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About a week ago, I was lucky to moderate the digital equivalent of a “fireside chat” with Richard Epstein about the patent system.  The topic was “Patent Rights: A Spark or Hindrance for the Economy?,” and Richard offered his usual brilliant analysis of the systemic viritues of securing patents as property rights.  you can listen to the podcast here.

The podcast is also available via iTunes, for readers of this blog who are members of the “cult of Apple.”

Here’s the description of the podcast:

Innovation and entrepreneurship are integral to America’s economic strength, and the U.S. patent system has been critical to nurturing the innovation economy.  With its foundation in Article One, Section 8 of the Constitution, the U.S. patent system has been the strongest in the world.  In recent years, some critics, including Judge Richard Posner, have argued that the patent system has led to excessive patenting, too much litigation, and unwarranted costs for consumers.  Patent defenders have responded that with every spike in innovation comes a corresponding increase in the number of patent suits, and efforts to weaken patent rights will inevitably lead to less innovation.  With the passage of the America Invents Act — the broadest overhaul of the patent system in 50 years America — many people believed that the dispute over patent rights would recede.  However, with a string of high profile patent infringement suits in the smartphone industry – and a new effort to roll back patent rights at the International Trade Commission certain patents held by so-called “non-practicing entities” (NPEs) – the debate over intellectual property has grown more intense.  Would reduced patent rights diminish U.S. competitiveness and depress innovation?  In a diversified economy, should NPEs have fewer patent rights than those that manufacture their inventions?   Will innovation continue apace even if patent protections are scaled back?

 

Filed under: intellectual property, patent

We often hear today that there’s an unprecedented “patent litigation explosion” that’s killing innovation. Last week, the New York Times plied this claim without abandon in its hit piece on high-tech patents.  It’s become so commonplace that this phrase garners over 1.3 million hits on Google. It’s especially common fare in discussions about the “smart phone war.”  It was raised repeatedly by my fellow panelists, for instance, at a congressional briefing a few days ago (you can listen to the audio of the event here).

Of course, a blog posting is not a law review article and so I can’t get into all of the weeds here, but a blog is ideal for a few quick reactions to this tread-worn trope in the public policy debates about patents.

First, it’s simply untrue. Award-winning economist, Zorina Khan, reports in her book, The Democratization of Invention, that patent litigation rates from 1790 to 1860 fluctuated a lot, but averaged 1.65%. Today’s patent litigation rates are around 1.5%.  As Yoda would say: patent litigation explosion this is not, hmm, no.  In fact, for three decades in Khan’s study patent litigation rates were higher than today’s litigation rate. From 1840-1849, for instance, patent litigation rates were 3.6% — more than twice the patent litigation rate today.

This was during a time, as reported by patent law professor Michael Risch, when patents were handwritten, and even worse, patents were extremely vague, incoherent and sometimes outright unintelligible.  And, as Professor Risch and others have so ably reported, patent law was very much unsettled at this time as well given the many new ways that the American patent system departed from English patent law. 

And it wasn’t just that the law was new and that patents were vague, as early scientific and technological discoveries were just as difficult to comprehend as the new scientific and technological discoveries are today. Long before Judge Richard Posner was complaining of the lack of technical competence at the PTO or Judge Learned Hand was complaining about his own ignorance of biochemistry in assessing the validity of early pharma patents, Supreme Court Justice Joseph Story was explaining in 1841 that

Patents and copyrights approach nearer than any other class of cases belonging to forensic discussions, to what may be called the metaphysics of law, where the distinctions are, or at least may be very subtle and refined, and sometimes, almost evanescent.

Frankly, with all of the rampant uncertainty in early patent law and in early developments in science and technology — early nineteenth-century scientists, for instance, were still vigorously debating whether the atomic theory of matter was valid — it’s surprising that the patent litigations rates weren’t astronomically higher than just 1.65%, or with many similar problems today that our patent litigations rates are only 1.5%.

