Sometimes Congress does something right, and one example is the Bayh-Dole Act of 1980. This bipartisan patent law is widely recognized as one of the great legislative achievements of the past 60 years. It has massively boosted innovation and economic growth by incentivizing researchers and universities to commercialize their new inventions by, paradoxically, removing them from public control by the government. The Biden administration has now announced a plan to twist this law to reimpose government control over these inventions in the form of price controls. This proposal would kill this “golden goose” of innovation.

Read the full piece here.

Interest of Amici Curiae

Amici curiae are seventeen law professors, economists, and former government officials with expertise in antitrust, patent law, and law and economics. Their work has appeared in the American Economic Review, the Journal of Law and Economics, the Yale Law Journal, and the Harvard Law Review, among others, and collectively has been cited more than 16,000 times. As scholars and former public servants, they have an interest in promoting the coherence and development of legal doctrines consonant with sound economic principles and in ensuring that both consumers and the general public benefit from new inventions and technologies. They have no stake in any party nor in the outcome of this proceeding. Amici write to serve the Commission and the public interest by elaborating the legal and economic principles that frame this dispute. The amici and their affiliations are listed in the Appendix.

Introduction

This case presents a complex set of transactions whereby Illumina, Inc. (“Illumina”) created GRAIL, Inc. (“GRAIL”), spun it off while retaining a minority interest, and now has reacquired it. Complaint Counsel seeks to unwind this recent reacquisition. But as Chief Administrative Law Judge D. Michael Chappell’s Initial Decision (“ID”) recognized, vertical mergers are structurally distinct from horizontal mergers. Horizontal mergers carry inherent risks of anti-competitive effect; vertical mergers, by contrast, often offer procompetitive benefits. (See ID 169.) Unwinding this transaction would set a dangerous precedent by deterring innovative companies like Illumina from developing and commercializing new products or, at a minimum, restricting consumers’ access to those products. Antitrust enforcers should be held to a higher burden before risking such market disruptions.

An overbroad presumption against vertical mergers—of the type Complaint Counsel advocates here—is particularly inappropriate in the complicated institutional landscape of biopharmaceutical markets, especially those still in their infancy. Here, for example, it is difficult to predict how the market for Multi-Cancer Early Detection Tests (“MCEDs”) will operate, particularly when true alternatives to GRAIL’s products from other producers are still years away. (See ID 143.) Given the singular importance of capital investment in developing, testing, and commercializing MCEDs, the risks to consumers of blocking such investment are particularly high. Accordingly, courts have refused to enjoin vertical mergers without compelling, concrete evidence that a vertical merger is likely to harm competition to a substantial degree. See, e.g., United States v. AT&T, Inc., 916 F.3d 1029, 1032 (D.C. Cir. 2019). Scholars and courts alike have recognized that the efficiency gains from vertical mergers make it impossible to treat this class of transactions as presumptively anticompetitive. As Judge Chappell acknowledged, challenges to vertical mergers require a more fact-intensive inquiry. (ID 168-69.)

Nor should a company’s self-imposed restraints, such as Illumina’s Open Offer, be discounted in the way that Complaint Counsel advocates. (See Complaint Counsel Br. (“CC Br.”) 35.) The Open Offer is a market fact, not a legal remedy, and implicates Complaint Counsel’s prima facie case. Market participants should be encouraged to structure their operations ex ante to avoid potential anticompetitive effects. When markets are new and incentives are speculative, the Commission should not presume that a company in a vertical merger would breach its contractual obligations, especially when there are clear performance metrics that are easily monitored and enforced by the relevant parties.

The potential costs of preventing vertical mergers are high, as experience in emerging-technology markets amply demonstrates. Given the ultimate benefits to consumers, the Commission should be wary about importing the strong presumptions from horizontal-merger law and upsetting a model of spin-off and reacquisition that offers significant procompetitive benefits to consumers.

Read the full brief here.

