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.

Pursuant to the Committee’s request for information to aid its inquiry concerning the state of existing antitrust laws, we offer the following joint submission: 

We are economists, legal scholars, and practitioners—focused on antitrust law, economics, and policy—who believe in maintaining healthy markets and well-functioning antitrust institutions. We value the important role of antitrust as the “Magna Carta of free enterprise,” which sets the rules that govern how firms compete against one another in our modern economy. Many of us have served in antitrust enforcement agencies. Each of us believes it is vital that the antitrust laws promote competitive markets, innovation, and productivity by deterring anticompetitive conduct throughout our economy, including in digital markets. 

We write because the modern antitrust debate has become characterized by sustained attacks on the integrity of antitrust institutions and by unsubstantiated dismissals of debate. This atmosphere has led to a variety of proposals for radical changes to the antitrust laws and their enforcement that we believe are unsupported by the evidence, counterproductive to promoting competition and consumer welfare, and offered with an unwarranted degree of certainty. 

Vigorous debate and disagreement have long been a hallmark of antitrust scholarship and policy. Competition policy has been formed through an iterative process echoed in the courts’evolving doctrine over more than a century. Today, however, efforts to sidestep the discussion, or to declare it over, and to force hasty and far-reaching changes have come to the fore. These proposals are numerous and include: (1) abandoning the consumer welfare standard; (2) overturning unanimous and supermajority judicial precedents, which are foundational to modern antitrust law; (3) imposing obsolete and arbitrary market share tests to determine the legality of mergers; (4) shifting the burden of proof from plaintiffs to defendants to render large swaths of business behavior presumptively unlawful; (5) creating another federal regulator to oversee competition in digital markets; (6) breaking up major tech companies or their products without evidence of antitrust harm or that the remedy would make consumers better off; and (7) imposing a general prohibition on all mergers either involving specific firms or during the current health crisis.

Such proposals would abandon the legal and political traditions that helped transform antitrust from an unprincipled and incoherent body of law, marred by internal contradictions, into a workable system that contributes positively to American competitiveness and consumer welfare. It should be noted that we use the term “consumer welfare” throughout this letter, consistent with modern parlance about competition policy, to include the benefits of competition to the welfare of workers and other input suppliers, as well as consumers. Thus, the consumer welfare standard is not a narrowly circumscribed objective, but rather a prescription for the general social wellbeing generated by the competitive process. By contrast, many of the current proposals would (1) undermine the rule of law; (2) undo the healthy evolution of antitrust law in the courts over time; (3) require antitrust agencies to micromanage the economy by picking winners and losers; (4) abandon a focus on consumer welfare in favor of vague and politically-oriented goals; and (5) undermine successful American businesses and their competitiveness in the global economy at the worst-imaginable time. 

The assertions about the state of antitrust law and policy that purportedly justify these radical changes are not supported by the evidence. A more accurate reading of the evidence supports the following view of the American economy and the role of antitrust law:

1. The American economy—including the digital sector—is competitive, innovative, and serves consumers well. Debate about whether the antitrust laws should be fundamentally re-written originated from a concern that markets have recently become more concentrated and that competition had decreased as a result. The popular narrative, that increases in concentration have caused harm to competition throughout the economy, does not withstand close scrutiny. In reality, most markets in the American economy—including digital markets—are competitive, and thriving, and create huge benefits for consumers.
2. Structural changes in the economy have resulted from increased competition. The economic data show that intense competition, winner-take-all rivalry, and the adoption of new successful technologies in relevant antitrust markets were major economic forces that led to structural changes (i.e., increased national-level concentration) in the economy. The existence of these structural changes does not itself support changes in the law.
3. Lax antitrust enforcement has not allowed systematic increases in market power. There is little evidence to support the view that anemic antitrust enforcement has led to a systematic rise in market power in the American economy. The evidence is especially weak as it relates to digital markets.
4. Existing antitrust law is adequate for protecting competition in the modern economy. Antitrust law has developed incrementally through the common law approach. A strength of antitrust law is that it can incorporate learning about new business practices and economics to protect competition in an evolving economy. The existing antitrust laws and enforcement framework, when correctly applied, are more than adequate to deter anticompetitive conduct today, including in new and growing digital markets.
5. History teaches that discarding the modern approach to antitrust would harm consumers. Many of the radical reforms being proposed today seek to return antitrust to what it was in the 1960s. But antitrust during that time was based primarily on per se rules that prohibited economic analysis and fact-based defenses. This created a body of law, fundamentally marred by internal contradiction, that frequently protected individual competitors over consumers and did not focus on the central goal of protecting competition. Congress has considered and rejected radical proposals to overhaul antitrust in the past and should do so again.
6. Common sense reforms should be pursued to improve antitrust enforcement. A positive agenda for antitrust reform would pursue common-sense initiatives that build upon prior learning while incorporating advances in industrial organization economics, empirical research, and analytical techniques. These proposals should focus antitrust enforcement on areas that will have the biggest return for consumers and input suppliers, support balanced retrospectives of agency decisions to identify gaps in enforcement, and address any institutional impediments to effective enforcement.

