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

Stan Liebowitz (UT-Dallas) offers a characteristically thoughtful and provocative op-ed in the WSJ today commenting on SOPA and the Protect IP Act.  Here’s an excerpt:

You may have noticed last Wednesday’s blackout of Wikipedia or Google’s strange blindfolded-logo screen. These were attempts to kill the Protect IP Act and the Stop Online Piracy Act, proposed legislation intended to hinder piracy and counterfeiting. The laws now before Congress may not be perfect, and they can still be amended. But to do nothing and stay with the status quo is to keep our creative industries at risk by failing to enforce their property rights.

Critics of these proposed laws claim that they are unnecessary and will lead to frivolous claims, reduce innovation and stifle free speech. Those are gross exaggerations. The same critics have been making these claims about every previous attempt to rein in piracy, including the Digital Millennium Copyright Act that was called a draconian antipiracy measure at the time of its passage in 1998. As we all know, the DMCA did not kill the Internet, or even do any noticeable damage to freedom—or to pirates.

…

Scads of Internet pundits and bloggers have vehemently argued that piracy is really a sales-promoting activity—because it gives people a free sample that might lead to a purchase—or that any piracy problems have been due to a failure of industry to embrace the Internet. Yet these claims are little more than wishful thinking. Some reflect a hostility to commercial activities—think Occupy Wall Street, or self-interest. Others make “freedom” claims on behalf of sites that profit by helping individuals find pirate sites, makers of complementary hardware, or companies that benefit from Internet usage and collect revenues whether the material being accessed was legally obtained or not.

In my examination of peer-reviewed studies, the great majority have results that conform to common sense: Piracy harms copyright owners. I was also somewhat surprised to discover that the typical finding of such academic studies was that the entire enormous decline that has occurred is due to piracy.

Contrary to an often-repeated myth, providing consumers with convenient downloads at reasonable prices, as iTunes did, does not appear to have ameliorated piracy at all. The sales decline after iTunes exploded on the scene was about the same as the decline before iTunes existed. Apparently it really is difficult to compete with free. Is that really such a surprise?

Do check out the whole thing.

 

 

Filed under: business, copyright, economics, intellectual property, music, technology

The fight over SOPA is about the ownership of intellectual property.  Rights to intellectual property have two effects.  The benefits of intellectual property are the incentives for creation.  The costs are that after some work is created any price above marginal cost (which is often zero for digital property) will discourage valuable use.

Every piece of intellectual property than now exists was created with the incentives that were in place when it was created.  No change in intellectual property rights can have any effect on existing works.  Therefore, any change in property rights should be entirely prospective.  That is, any change in property rights should effect only works copyrighted after the passage of the legislation.

Of course, there are huge rents associated with the ownership of existing rights, and fights over these rents will  continue.  But we should recognize that these fights are over rents — payments which have no incentive effects.  If our goal is efficiency, we should stop wasting resources on these fights and start from now.

Filed under: copyright, intellectual property, truth on the market

Herb Hovenkamp has posted his new casebook on Innovation and Competition Policy to SSRN, where one can download the chapters individually.  This is a very nice development for students; and the book seems perfectly fit for a course on Innovation and Competition Policy — for which it was designed — but also appropriate for a variety of similarly-themed seminar courses.

Professor Hovenkamp describes the aims of the book here:

This is not an “IP/antitrust” casebook.  There are already excellent books in that field.  Only about half of the principal cases printed in this book are antitrust decisions.  I use this book to present issues of innovation and competition policy to students in a broader context, examining not only antitrust but also the intellectual property laws and including shorter examination of several other topics, such as telecommunications, net neutrality, and competition issues raised by the DMCA.  Brief attention is also given to the industrial organization literature on innovation.

This casebook begins with a chapter on patent scope and its implications for innovation, with brief coverage of the Schumpeter-Arrow literature and the problem of sequential innovation.  Then it looks in some detail at the problem of complementary relationships, addressed in antitrust mainly through the law of tying arrangements.  After that is a chapter on remedies issues, followed by chapters on the patent system, copyright, practices that restrain innovation, and intellectual property misuse.  Another chapter covers exclusionary practices and another a wide variety of collaborative arrangements, including pooling, standard setting, blanket licenses, and the like.  The final chapter focuses on vertical restraints and the post-sale (exhaustion) doctrine.

I hope to keep this book up to date on a regular basis and welcome any suggestions for revision or inclusion.  My overall goal, however, is to hold the book somewhere in the range of its current length.

