As former judges and government officials, legal academics and economists who are experts in antitrust and intellectual property law, we write to express our support for the Avanci business review letter issued by the Antitrust Division of the U.S. Department of Justice on July 28, 2020 (the “2020 business review letter”). The 2020 business review letter represented a legally sound and evidence-based approach in applying antitrust law to innovative commercial institutions like the Avanci patent pool that facilitate the efficient commercialization of new standardized technologies in the fast-growing mobile telecommunications sector to the benefit of innovators, implementers, and consumers alike.

Read the full letter here.

Abstract

This comment by 25 law professors, economists and former United States government officials was submitted to the European Union Commission in response to a “call for evidence” on the licensing, litigation, and remedies of standard-essential patents (SEPs). It details the principal concepts and substantial evidence relating to the constructive role of SEPs in efficiently promoting innovation and structuring commercialization activities in high-tech devices generally and the mobile revolution specifically. It also addresses widespread misunderstandings and misstatements about the commercialization and litigation of SEPs. It broadly makes three points.

First, in contrast to the evidence of the positive role of SEPs in promoting innovation and commercialization in wireless technologies, no published empirical study has found evidence of the predicted marketplace effects of “holdup” or “royalty stacking” theories, such as higher prices, less innovation, and less market competition in smartphones. Second, contrary to claims by some commentators that courts do not issue injunctions for the infringement of SEPs, the comment reviews some representative decisions from the substantial case law in Europe in which SEP owners have requested or obtained injunctions against implementers engaging in holdout tactics. Third, it explains how courts have consistently held that the fair, reasonable, and non-discriminatory (FRAND) commitment by SEP owners does not mandate a “license to all” rule nor that reasonable royalties be calculated according to the “smallest salable, patent practicing unit” (SSPPU) standard. These court decisions are consistent with the economic function and evidence of SEP licensing on FRAND terms.

The mobile revolution has created unparalleled economic and technological growth over the past three decades. So long as courts provide robust enforcement of intellectual property rights, and do not impede the licensing and other contracts predicated on those rights, there is every reason to believe that the mobile market will continue to thrive. The comment concludes with an Appendix listing the substantial, published literature addressing both the success of the SEP-based sector of the global innovation economy and the numerous substantive and methodological flaws in “holdup” and “royalty stacking” theories.

Abstract

This comment by 27 law professors, economists and former government officials was submitted to the Department of Justice in response to a call for comments on a draft policy statement on standard essential patents (SEPs). Although the draft policy statement is right to seek a “balanced, fact-based analysis [that] will facilitate and help to preserve competition and incentives for innovation and continued participation in voluntary, consensus-based standard-setting activity,” the comment identifies how its proposals fail to accomplish this goal. First, the draft policy statement fails to account for the extensive scholarly research and rigorous empirical studies identifying numerous substantive and methodological flaws in the “patent holdup” theory, including its failed predictions of high prices, less innovation, and less market competition; instead, a growing mobile communications marketplace has existed for several decades. Second, the draft policy statement micro-manages the negotiation and litigation process for SEPs, which would make injunctions and exclusion orders at the International Trade Commission a de facto nullity for SEPs. This special rule effectively prohibiting injunctions contradicts repeated court decisions in both the U.S. and Europe concerning the general availability of all patent remedies for SEPs. Ultimately, the draft policy statement incentivizes strategic holdout by implementers and de facto prohibits injunctive relief for ongoing infringement of an SEP by an unwilling licensee. This would harm U.S. innovators facing increasing economic and strategic competition from China. It also threatens U.S. economic leadership and its national security, which contradicts the expressly stated goal of President Joseph Biden’s Executive Order, the progenitor of this draft policy statement, of “preserving America’s role as the world’s leading economy.” Thus, the 27 legal academics, economists, and former government officials urge the agencies to reconsider its draft policy statement on SEPs. The comment includes an Appendix of the literature on the licensing and enforcement of SEPs.

Summary

While the three-step burden-shifting framework for evaluating antitrust cases under the rule of reason is conceptually well-accepted and understood, case law remains unclear regarding what suffices to satisfy each party’s burden at each of the three stages. This case offers the Court an opportunity both to clarify what constitutes harm to competition and to explain the nature of the shifting burdens in rule of reason analysis.

In their merits briefing, rather than offer tools for providing structure to the rule of reason, Petitioners urge the Court to adopt an amorphous standard that would permit plaintiffs to satisfy their burden without evidence of durable market power— and even without direct proof of anticompetitive effects as the term is traditionally and properly understood in Section 1 jurisprudence. Acquiescing to Petitioners’ vague conception of a plaintiff’s prima facie burden would untether antitrust law from rigorous economic analysis and harm consumers by increasing significantly the risk of error in lower courts. This would leave litigants with little to no certainty regarding what evidence they should introduce, let alone what evidence a court would find persuasive in any given case, and no clarity as to what businesses can and cannot do.

Without an approach to establishing plaintiff’s burden disciplined by economic analysis and proof, the balance of false positive (Type I) and false negative (Type II) errors—which is critical to proper adjudication of the antitrust laws—would be thrown off keel. The fundamental goal of antitrust law is to foster consumer welfare by enhancing or increasing output in a relevant market. Output is the touchstone of antitrust analysis because a dominant firm’s ability to constrain market-wide output is what allows it to anticompetitively raise prices and harm consumers. Petitioners’ approach, however, would flip this analysis on its head and allow price effects to dictate results, thereby permitting courts to ignore output effects—the sine qua non of antitrust analysis—in ascertaining whether a plaintiff satisfied its prima facie burden.

Such a result is contrary to this Court’s precedent and particularly problematic here. This Court has recognized that vertical restraints might “[increase prices] in the course of promoting procompetitive effects.” Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 895-96 (2007) (citing Bus. Elecs. Corp. v. Sharp Elecs. Corp., 485 U.S. 717, 728 (1988)). And modern economics provides no basis for assuming that a demonstration of price effects on only one side of a two-sided market accurately represents the market-wide effects of a course of conduct. Rather, economics predicts that market-wide welfare might increase, decrease, or remain neutral given price effects on a single side. Only an analysis of the market as a whole can illuminate the true competitive implications.

This brief explains amici’s understanding of the relevant economic analysis. It explains why basic economic principles underlying the analysis of multi-sided markets lead to the conclusion that a plaintiff should be required to demonstrate, at a minimum, that: (1) the allegedly unlawful restraint caused anticompetitive effects in the form of actual or probable restricted output market-wide—a showing that logically requires analyzing both sides of a two-sided market; and (2) the defendant had sufficient market power to restrict output in a properly defined market. These two requirements align with sound economics and would also provide clear guidance for courts in applying the rule of reason.