Introduction and Summary of Argument

Building and maintaining a successful brand is no small task. First you must spot a widespread need or desire that no one else can see—or can even feel yet. “People don’t know what they want until you show it to them,” Steve Jobs said. An entrepreneur must aim, therefore, “to read things that are not yet on the page.” Walter Isaacson, Steve Jobs 567 (2011). This, believe it or not, is sometimes the easy part.

Next, you must get people to notice you and your great idea. You must raise your voice above the modern din. This usually requires advertisements. Lots of advertisements. “Half the money I spend on advertising is wasted,” nineteenth-century retailer John Wanamaker is supposed to have said; “the trouble is I don’t know which half.”

Finally, you must maintain your momentum. During a train ride, a friend asked William Wrigley why he spent so much advertising his chewing gum when he already dominated the market. “How fast do you think this train is going?” Wrigley replied. “About ninety miles an hour,” answered the friend. “Well,” said Wrigley, “do you suggest we unhitch the engine?” David Ogilvy, Ogilvy on Advertising 171-72 (1985).

All this assumes, of course, that after you have innovated, invested, and risked all to climb to the top, the antitrust laws will not thwart your efforts to recoup a reward commensurate to your sacrifices. To read the Sherman Act as “making everyone fight but forbidding anyone to be victorious” would, observed Justice Holmes, turn it into an “imbecile statute.” Ron Collins, Ask the Author: “The Great Oracle of American Legal Thought”—Revisiting the Life and Times of Justice Holmes, SCOTUSblog, http://bit.ly/2Phv3qh (Mar. 28, 2019).

With pluck, daring, and dedication, 1-800 Contacts built the online contact lens market. People had assumed that contact lenses were available only at an optometrist’s office or a brick-and-mortar store. Spending many millions of dollars on advertising, 1-800 raised awareness that contact lenses could be bought—and bought cheaply—on the web. And 1-800 did not stop there. Thanks in no small part to its continuing to advertise widely to this day, the online lens market remains a thriving one.

Many copycat firms wisely followed 1-800 into the online contact lens market. Unfortunately, however, some of these firms sought not just to share in the successful market 1-800 created, but also to directly piggyback on 1-800’s advertising. Instead of following 1-800’s lead by doing the hard and expensive work of advertising broadly—on television, in print, on the radio, and so on—these firms just bought the advertising space at the top of internet search results for terms like “1-800 Contacts.” Rather than attract new customers of their own, in other words, the firms just tried to divert 1-800’s.

1-800 sued (or threatened to sue) each of the free-riding firms for trademark infringement, and each lawsuit settled. As part of the settlements, the parties agreed not to buy advertisements keyed to navigational searches of brand names like “1-800 Contacts.” Generic search terms like “cheap contact lenses” remained fair game for all, as did advertising in all other forms of media.

The Federal Trade Commission examined whether the settlements are an antitrust violation under the Sherman Act (as applied through the FTC Act). Assuming the settlements are even a proper subject of antitrust scrutiny 1-800 argues they are not—the FTC needed at the outset to decide the standard under which to perform its review. It could choose to conduct either (a) a “quick look” analysis of the settlements’ effect on competition, or (b) a more complete “rule of reason” analysis of it. The FTC erred, we contend in this brief, in electing to take only a “quick look” before condemning the settlements:

A. The quick-look standard governs only when the conduct at issue is obviously anticompetitive. The Supreme Court has accordingly applied the quick-look standard only to agreements that explicitly suppress competition. The settlements here, which leave almost the entire universe of contact-lens advertising intact, do nothing like that. What is more, the Supreme Court has declined to apply the quick-look standard to conduct accompanied by suspicious elements, such as a de facto advertising ban or a payment to delay entry into a market, that do not exist here.

B. Even without the Supreme Court’s guidance, the need for a rule-of-reason analysis would still be clear. The FTC cited no case or research that finds behavior analogous to the settlements an unreasonable restraint of trade. This is hardly surprising given that, as the FTC itself acknowledged, search-engine keyword advertising is “relatively new.” The lack of consensus about the settlements’ effect on competition should have driven the FTC toward the rule-of-reason standard.