The historical patent litigation rates are significant because they also include the same “patent wars” that we are experiencing with the “smart phone war.” The very first patent war began in 1851, and was called at the time in the popular press the “Sewing Machine War.”  The Sewing Machine War had all of the allegedly new problems about which there is much breathless commentary on the “smart phone war” today: lawsuits in multiple venues, expensive litigation, numerous overlapping patents, non-practicing (patent-licensing) entities obtaining injunctions against manufacturers, “defensive patenting,” inventors’ sales of patents to firms, etc., etc. There was even widespread popular outcry over the Sewing Machine War, as it was fought as much in the newspapers as it was in the courts. As the classic saying goes: What’s old is new again.

Importantly, the Sewing Machine War was ultimately resolved by patent-owners innovatively creating the very first patent pool in American history, called the Sewing Machine Combination, which functioned successfully until its last patent expired in the 1870s. The Sewing Machine Combination unleashed a tremendous amount of commercial, technological and even social innovation — including new innovative manufacturing techniques, innovative commercial practices, and even helping change social prejudices about women’s ability to use machines.  As a result, the sewing machine was fundamental to the success of the Industrial Revolution in the U.S., as I have detailed extensively in my historical research.

But even after the Sewing Machine War was brought to an end in 1856 by the Sewing Machine Combination, so-called “patent wars” continued to occur with every pioneering leap forward in technological innovation — the incandescent light bulb, telephone, electrical systems, automobile, airplane, and radio were all subjects of patent wars. Today’s patent lawyers remember very well the “diaper wars” and the “stent wars” of the 1980s, resulting in hundreds of millions of dollars in patent damages awards. If cutting-edge innovation in disposable diapers (a multi-billion-dollar industry, as any parent knows) is the subject of intense patenting and extensive litigation, then frankly we should be unsurprised that this occurs again with 21st-century cutting-edge innovation in smart phones, tablet computers and other digital devices.

Unfortunately, the complaints today about today’s patent litigation crisis arise more from unchecked intuitions about what feels like a bad situation, from unrealistic assumptions about how much certainty we can achieve in the patent system, and from emotionally-compelling anecdotes about innovators running into trouble with patents — like the ones that dominated the New York Times hit piece on high-tech patents a week ago.

As I said in a previous blog posting, it’s time to bring objectivity and a historical-based perspective to public policy discussions about patent litigation, the smart phone wars, and the role of property rights in innovation.

Filed under: intellectual property, litigation, patent, technology, war

The New York Times set hearts aflutter in the IP world yesterday with its hit piece on patents in the high-tech industry– I’m shocked, shocked to find the New York Times publishing biased articles on hot topics in politics and law — but Bloomberg also published an important article yesterday on the smart phone war, software patents and other topics raised by today’s so-called patent litigation crisis: Apple Phone Patent War Like Sewing Machine Minus Violence.

Read the full piece here. 

In a response to my essay, The Trespass Fallacy in Patent Law, in which I explain why patent scholars like Michael Meurer, James Bessen, T.J. Chiang and others are committing the nirvana fallacy in their critiques of the patent system, my colleague, T.J. Chiang writes at PrawfsBlawg:

The Nirvana fallacy, at least as I understand it, is to compare an imperfect existing arrangement (such as the existing patent system) to a hypothetical idealized system. But the people comparing the patent system to real property—and I count myself among them—are not comparing it to an idealized fictional system, whether conceptualized as land boundaries or as estate boundaries. We are saying that, based on our everyday experiences, the real property system seems to work reasonably well because we don’t feel too uncertain about our real property rights and don’t get into too many disputes with our neighbors. This is admittedly a loose intuition, but it is not an idealization in the sense of using a fictional baseline. It is the same as saying that the patent system seems to work reasonably well because we see a lot of new technology in our everyday experience.

