Abstract

This Chapter, forthcoming in the ABA Handbook on the Antitrust Aspects of Standards Setting (2010) provides an analytical overview of the antitrust issues involving intellectual property and standard setting including, but not limited to, patent holdup, royalty stacking, refusals to license, and patent pools.

This essay is the introduction to a forthcoming volume entitled, Regulating Innovation: Competition Policy and Patent Law Under Uncertainty (Cambridge U. Press 2009 forthcoming).

In addition to introducing all of the papers in the volume, this essay introduces the organizing themes of the volume. Innovation is critical to economic growth. While it is well understood that legal institutions play an important role in fostering an environment conducive to innovation and its commercialization, much less is known about the optimal design of specific institutions. Regulatory design decisions, and in particular competition policy and intellectual property regimes, can have profoundly positive or negative consequences for economic growth and welfare. However, the ratio of what is known to unknown with respect to the relationship between innovation, competition, and regulatory policy is staggeringly low. In addition to this uncertainty concerning the relationships between regulation, innovation, and economic growth, the process of innovation itself is not well understood.

The regulation of innovation and the optimal design of legal institutions in this environment of uncertainty are two of the most important policy challenges of the 21st century. Any legal regime must attempt to assess the tradeoffs associated with rules that will affect incentives to innovate, allocative efficiency, competition, and freedom of economic actors to commercialize the fruits of their innovative labors and foster economic growth. Unfortunately, as this essay describes, our tools for assessing these tradeoffs are limited.

Any coherent regulatory framework must take account of the low level of empirical knowledge surrounding the complex relationship between regulation – both through competition policy and patent law – and innovation, and the corresponding uncertainty caused by this absence of knowledge. The relationship between regulation and innovation has posed a significant challenge to antitrust economists at least since Schumpeter’s suggestion that dynamic competition would result in “creative destruction,” leading to a competitive process where one monopolist would replace another sequentially as new entrants developed a superior product.

Interfering in this dynamic process for the sake of static efficiency gains is perilous, but, of course, not impossible. But regulators and policy makers must take (more) seriously the condition of fundamental uncertainty in which they act, and the significant costs of their inevitable errors before justifying interventions on grounds of promoting competition or facilitating innovation.

This essay and the chapters in this book, approach this critical set of problems from an economic perspective, relying on the tools of microeconomics, quantitative analysis, and comparative institutional analysis to explore and begin to provide answers to the myriad challenges facing policymakers. The strength of this analysis – often described as the New Institutional Economic approach – is in its recognition that understanding economic performance requires not only economic modeling of narrow behavior, but also an understanding of that behavior in its legal, economic, social, and political institutional context.

Read the full paper here.

In light of the recent political focus on healthcare, several Congressional bills propose to single out a class of contracts between pharmaceutical companies for closer antitrust scrutiny.  Oftentimes, a pharmaceutical company will engineer a functionally identical substitute to a “brand name” drug with specific appeal to consumers.  This substitute – with the chemical properties of the known drug but a different name – is known as a “generic drug,” or simply a “generic.”  In an attempt to preserve the legal monopoly a patented brand-name enjoys, the branded drug’s producer will sometimes offer the generic’s producer a payment to delay entry into the market for a fixed amount of time.  Known as a “reverse payment settlement” – or colloquially as “pay for delay” – these agreements are at the intersection of contemporary fears and debates about healthcare and a debate as old as the law of competition itself.

Read the full piece here.

It looks like the old/new EU Microsoft browser tie-in case might be resolved through a requirement that Microsoft offers consumers a “ballot screen”  that would allow users to select and install competing browsers.  (HT: WSJ) That is, Microsoft will be offering up a menu of rival browsers to consumers.  Apparently, the EU is willing to allow Internet Explorer on the menu.  Word from the Commission on the proposal is favorable…

Read the full piece here. 

