.S. companies were tired of the litigation and wanted to settle. They agreed to sweeping prohibitions on future patent licenses, the kind of thing that pre-Reagan antitrusters thought would spur competition. Both Hercules and Stauffer promised not to be part of any agreement for using a method of making a product that gives any company an exclusive right to sell the product, unless that product itself is patented.
The Justice Department now wants to tear up that consent decree. It puts the two companies at a competitive disadvantage, Rule says, because their competitors have a licensing freedom that they do not have. Beside, the German patent owner, refusing to settle the original Justice suit, in 1982 won a ruling from a U.S. Court of Appeals that there was nothing unlawful about the license terms in the first place.
Essentially, the aluminum trialkyls case shows that judges are responding to the same changes in economic theory and legal reasoning that have caused the antitrusters to change their tune. And that makes the lawmakers loathe to make the major effort needed to write into the antitrust laws a change that may, in reality, have already been read into them by the courts.
Moskowitz covers legal affairs for McGraw-Hill World News.