I would like to make two quick points in response to T.J.’s attempt at wiggling out from serving as one of the examples I identify in my essay as a patent scholar who uses trespass doctrine in a way that reflects the nirvana fallacy.

First, what T.J. describes as what he is doing — comparing an actual institutional system to a “loose intuition” about another institutional system — is exactly what Harold Demsetz identified as the nirvana fallacy (when he roughly coined the term in 1969).  When economists or legal scholars commit the nirvana fallacy, they always justify their idealized counterfactual standard by appeal to some intuition or gestalt sense of the world; in fact, Demsetz’s example of the nirvana fallacy is when economists have a loose intuition that regulation always works perfectly to fix market failures.  These economists do this for the simple reason that they’re social scientists, and so they have to make their critiques seem practical.

It’s like the infamous statement by Pauline Kael in 1972 (quoting from memory): “I can’t believe Nixon won, because I don’t know anyone who voted for him.” Similarly, what patent scholars like T.J. are doing is saying: “I can’t believe that trespass isn’t clear and efficient, because I don’t know anyone who has been involved in a trespass lawsuit or I don’t hear of any serious trespass lawsuits.”  Economists or legal scholars always have some anecdotal evidence — either personal experiences or merely an impressionistic intuition about other people — to offer as support for their counterfactual by which they’re evaluating (and criticizing) the actual facts of the world. The question is whether such an idealized counterfactual is a valid empirical metric or not; of course, it is not.  To do this is exactly what Demsetz criticized as the nirvana fallacy.

Ultimately, no social scientist or legal scholar ever commits the “nirvana fallacy” as T.J. has defined it in his blog posting, and this leads to my second point.  The best way to test T.J.’s definition is to ask: Does anyone know a single lawyer, legal scholar or economist who has committed the “nirvana fallacy” as defined by T.J.?  What economist or lawyer appeals to a completely imaginary “fictional baseline” as the standard for evaluating a real-world institution?

The answer to this question is obvious.  In fact, when I posited this exact question to T.J. in an exchange we had before he made his blog posting, he could not answer it.  The reason why he couldn’t answer it is because no one says in legal scholarship or in economic scholarship: “I have a completely made-up, imaginary ‘fictionalized’ world to which I’m going to compare to a real-world institution or legal doctrine.”  This is certainly is not the meaning of the nirvana fallacy, and I’m fairly sure Demsetz would be surprised to learn that he identified a fallacy that according to T.J. has never been committed by a single economist or legal scholar. Ever.

In sum, what T.J. describes in his blog posting — using a “loose intuition” of an institution an empirical standard for critiquing the operation of another institution — is the nirvana fallacy. Philosophers may posit completely imaginary and fictionalized baselines — it’s what they call “other worlds” — but that is not what social scientists and legal scholars do.  Demsetz was not talking about philosophers when he identified the nirvana fallacy.  Rather, he was talking about exactly what T.J. admits he does in his blog posting (and which he has done in his scholarship).

Filed under: economics, intellectual property, law and economics, legal scholarship, patent, scholarship

Thank you to Josh for inviting me to guest blog on Truth on the Market.  As my first blog posting, I thought TOTM readers would enjoy reading about my latest paper that I posted to SSRN, which has been getting some attention in the blogosphere (see here and here).  It’s a short, 17-page essay — see, it is possible that law professors can write short articles — called, The Trespass Fallacy in Patent Law.

This essay responds to the widely-heard cries today that the patent system is broken, as expressed in the popular press and by tech commentators, legal academics, lawyers, judges, congresspersons and just about everyone else.  The $1 billion verdict issued this past Friday against Samsung in Apple’s patent infringement lawsuit, hasn’t changed anything. (If anything, Judge Richard Posner finds the whole “smart phone war” to be Exhibit One in the indisputable case that the patent system is broken.)