We believe open discussion of existing evidence is necessary to advance contemporary debates about the performance of antitrust institutions in the digital economy. We welcome that discussion. We discuss below various dimensions of antitrust law, economics, and institutions that have been the targets of radical reform proposals. The signatories to this letter hold a steadfast belief that antitrust institutions, including the courts, are up to the task of protecting competition, and that the federal antitrust laws as written are effective in accomplishing that goal. While many signatories have offered diverse proposals to improve the functioning of those institutions—a few of which we share in this letter—we hold the common view that the proposed radical reforms would make consumers worse off in the short run and over the long haul by chilling efficient behavior and stymieing innovation.

Read the full submission here. 

In response to the Draft Vertical Merger Guidelines released by DOJ and the FTC on January 10, 2020,1 the International Center for Law & Economics convened a blog symposium to discuss the legal and economic implications of the proposed changes. Published on Thursday, February 6, 2020 and Friday, February 7, 2020 on TruthOnTheMarket.com, that symposium included contributions from twenty-six well respected legal academics, economists, and seasoned practitioners. This Comment collects those posts together so that they can form part of the record as DOJ and the FTC consider the final form of the Vertical Merger Guidelines.

Please note, inclusion of the posts in this comment should not be interpreted as indicating that any particular author supports any post that is not his or her own — this was a broad effort that included many different viewpoints.

After much anticipation, the Department of Justice Antitrust Division and the Federal Trade Commission released a draft of the Vertical Merger Guidelines (VMGs) on January 10, 2020. The Global Antitrust Institute (GAI) will be submitting formal comments to the agencies regarding the VMGs and this post summarizes our main points.

Read the full piece here.

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.

Tad Lipsky is a partner in the law firm of Latham & Watkins LLP.

The FTC’s struggle to provide guidance for its enforcement of Section 5’s Unfair Methods of Competition (UMC) clause (or not – some oppose the provision of forward guidance by the agency, much as one occasionally heard opposition to the concept of merger guidelines in 1968 and again in 1982) could evoke a much broader long-run issue: is a federal law regulating single-firm conduct worth the trouble?  Antitrust law has its hard spots and its soft spots: I imagine that most antitrust lawyers think they can define “naked” price-fixing and other hard-core cartel conduct, and they would defend having a law that prohibits it.  Similarly with a law that prohibits anticompetitive mergers.  Monopolization perhaps not so much: 123 years of Section 2 enforcement and the best our Supreme Court can do is the Grinnell standard, defining monopolization as the “willful acquisition or maintenance of [monopoly] power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.”  Is this Grinnell definition that much better than “unfair methods of competition”?

The Court has created a few specific conduct categories within the Grinnell rubric: sham petitioning (objectively and subjectively baseless appeals for government action), predatory pricing (pricing below cost with a reasonable prospect of recoupment through the exercise of power obtained by achieving monopoly or disciplining competitors), and unlawful tying (using market power over one product to force the purchase of a distinct product – you probably know the rest).  These categories are neither perfectly clear (what measure of cost indicates a predatory price?) nor guaranteed to last (the presumption that a patent bestows market power within the meaning of the tying rule was abandoned in 2005).  At least the more specific categories give some guidance to lower courts, prosecutors, litigants and – most important of all – compliance-inclined businesses.  They provide more useful guidance than Grinnell.