Not only do the settlements serve no anticompetitive ends; they serve procompetitive ones. As 1-800 and Commissioner Phillips, writing in dissent below, explain, the settlements save litigation costs and protect trademark rights.

We home in on one vital benefit of trademark protection: the suppression of advertisement free riding. 1-800’s advertising attracted customers both to purchase contact lenses online and to purchase them from 1-800 specifically. The settlements did nothing to stop the general shoppers from finding the cheapest online contact lenses, but they did stop firms from diverting customers searching for 1-800. The settlements thus helped ensure that when 1-800’s broad (and expensive) advertising attracted new customers specifically to 1-800, competitors could not poach those customers on the cheap. By foreclosing a form of advertisement free riding, the settlements preserved the incentives that lead firms to invest in advertising in the first place. And because they therefore may have promoted, rather than suppressed, advertising, the settlements should not have been declared “obviously” anticompetitive and then subjected to a mere quick look.

C. The FTC claimed that, although it need not have done so, it ultimately conducted a rule-of-reason analysis. But the FTC never defined a market. And although it looked at prices, output, and quality, its analysis was abbreviated and defective. It plainly both adopted and applied the quick-look standard. This was error.

Read the full brief here.

On balance the Second Circuit was right to apply the antitrust laws to Apple.

Right now the Supreme Court has before it a petition for Certiorari, brought by Apple, Inc., which asks the Court to reverse the decision of the Second Circuit. That decision found per se illegality under the Sherman Act, for Apple’s efforts to promote cooperation among a group of six major publishers, who desperately sought to break Amazon’s dominant position in the ebook market. At that time, Amazon employed a wholesale model for ebooks under which it bought them for a fixed price, but could sell them for whatever price it wanted, including sales at below cost of popular books treated as loss leaders. These sales particularly frustrated publishers because of the extra pressure they placed on the sale of hard cover and paper back books. That problem disappeared under the agency relationship model that Apple pioneered. Now the publishers would set the prices for the sale of their own volumes, and then pay Apple a fixed commission for its services in selling the ebooks.

Read the full piece here.

by Richard A. Epstein, Laurence A. Tisch Professor of Law, NYU School of Law

A recent story in the Wall Street Journal described Josh Wright as the “FTC’s most conservative commissioner.” It is a sign of today’s politicized environment that this label is used as a substitute for serious substantive analysis of the particular positions that Wright has taken relative to the other commissioners. The article also noted that he was the Republican commissioner who brokered a deal with the three democratic members to publish a short set of guidelines to deal with the Delphic question of what counts as unlawful methods of competition. Before I had received knowledge that Josh was about to resign, I had posted a piece on Defining Ideas that carried with it the near-oxymoronic title, “When Bureaucrats Do Good.”

I must confess that my initial impression on hearing of the publication of the statement was that it would be more bad news. But I happily I changed course after reading the statement, which is mercifully short, and after having the benefit of the thoughtful dissent of the other Republican Commissioner Maureen Ohlhausen, and of the speech that FTC Chairwoman Edith Ramirez gave in defense of those guidelines at the George Washington Law School.

There are clearly times when short should be regarded as sweet, and this is one of them.  It may well be that there is an iron law that says the longer the document that any government prepares, the worse its content. This short policy statement sets matters in the right direction when it treats unfair methods of competition as a variation on the basic theme of monopoly, and notes that where the antitrust laws do apply, the FTC should be reluctant to exercise its standalone jurisdiction. It is a tribute to Ramirez and Wright that they could come to agree on the statement, so that a set of sound principles has bipartisan support.

It is also welcome that the dissent of Commissioner Ohlhausen does not differ on fundamental orientation but on two questions that I regard as having subordinate importance: do we give public hearings before publishing the statement; and do we provide more illustrations as to how the principle out to be applied. The pressure therefore came from the pro-market side of the political spectrum such that there is now no Commissioner on the FTC who regards Section 5 of the Federal Trade Commission Act as a general warrant to pursue any and all forms of professional mischief.

The contrast of this document with the FCC’s net neutrality principles is too clear to require much comment.