Although there are many reasons why people think the patent system is systemically broken, one common refrain is that patents fail as property rights because patent infringement doctrine is not as clear, determinate and efficient as trespass doctrine is for real estate. Thus, the explicit standard that is invoked to justify why we must fix patent boundaries — or the patent system more generally — is that the patent system does not work as clearly and efficiently as fences and trespass doctrine do in real property. As Michael Meurer and James Bessen explicitly state in their book, Patent Failure: “An ideal patent system features rights that are defined as clearly as the fence around a piece of land.”

My essay explains that this is a fallacious argument, suffering both empirical and logical failings. Empirically, there are no formal studies of how trespass functions in litigation; thus, complaints about the patent system’s indeterminacy are based solely on an idealized theory of how trespass should function.  Often times, patent scholars, like my colleague, T.J. Chiang, just simply assert without any supporting evidence whatsoever that fences are “crystal clear” and thus there are “stable boundaries” for real estate; T.J. thus concludes that the patent system is working inefficiently and needs to be reformed (as captured in the very title of his article, Fixing Patent Boundaries). The variability in patent claim construction, asserts T.J. is tantamount to “the fence on your land . . . constantly moving in random directions. . . . Because patent claims are easily changed, they serve as poor boundaries, undermining the patent system for everyone.”

Other times, this idealized theory about trespass is given some credence by appeals to loose impressions or a gestalt of how trespass works, or there are appeals to anecdotes and personal stories about how well trespass functions in the real world. Bessen and Meurer do this in their book, Patent Failure, where they back up their claim that trespass is clear with a search they apparently did on Westlaw of innocent trespass cases in California in a 3-year period. Either way, assertions backed by intuitions or a few anecdotal cases cannot serve as an empirical standard by which one makes a systemic evaluation that we should shift to anther institutional arrangement because the current one is operating inefficiently. In short, the trespass standard represents the nirvana fallacy.

Even more important, anecdotal evidence and related studies suggest that trespass and other boundary disputes between landowners are neither as clear nor as determinate as patent scholars assume them to be (something I briefly summarize on in my essay and call for more empirical studies to be done).

Logically, the comparison of patent boundaries to trespass commits what philosophers would call a category mistake. It conflates the boundaries of an entire legal right (a patent), not with the boundaries of its conceptual counterpart (real estate), but rather with a single doctrine (trespass) that secures real estate only in a single dimension (geographic boundaries). As all 1Ls learn in their Property courses, real estate is not land. Accordingly, estate boundaries are defined along the dimensions of time, use and space, as represented in myriad doctrines like easements, nuisance, restrictive covenants, and future interests, among others. In fact, the overlapping possessory and use rights shared by owners of joint tenancies or by owners of possessory estates with overlapping future interests share many conceptual and doctrinal similarities to the overlapping rights that patent-owners may have over a single product in the marketplace (like a smart phone).  In short, the proper conceptual analog for patent boundaries is estate boundaries, not fences.

In sum, the trespass fallacy is driving an indeterminacy critique in patent law that is both empirically unverified and conceptually misleading, and check out my essay for much more evidence and more in-depth explanation of why this is the case.

Filed under: intellectual property, law and economics, patent, SSRN, truth on the market

Richard Epstein replies to Judge Posner’s Apple v. Motorola opinion and follow-up article in The Atlantic.

The anti-patent sentiment has just been fueled by a remarkable opinion by Judge Richard Posner, my long-time colleague at the University of Chicago, sitting as a trial judge in the major case, Apple v. Motorola. The high-profile case concerns five patents—four by Apple and one by Motorola—that are involved in mobile phone technology, and it has drawn more than its fair share of attention. Judge Posner took the extraordinary step of dismissing the claims of both sides with prejudice—meaning, the case cannot be filed again elsewhere—on the grounds that neither side could make good on its argument for either damages or injunctions.

Thus, when the dust settled, there was no reason at all to have a trial on whether either side had infringed the patents of the other. In a subsequent piece written for The Atlantic, grandly entitled “Why There are Too Many Patents in America,” Posner delivered a general critique of the patent system, discussing the broader issues involved in his judicial decision.