I was very pleased to thumb through the newest version of Antitrust Magazine and see a TOTM post get some attention.  Its always nice to be cited and have folks take the time to respond to your work — or in this case, blog post.  Its even more tickling when the person doing the responding is a prominent and well respected figure such as former Federal Trade Commissioner Leary.  Commissioner Leary revisits the FTC’s enforcement action in Ovation and takes on the criticism of that enforcement action in this post.  You can see Commissioner Leary’s article here (I believe ABA registration and password required).  I’m grateful for the response and am going to take the opportunity  to argue that, despite the Commissioner’s criticisms, the troublesome implications that I pointed out in the earlier post associated with the enforcement approach in Ovation remain (see also guest blogger Mary Coleman’s related concerns).

Read the full piece here. 

Abstract

Complaints about frivolous patents abound in academic, business, and policy circles, and the focus of blame is usually on the large number of junk patents that have issued from the Patent Office that are actually invalid. The underlying cause is said to be the relatively modest examination performed by the Patent Office. Most popular proposals for change suggest methods for segregating patents into two or so bundles based on whether the patents should be subject to closer examination. A so-called “second window of review” has been proposed to allow competitors to make the choice of which patents get closer examination; and a so-called “gold-plated approach” has been proposed to allow patentees to make the election. Applying a back-to-basics approach, this Article points out two core problems with these popular proposals: (1) they do not adequately account for the information costs, error costs, and risks of capture that accompany any system premised on flexible and discretionary administrative review, and (2) they overlook the central lessons learned through debates over civil litigation generally about how to balance the conflicting goals of speed, cost, accuracy, and finality. The Article then elucidates how some small changes to our patent system could be used to better solve the problem of bad patents than would other popular proposals. This small number of changes, which are implementable through either case law or statute, would interact to make available a symmetrical risk of fee and cost shifting for bad-faith litigation over patents to encourage parties to exchange information and resolve disputes before getting deeply into expensive litigation. Such an approach would directly address the complaints of patent critics without injecting the degree of unpredictability and political manipulability into the system that would be caused by their proposed changes. It takes seriously the importance to the economy of strong intellectual property rights as well as reforms designed to lessen the negative impact of junk patents and frivolous lawsuits.

Economic theory is essential to antitrust law.  It is economic analysis that constrains antitrust law and harnesses it so that it is used to protect consumers rather than competitors.  And the relationship between economics and antitrust is responsible for the successful evolution of antitrust from its economically incoherent origins to its present state.  In my view, which I’ve expressed in greater detail elsewhere, the fundamental challenge for antitrust is one that is created by having “too many theories” without methodological commitments from regulators and courts on how to select between them.  The proliferation of economic models that came along with the rise of Post-Chicago economics and integration of game theory into industrial organization has led to a state of affairs where a regulator or court has a broad spectrum of models to choose from when analyzing an antitrust issue.

Read the full piece here. 

Expanding on the themes in this post from the TOTM symposium book review of Professor Carrier’s new book on “Harnessing the Power of Intellectual Property and Antitrust Law” to encourage innovation, I’ve posted an essay co-authored with a very talented former student and research assistant, Aubrey Stuempfle. The essay expands on some of the themes we touched upon in reviewing Carrier’s analysis of standard setting issues, including the potential threat to innovation posed by invoking antitrust remedies to govern the SSO contracting process (whether under Section 2 of the Sherman Act of Section 5 of the FTC Act) in patent holdup cases. The review (along with the others from the symposium on Carrier’s book) will be published in the Alabama Law Review.

Read the full piece here.

One interesting aspect of the DOJ Report on Section 2 is the scant, episodic treatment of IP issues. The Report rejects the presumption of market power for patent ties (p. 81); has a very brief discussion of refusal to license patented parts in which it properly rejects the reasoning of the Ninth Circuit’s Kodak decision and aligns itself with the Federal Circuit’s Xerox decision (p. 121-122). The Walker Process case, which held that an infringement action based on an improperly acquired and unenforceable patent could violate §2, is cited in a footnote, and only for the proposition that market power is required in a §2 case (p. 25 n. 53). Finally, the Report contains a brief discussion of the presence of intellectual property in measuring incremental cost for purposes of analyzing predatory pricing (p. 63).

Read the full piece here.