At this point, Josh will return to his position at George Mason University Law School, where he shall resume his distinguished academic career. He regards the publication of this one page statement as the capstone of his career. On that point, I am confident that history will prove him right. Welcome back to the Academy, and thanks for a job well done on the Commission.

Filed under: consumer protection, federal trade commission, ftc, JDW Symposium, regulation, section 5 Tagged: Federal Trade Commission, ftc, joshua wright, Symposium

Abstract

In its recent report entitled “The Evolving IP Marketplace,” the Federal Trade Commission (FTC) advances a far-reaching regulatory approach (Proposal) whose likely effect would be to distort the operation of the intellectual property (IP) marketplace in ways that will hamper the innovation and commercialization of new technologies. The gist of the FTC Proposal is to rely on highly non-standard and misguided definitions of economic terms of art such as “ex ante” and “hold-up,” while urging new inefficient rules for calculating damages for patent infringement. Stripped of the technicalities, the FTC Proposal would so reduce the costs of infringement by downstream users that the rate of infringement would unduly increase, as potential infringers find it in their interest to abandon the voluntary market in favor of a more attractive system of judicial pricing. As the number of nonmarket transactions increases, the courts will play an ever larger role in deciding the terms on which the patents of one party may be used by another party. The adverse effects of this new trend will do more than reduce the incentives for innovation; it will upset the current set of well-functioning private coordination activities in the IP marketplace that are needed to accomplish the commercialization of new technologies. Such a trend would seriously undermine capital formation, job growth, competition, and the consumer welfare the FTC seeks to promote.

In this paper, we examine how these consequences play out in the context of standard-setting organizations (SSOs), whose activities are key to bringing standardized technologies to market. If the FTC’s proposed definitions of “reasonable royalties” and “incremental damages” become the rules for calculating damages in patent infringement cases, the stage will be set to allow the FTC and private actors to attack, after the fact, all standard pricing methods through some combination of antitrust litigation or direct regulation on the ground that such time-honored royalty arrangements involve the use of monopoly power by patent licensors. In consequence, the FTC’s Proposal, if adopted, could well encourage potential licensees to adopt the very holdout strategies the FTC purports to address and that well-organized SSOs routinely counteract today. Simply put, the FTC’s proposal for regulating IP by limiting the freedom of SSOs to set their own terms would replace private coordination with government hold-up. The FTC should instead abandon its preliminary recommendations and support the current set of licensing tools that have fueled effective innovation and dissemination in the IP marketplace. FTC forbearance from its unwise Proposal will improve bargaining incentives, reduce administrative costs, and remove unnecessary elements of legal uncertainty in the IP system, thereby allowing effective marketplace transactions to advance consumer welfare.

Few academic publications have had as much direct public influence on the law as the 2008 article by my NYU colleague Oren Bar-Gill and then Harvard Law Professor Elizabeth Warren.  In “Making Credit Safer,” they seek to combine two strands of academic thought in support of one great cause—more regulation of financial markets.  They start with the central claim of behavioral economics that sophisticated entrepreneurs are able to take advantage of the systematic foibles of ordinary people, by rigging their products in ways that work systematically to their own advantage.  By plying ordinary individuals will carefully packaged payment contracts, firms can undercut the central postulate of rational choice economics that all voluntary transactions produce mutual gains for the parties.  In its stead we get the wreckage of families and fortunes brought about by unscrupulous bankers in search of a buck.  Warren and Bar-Gill repeatedly talk about the importance of empirical evidence.  Her own work, however, is exceptionally shoddy, as Todd Zywicki has recently pointed out in the Wall Street Journal.

Read the full piece here. 

I have now had a chance to review the excellent posts on the second day, all of which have a common flavor.  They expand the universe of relative considerations that need to be taken into account to decide whether imposing caps on interchange fees enhances or reduces overall social welfare.  The narrow perspective on this issue, which is difficult enough, is to master the dynamics of two-sided markets to figure out where the fixed costs of running the overall system should be allocated.

Read the full piece here.