There is much of interest, as always, in Epstein’s column.  But the closing section on damages and injunctions is where the action is:

What is so striking about Posner’s relentless dissection of the imprecision in these claims was that he could apply it with equal conviction in any patent software dispute. The estimates of damages under the law are not confined to a single standard, but often involve an uncertain choice between reasonable royalties for licensing the patent and actual damages that were incurred because the patents were not licensed. The injunctive relief is (or at least should be) awarded precisely because it is so difficult to figure out what those damages really ought to be.

But Posner said that he would not allow an injunction if the best that the plaintiffs could garner was $1 in nominal damages. That surely seems over the top, because if there is infringement, the one number that is manifestly wrong is $1. A more sensible approach here, therefore, is to mix and marry the two remedies, so that the injunction does not pull the past product off the market, but awards some damages for past losses, while giving the infringer some period of time—say three to six months—to invent around the patent for future output. This then sets the stage for a negotiated license if that is cheaper.

By putting the remedial cart before the liability horse, we have the odd situation that no one can find out anything about the strength of the patent or the potential range of damages. If that is done on a common basis, then we will have knocked out the entire patent system for software, without having the slightest idea of the relative strength of the Apple and Motorola contentions.

The Posner decision looks doubly worrisome against the backdrop of his ominous Atlantic column, which shows his ill-concealed disdain for a complex industry with which he has had no direct engagement. It is an odd way to make patent policy. Right now, a similar Apple-Samsung dispute is before Judge Lucy Koh, which will involve a real trial. The Posner opinion is already on the fast track to appeal before the Federal Circuit, which will give us more information as to whether these submarine assaults on the patent system will take hold. Let us hope that Posner’s mysterious patent adventurism dies a quick and deserved death.

Do go read the whole thing.  For interested readers, here is Posner’s Atlantic column.

Filed under: business, economics, entrepreneurship, intellectual property, licensing, litigation, markets, patent, technology

Last week, the FTC hired outside litigator Beth Wilkinson to lead an investigation into Google’s conduct, which some in the press have interpreted as a grave sign for the search company. The FTC is reportedly interested in pursuing Google under Section 5 of the FTC Act, which prohibits a firm from engaging in “unfair methods of competition.” Along with Bob Litan, who served as Deputy Assistant Attorney General in the Antitrust Division during the Microsoft investigation, I have penned a short paper on the FTC’s seemingly unorthodox Section 5 case against Google. (Disclosure: This paper was commissioned by Google.)

Read the full piece here.

The DOJ’s recent press release on the Google/Motorola, Rockstar Bidco, and Apple/ Novell transactions struck me as a bit odd when I read it.  As I’ve now had a bit of time to digest it, I’ve grown to really dislike it.  For those who have not followed Jorge Contreras had an excellent summary of events at Patently-O.

For those of us who have been following the telecom patent battles, something remarkable happened a couple of weeks ago.  On February 7, the Wall St. Journal reported that, back in November, Apple sent a letter[1] to the European Telecommunications Standards Institute (ETSI) setting forth Apple’s position regarding its commitment to license patents essential to ETSI standards.  In particular, Apple’s letter clarified its interpretation of the so-called “FRAND” (fair, reasonable and non-discriminatory) licensing terms that ETSI participants are required to use when licensing standards-essential patents.  As one might imagine, the actual scope and contours of FRAND licenses have puzzled lawyers, regulators and courts for years, and past efforts at clarification have never been very successful.  The next day, on February 8, Google released a letter[2] that it sent to the Institute for Electrical and Electronics Engineers (IEEE), ETSI and several other standards organizations.  Like Apple, Google sought to clarify its position on FRAND licensing.  And just hours after Google’s announcement, Microsoft posted a statement of “Support for Industry Standards”[3] on its web site, laying out its own gloss on FRAND licensing.  For those who were left wondering what instigated this flurry of corporate “clarification”, the answer arrived a few days later when, on February 13, the Antitrust Division of the U.S. Department of Justice (DOJ) released its decision[4] to close the investigation of three significant patent-based transactions:  the acquisition of Motorola Mobility by Google, the acquisition of a large patent portfolio formerly held by Nortel Networks by “Rockstar Bidco” (a group including Microsoft, Apple, RIM and others), and the acquisition by Apple of certain Linux-related patents formerly held by Novell.  In its decision, the DOJ noted with approval the public statements by Apple and Microsoft, while expressing some concern with Google’s FRAND approach.  The European Commission approved Google’s acquisition of Motorola Mobility on the same day.

