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Antitrust Problems

Antitrust and Unfair Competition Problems in General

Since by definition, most small startups do not possess a large enough segment of the market to have monopoly power or effect anticompetitive practices which violate the securities laws, antitrust and unfair competition considerations do not usually come up in the operations of small startups. On the other hand, small startups may from time to time be the victims of monopolistic or other anticompetitive practices of large companies who are their competitors. The area of greatest concern is the effect of antitrust laws on licensing of patents and trade secrets. Trade secrets and patents are different routes to the exploitation of intellectual property, and they have substantial differences in terms of antitrust law. Thus, patents are a legal monopoly granted by the Senate in Canada and Congress in the USA, whereas trade secrets do not possess such statutory power to exclude non-licensed persons. A trade secret, since it is the product of secrecy, ceases to exist when secrecy is lost, whereas a patent lasts for its statutory term unless it expires for failure to pay the required maintenance fee or is held to be invalid or not enforceable. A patent is enforceable against an identical invention created by independent research or reverse engineering, whereas trade secret rights are not enforceable if secrecy is lost through independent invention or reverse engineering. Trade secrets are not deemed to be restraints of trade. A trade secret license does not inherently impose a restraint on competition and the public enjoys the same rights before and after the development and use of a trade secret. In light of these differences, the courts apply antitrust laws less vigorously to trade secret licensing than to patent licensing.

Varies Restrains

Product Price Restrains

In a leading case, Dr. Miles Medical Co. v. John D. Park & Sons Co., the United States Supreme Court denied the plaintiff the right to set prices of a product based on a secret process. The illegality of resale price maintenance and trade secrets is similar to that with respect to patents.

Territorial Restrains

The courts have been much more lenient in allowing restrictions as to territory, in both patent and trade secret licensing provided that the territorial restrictions are reasonably ancillary to the grant of the technology itself. On the other hand, if territorial restraints in technology licensing are merely a subterfuge for division of horizontal markets, such restraints will be held illegal.

Duration of Licensing Agreements

In the case of a patent licensing agreement, payment of royalties is usually coterminous with the life of the patent. On the other hand, since trade secrets have no defined life, royalties can be extended beyond public disclosure of the trade secret. Where a licensing agreement covers both patentable and trade secret aspects of a product, separate agreements should be used so that termination of the patented portion will not terminate royalties under the trade secret license, or, if one agreement is used, royalties should be allocated between the patents and trade secrets so that termination of royalty payments under the licensed patents expiration will not affect the royalties under the trade secrets.

Quality and Field of Used Restrictions

Where the licensor desires to limit the quantity and field of use of a patented product, quantity and field of use restrictions will usually be upheld although quantity restrictions are subject to the rule of reason. Restrictions on quantity and field of use in trade secret licenses are permissible provided that the restrictions are ancillary to the principal purpose of the license, which is to transfer secret technology.

Grant Back Provisions

Grant-back provisions allow for a return or grant-back of inventions developed by the licensee relating to the licensed technology. Such provisions in patent licenses are subject to the rule of reason. The courts also permit such provisions in trade secret clauses provided they are confined in scope to the technology granted under the main license agreement.

Tying Agreements

Tying agreements require the licensee to purchase one product as a condition to receiving supplies of another product. In patent licensing agreements, such agreements are strongly disfavored where the licensor/seller has sufficient economic power in the "tying product" so as to be able to restrain competition in the market place where the "tied" product is sold. In trade secret cases, if the tying has a market impact, and there is substantial economic power in the technology, which is licensed, the arrangement may be illegal.

Predatory Pricing

The Competition Act makes unlawful in Canada three basic types of business practices: (1) price discrimination in its various forms; (2) sales below cost; and (3) the granting of rebates and discounts not made available to all buyers on like terms and conditions. The purpose of the Act is to safeguard the public against the creation or perpetuation of monopolies and to foster and encourage competition, by prohibiting unfair, dishonest, deceptive, destructive, fraudulent and discriminatory practices by which fair and honest competition is destroyed or prevented.