 

Filed under: antitrust

The New York Times reports that the most recent price for a taxi in New York medallion is $1,000,000.  Wikipedia reports that there are 13,237 licensed cabs in New York.   (A “medallion” is  the physical form of a taxicab license.)  This means that the present value of the rents created by limiting taxicabs is $13,237,000,000  — thirteen billion dollars.  This is just the rents; the total lost consumer surplus is much greater because the lack of taxicabs creates substantial deadweight losses.  For example, I am confident that many people have cars in New York only because they cannot count on getting a cab.  Cabs change shifts during rush hour because they can earn less at this time and so that is when they go out of Manhattan to change drivers, just when demand is greatest.  (This is also caused by the relatively too low price for waiting compared with the price for driving.)  There is a proposal which will make it easier for limousines to pick up passengers.  Of course, the taxi owners are opposed to this plan, but it would clearly be an efficient change.

Filed under: business, licensing, regulation Tagged: New York, Taxicabs

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.

Read the full piece here.

My first post discussed one primary impediment to deregulating all the lawyers – which is the current system of legal regulation of lawyers.   Even if one agrees that deregulating all the lawyers may be the ultimate goal, this still leaves the question of how best to achieve this result.  Deregulating all the lawyers may not be the first thing we do.  One plausible candidate is fixing intellectual property protection for law.

This view is based upon the assumption that the best way to achieve the goal of deregulating all the lawyers is to create incentives for entrepreneurs to produce new and innovative legal information products.  As noted in my earlier post, innovation and entry by entrepreneurs into the legal information market can be a powerful force that weakens of the economic and political power of those whose interests are aligned with maintaining the current regulatory regime.  One result of this process is that deregulation becomes more likely.   This dynamic is why I love Virginia wine, even though I never drink it.

Creating incentives for entrepreneurs to innovate and enter requires a mechanism that allows them to appropriate a return to their investments.  Intellectual property rights can be an essential mechanism through which this occurs. Indeed, intellectual property rights can effectively protect many innovative legal information products.  However, in several important cases, legal information is subject to what can be described as a form of legal exceptionalism that results in weakened intellectual property rights.  In general, the availability and scope of intellectual property rights are limited so that the costs of restricting the use of already produced information do not exceed the benefits associated with the marginal incentives to create the information.   Intellectual property rights for law and related works seem to be further limited because of heightened concerns regarding use costs that are specific to legal information.

Perhaps the best example of legal exceptionalism is the legal treatment of the privately produced model building codes in Veeck v. SBCCI, 293 F.3d 791 (5th Cir. 2002, en banc).  In this case, Veeck posted SBCCI’s copyrighted model building codes on a website in violation of a license agreement that prohibited copying or distributing the work. The court held that the copyrighted code text entered the public domain when adopted as law by several local jurisdictions.  Through SBCCI retained copyrights to its model codes, they could not enforce them against Veeck, who identified the posted SBCCI model codes as the building codes of two municipalities.

Current copyright law precludes copyright protection for any work “prepared by an officer or employee of the United States Government as part of that person’s official duties”.  Under this definition, court opinions written by federal judges, congressional bills and statutes, and federal regulations are ineligible for copyright protection.  Courts have applied similar rules to state legal materials, including state judicial opinions, statutes, and regulations.   These rules assume that the use costs of intellectual property protection outweigh gains from improved private incentives to produce model laws.   Copyright law does not explicitly preclude copyright for model codes and other privately produced laws.  However, the court’s holding, by elevating due process concerns with public access to the law over providing economic incentives to produce model codes, effectively extends this prohibition to privately produced model codes and laws that have been adopted as law.

Protecting due process concerns does not require precluding copyright protection for privately produced works adopted as law.  Broad fair use privileges for those bound by the laws or codes could address these concerns while simultaneously protecting model codes from appropriation by competing commercial interests and other jurisdictions.   Restrictive licenses can also serve to appropriately balance the use-creation tradeoff by clarifying parties’ expectations regarding permitted uses and pricing of the copyrighted model law.   As part of these licenses, jurisdictions that adopt privately produced and copyrighted model codes could alleviate due process concerns by authorizing use by citizens bound by the law while preventing reproduction for other purposes.  Courts could require similar licenses to be granted by those wishing to file briefs and other potentially copyrightable documents.

The court’s holding in Veeck unnecessarily limits the ability to use these mechanisms by effectively eliminating copyright protection rather than retaining the protection and using the mechanisms discussed above that would permit limited public use and mitigate any due process concerns.  In doing so, the courts holding, along with other similar forms of legal exceptionalism unnecessarily weakens incentives for legal innovation and can result in less pressure to deregulate all the lawyers.

First, thanks to TOTM for organizing this symposium on a most timely and important topic.  As computers and technology have revolutionized every aspect of human endeavor it is a particularly critical time to ask ourselves why 21^st century law schools closely resemble the law schools of the late-19^th century and why in court litigation would seem relatively familiar to Clarence Darrow.  One significant answer is the regulation of the legal profession, and one possible solution is significant deregulation.

Read the full piece here.