To understand the significance of the Apple, Microsoft and Google FRAND statements, some background is in order.  The technical standards that enable our computers, mobile phones and home entertainment gear to communicate and interoperate are developed by corps of “volunteers” who get together in person and virtually under the auspices of standards-development organizations (SDOs).  These SDOs include large, international bodies such as ETSI and IEEE, as well as smaller consortia and interest groups.  The engineers who do the bulk of the work, however, are not employees of the SDOs (which are usually thinly-staffed non-profits), but of the companies who plan to sell products that implement the standards: the Apples, Googles, Motorolas and Microsofts of the world.  Should such a company obtain a patent covering the implementation of a standard, it would be able to exert significant leverage over the market for products that implemented the standard.  In particular, if a patent holder were to obtain, or even threaten to obtain, an injunction against manufacturers of competing standards-compliant products, either the standard would become far less useful, or the market would experience significant unanticipated costs.  This phenomenon is what commentators have come to call “patent hold-up”.  Due to the possibility of hold-up, most SDOs today require that participants in the standards-development process disclose their patents that are necessary to implement the standard and/or commit to license those patents on FRAND terms.

As Contreras notes, an important part of these FRAND commitments offered by Google, Motorola, and Apple related to the availability of injunctive relief (do go see the handy chart in Contreras’ post laying out the key differences in the commitments).  Contreras usefully summarizes the three statements’ positions on injunctive relief:

In their February FRAND statements, Apple and Microsoft each commit not to seek injunctions on the basis of their standards-essential patents.  Google makes a similar commitment, but qualifies it in typically lawyerly fashion (Google’s letter is more than 3 single-spaced pages in length, while Microsoft’s simple statement occupies about a quarter of a page).  In this case, Google’s careful qualifications (injunctive relief might be possible if the potential licensee does not itself agree to refrain from seeking an injunction, if licensing negotiations extended beyond a reasonable period, and the like) worked against it.  While the DOJ applauds Apple’s and Microsoft’s statements “that they will not seek to prevent or exclude rivals’ products form the market”, it views Google’s commitments as “less clear”.  The DOJ thus “continues to have concerns about the potential inappropriate use of [standards-essential patents] to disrupt competition”.

Its worth reading the DOJ’s press release on this point — specifically, that while the DOJ found that none of the three transactions itself raised competitive concerns or was substantially likely to lessen the competition, the DOJ expressed general concerns about the relationship between these firms’ market positions and ability to use the threat of injunctive relief to hold up rivals:

Apple’s and Google’s substantial share of mobile platforms makes it more likely that as the owners of additional SEPs they could hold up rivals, thus harming competition and innovation.  For example, Apple would likely benefit significantly through increased sales of its devices if it could exclude Android-based phones from the market or raise the costs of such phones through IP-licenses or patent litigation.  Google could similarly benefit by raising the costs of, or excluding, Apple devices because of the revenues it derives from Android-based devices.

The specific transactions at issue, however, are not likely to substantially lessen competition.  The evidence shows that Motorola Mobility has had a long and aggressive history of seeking to capitalize on its intellectual property and has been engaged in extended disputes with Apple, Microsoft and others.  As Google’s acquisition of Motorola Mobility is unlikely to materially alter that policy, the division concluded that transferring ownership of the patents would not substantially alter current market dynamics.  This conclusion is limited to the transfer of ownership rights and not the exercise of those transferred rights.