The scope for differences of opinion regarding the definition of monopolization is at an historical zenith.  Some of the least civilized disagreements between the FTC and the Antitrust Division – the Justice Department’s visible contempt for the FTC’s ReaLemon decision in the early 1980’s, or the three-Commissioner vilification of the Justice Department’s 2008 report on unilateral conduct – concern these differences.  The 2009 Justice Department theatrically withdrew the 2008 Justice Department’s report, claiming (against clear objective evidence to the contrary) that the issue was settled in its favor by Lorain Journal, Aspen Skiing, and the D.C. Circuit decision in the main case involving Microsoft.

Although less noted in the copious scholarly output concerning UMC, disputes about the meaning of Section 5 are encouraged by the lack of definitive guidance on monopolization.  For every clarification provided by the Supreme Court, the FTC’s room for maneuver under UMC is reduced.  The FTC could not define sham litigation inconsistently with Professional Real Estate Investors v. Columbia Pictures Industries; it could not read recoupment out of the Brooke Group v. Brown & Williamson Tobacco Co. definition of predatory pricing.

The fact remains that there has been less-than-satisfactory clarification of single-firm conduct standards under either statute.  Grinnell remains the only “guideline” for the vast territory of Section 2 enforcement (aside from the specific mentioned categories), especially since the Supreme Court has shown no enthusiasm for either of the two main appellate-court approaches to a general test for unlawful unilateral conduct under Section 2, the “intent test” and the “essential facilities doctrine.”  (It has not rejected them, either.)  The current differences of opinion – even within the Commission itself, leave aside the appellate courts – are emblematic of a similar failure with regard to UMC.  Failure to clarify rules of such universal applicability has obvious costs and adverse impacts: creative and competitively benign business conduct is deterred (with corresponding losses in innovation, productivity and welfare), and the costs, delays, disruption and other burdens of litigation are amplified.  Are these costs worth bearing?

Years ago I heard it said that a certain old-line law firm had tightened its standards of partner performance: whereas formerly the firm would expel a partner who remained drunk for ten years, the new rule was that a partner could remain drunk only for five years.  The antitrust standards for unilateral conduct have vacillated for over a century.  For a time (as exemplified by United States v. United Shoe Machinery Corp.) any act of self-preservation by a monopolist – even if “honestly industrial” – was presumptively unlawful if not compelled by outside circumstances.  Even Grinnell looks good compared to that, but Grinnell still fails to provide much help in most Section 2 cases; and the debate over UMC says the same about Section 5.  I do not advocate the repeal of either statute, but shouldn’t we expect that someone might want to tighten our standards?  Maybe we can allow a statute a hundred years to be clarified through common-law application.  Section 2 passed that milepost twenty-three years ago, and Section 5 reaches that point next year.  We shouldn’t be surprised if someone wants to pull the plug beyond that point.

When the Justice Department issued its Unilateral Conduct Report last September, it became an instant sensation not primarily because of its content, but because of a strident public critique issued by three FTC Commissioners, including now-Chairman Leibowitz. The three (Harbour, Leibowitz and Rosch, hereinafter “HLR”) accused the Antitrust Division of placing “a thumb on the scales in favor of firms with monopoly . . . power”, and of adopting “drastic changes” comprising “a legal regime [that places] . . . the interests of firms that enjoy monopoly or near monopoly power . . .ahead of the interests of consumers”. Thundering on, HLR savaged the DOJ Report as a “blueprint for radically weakened enforcement of Section 2”, accusing DOJ of “seriously overstat[ing] the level of . . . consensus” on Section 2, and of improperly glorifying economics as “tantamount to the law itself”. Although signed by three of the four Commission members, the Statement was not presented as a position of the FTC, leaving observers to wonder about the internal process that produced the HLR statement and what it reflected about the views of the various Bureaus and other key Commission staff. For FTC/DOJ relations, already rocked by a long series of public disagreements over a string of antitrust issues (reverse-payment Hatch-Waxman settlements, price squeezes), this was a new low, unprecedented in the living memory of the antitrust bar.

Read the full piece here.