With respect to Apple/Novell, the division concluded that the acquisition of the patents from CPTN, formerly owned by Novell, is unlikely to harm competition.  While the patents Apple would acquire are important to the open source community and to Linux-based software in particular, the OIN, to which Novell belonged, requires its participating patent holders to offer a perpetual, royalty-free license for use in the “Linux-system.”  The division investigated whether the change in ownership would permit Apple to avoid OIN commitments and seek royalties from Linux users.  The division concluded it would not, a conclusion made easier by Apple’s commitment to honor Novell’s OIN licensing commitments.

In its analysis of the transactions, the division took into account the fact that during the pendency of these investigations, Apple, Google and Microsoft each made public statements explaining their respective SEP licensing practices.  Both Apple and Microsoft made clear that they will not seek to prevent or exclude rivals’ products from the market in exercising their SEP rights.

What’s problematic about a competition enforcement agency extracting promises not to enforce lawfully obtained property rights during merger review, outside the formal consent process, and in transactions that do not raise competitive concerns themselves?  For starters, the DOJ’s expression about competitive concerns about “hold up” obfuscate an important issue.  In Rambus the D.C. Circuit clearly held that not all forms of what the DOJ describes here as patent holdup violate the antitrust laws in the first instance.  Both appellate courts discussion patent holdup as an antitrust violation have held the patent holder must deceptively induce the SSO to adopt the patented technology.  Rambus makes clear — as I’ve discussed — that a firm with lawfully acquired monopoly power who merely raises prices does not violate the antitrust laws.  The proposition that all forms of patent holdup are antitrust violations is dubious.  For an agency to extract concessions that go beyond the scope of the antitrust laws at all, much less through merger review of transactions that do not raise competitive concerns themselves, raises serious concerns.

Here is what the DOJ says about Google’s commitment:

If adhered to in practice, these positions could significantly reduce the possibility of a hold up or use of an injunction as a threat to inhibit or preclude innovation and competition.

Google’s commitments have been less clear.  In particular, Google has stated to the IEEE and others on Feb. 8, 2012, that its policy is to refrain from seeking injunctive relief for the infringement of SEPs against a counter-party, but apparently only for disputes involving future license revenues, and only if the counterparty:  forgoes certain defenses such as challenging the validity of the patent; pays the full disputed amount into escrow; and agrees to a reciprocal process regarding injunctions.  Google’s statement therefore does not directly provide the same assurance as the other companies’ statements concerning the exercise of its newly acquired patent rights.  Nonetheless, the division determined that the acquisition of the patents by Google did not substantially lessen competition, but how Google may exercise its patents in the future remains a significant concern.

No doubt the DOJ statement is accurate and the DOJ’s concerns about patent holdup are genuine.  But that’s not the point.

The question of the appropriate role for injunctions and damages in patent infringement litigation is a complex one.  While many scholars certainly argue that the use of injunctions facilitates patent hold up and threatens innovation.  There are serious debates to be had about whether more vigorous antitrust enforcement of the contractual relationships between patent holders and standard setting organization (SSOs) would spur greater innovation.   The empirical evidence suggesting patent holdup is a pervasive problem is however, at best, quite mixed.  Further, others argue that the availability of injunctions is not only a fundamental aspect of our system of property rights, but also from an economic perspective, that the power of the injunctions facilitates efficient transacting by the parties.  For example, some contend that the power to obtain injunctive relief for infringement within the patent thicket results in a “cold war” of sorts in which the threat is sufficient to induce cross-licensing by all parties.  Surely, this is not first best.  But that isn’t the relevant question.

There are other more fundamental problems with the notion of patent holdup as an antitrust concern.  Kobayashi & Wright also raise concerns with the theoretical case for antitrust enforcement of patent holdup on several grounds.  One is that high probability of detection of patent holdup coupled with antitrust’s treble damages makes overdeterrence highly likely.  Another is that alternative remedies such as contract and the patent doctrine of equitable estoppel render the marginal benefits of antitrust enforcement trivial or negative in this context.  Froeb, Ganglmair & Werden raise similar points.   Suffice it to say that the debate on the appropriate scope of antitrust enforcement in patent holdup is ongoing as a general matter; there is certainly no consensus with regard to economic theory or empirical evidence that stripping the availability of injunctive relief from patent holders entering into contractual relationships with SSOs will enhance competition or improve consumer welfare.  It is quite possible that such an intervention would chill competition, participation in SSOs, and the efficient contracting process potentially facilitated by the availability of injunctive relief.

The policy debate I describe above is an important one.  Many of the questions at the center of that complex debate are not settled as a matter of economic theory, empirics, or law.  This post certainly has no ambitions to resolve them here; my goal is a much more modest one.  The DOJs policymaking efforts through the merger review process raise serious issues.  I would hope that all would agree — regardless of where they stand on the patent holdup debate — that the idea that these complex debates be hammered out in merger review at the DOJ because the DOJ happens to have a number of cases involving patent portfolios is a foolish one for several reasons.

First, it is unclear the DOJ could have extracted these FRAND concessions through proper merger review.  The DOJ apparently agreed that the transactions did not raise serious competitive concerns.   The pressure imposed by the DOJ upon the parties to make the commitments to the SSOs not to pursue injunctive relief as part of a FRAND commitment outside of the normal consent process raises serious concerns.  The imposition of settlement conditions far afield from the competitive consequences of the merger itself is something we do see from antitrust enforcement agencies in other countries quite frequently, but this sort of behavior burns significant reputational capital with the rest of the world when our agencies go abroad to lecture on the importance of keeping antitrust analysis consistent, predictable, and based upon the economic fundamentals of the transaction at hand.

Second, the DOJ Antitrust Division does not alone have comparative advantage in determining the optimal use of injunctions versus damages in the patent system.

Third, appearances here are quite problematic.  Given that the DOJ did not appear to have significant competitive concerns with the transactions, one can create the following narrative of events without too much creative effort: (1) the DOJ team has theoretical priors that injunctive relief is a significant competitive problem, (2) the DOJ happens to have these mergers in front of it pending review from a couple of firms likely to be repeat players in the antitrust enforcement game, (3) the DOJ asks the firms to make these concessions despite the fact that they have little to do with the conventional antitrust analysis of the transactions, under which they would have been approved without condition.

The more I think about the use of the merger review process to extract concessions from patent holders in the form of promises not to enforce property rights which they would otherwise be legally entitled to, the more the DOJ’s actions appear inappropriate.  The stakes are high here both in terms of identifying patent and competition rules that will foster rather than hamper innovation, but also with respect to compromising the integrity of merger review through the imposition of non-merger related conditions we are more akin to seeing from the FCC, states, or less well-developed antitrust regimes.

Filed under: antitrust, contracts, economics, google, intellectual property, licensing, litigation, markets, merger guidelines, mergers & acquisitions, patent, technology, telecommunications, wireless

As we approach the end of this Symposium, I am struck by how much consensus exists on this subject. Of course, we are not conducting this exercise under the auspices of the ABA. Nevertheless, there is sufficient intellectual backing for a major push to begin the deregulation of legal services. Despite warnings that this is a bad time to consider such action, I think that there are reasons why this is a very good time to proceed. Contrary to popular wisdom, the number of employed lawyers has expanded through the recession, if one is to believe the results of the CPS household survey. But the employment in legal services firms has declined according to the BLS establishment survey. This is consistent with Larry Ribstein’s view on the decline of Big Law. The number of lawyers is growing slowly, but they are not having as much fun as before and are therefore less likely to come to the defense of their guild.

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