It happens at just about every hootenanny. There’s always at least one song that clears the dance floor. Some tunes, people just won’t dance to. But with a little remixing and a better tempo, even a dirge can be danceable.

For years, the Federal Communications Commission (FCC) has refused to dance to the tune of research that suggests Title II regulation depresses broadband investment. But a recently published paper changes the tune so much that the FCC can’t—or at least shouldn’t—ignore the vibe.

Read the full piece here.

ICLE Senior Scholar Eric Fruits joined Supermarket News‘ SN Off the Shelf podcast to discuss the proposed merger of Kroger and Albertsons and the likelihood that the Federal Trade Commission will attempt to block the deal. Video of the full episode is embedded below.

I.       Introduction

Proposals to protect children and teens online are among the few issues in recent years to receive at least rhetorical bipartisan support at both the national and state level. Citing findings of alleged psychological harm to teen users,[1] legislators from around the country have moved to pass bills that would require age verification and verifiable parental consent for teens to use social-media platforms.[2] But the primary question these proposals raise is whether such laws will lead to greater parental supervision and protection for teen users, or whether they will backfire and lead teens to become less likely to use the covered platforms altogether.

The answer, this issue brief proposes, is to focus on transaction costs.[3] Or more precisely, the answer can be found by examining how transaction costs operate under the Coase theorem.

The major U.S. Supreme Court cases that have considered laws to protect children by way of parental consent and age verification all cast significant doubt on the constitutionality of such regimes under the First Amendment. The reasoning such cases have employed appears to apply a Coasean transaction-cost/least-cost-avoider analysis, especially with respect to strict scrutiny’s least-restrictive-means test.

This has important implications for recent attempts to protect teens online by way of an imposed duty of care, mandatory age verification, and/or verifiable parental consent. First, because it means these solutions are likely unconstitutional. Second, because a least-cost-avoider analysis suggests that parents are in best positioned to help teens assess the marginal costs and benefits of social media, by way of the power of the purse and through available technological means. Placing the full burden of externalities on social-media companies would reduce the options available to parents and teens, who could be excluded altogether if transaction costs are sufficiently large as to foreclose negotiation among the parties. This would mean denying teens the overwhelming benefits of social-media usage.

Part II of this brief will define transaction costs and summarize the Coase theorem, with an eye toward how these concepts can help to clarify potential spillover harms and benefits arising from teens’ social-media usage. Part III will examine three major Supreme Court cases that considered earlier parental-consent and age-verification regimes enacted to restrict minors’ access to allegedly harmful content, while arguing that one throughline in the jurisprudence has been the implicit application of least-cost-avoider analysis. Part IV will argue that, even in light of how the internet ecosystem has developed, the Coase theorem’s underlying logic continues to suggest that parents and teens working together are the least-cost avoiders of harmful internet content.

Part V will analyze proposed legislation and recently enacted bills, some of which already face challenges in the federal courts, and argue that the least-cost-avoider analysis embedded in Supreme Court precedent should continue to foreclose age-verification and parental-consent laws. Part VI concludes.

II.     The Coase Theorem and Teenage Use of Social-Media Platforms

A.    The Coase Theorem Briefly Stated and Defined

The Coase theorem has been described as “the bedrock principle of modern law and economics,”[4] and the essay that initially proposed it may be the most-cited law-review article ever published.[5] Drawn from Ronald Coase’s seminal work “The Problem of Social Cost”[6] and subsequent elaborations in the literature,[7] the theorem suggests that:

1. The problem of externalities is bilateral;
2. In the absence of transaction costs, resources will be allocated efficiently, as the parties bargain to solve the externality problem;
3. In the presence of transaction costs, the initial allocation of rights does matter; and
4. In such cases, the burden of avoiding the externality’s harm should be placed on the lowest-cost avoider, while taking into consideration the total social costs of the institutional framework.

A few definitions are in order. An externality is a side effect of an activity that is not reflected in the cost of that activity—basically, what occurs when we do something whose consequences affect other people. A negative externality occurs when a third party does not like the effects of an action. When we say that such an externality is bilateral, it is to say that it takes two to tango: only when there is a conflict in the use or enjoyment of property is there an externality problem.

Transaction costs are the additional costs borne in the process of buying or selling, separate and apart from the price of the good or service itself—i.e., the costs of all actions involved in an economic transaction. Where transaction costs are present and sufficiently large, they may prevent otherwise beneficial agreements from being concluded. Institutional frameworks determine the rules of the game, including who should bear transaction costs. In order to maximize efficiency, the Coase theorem holds that the burden of avoiding negative externalities should be placed on the party or parties that can avoid them at the lowest cost.

A related and interesting literature focuses on whether the common law is efficient, and the mechanisms by which that may come to be the case.[8] Todd J. Zywicki and Edward P. Stringham argue—contra the arguments of Judge Richard Posner—that the common law’s relative efficiency is a function of the legal process itself, rather than whether judges implicitly or explicitly adopt efficiency or wealth maximization as goals.[9] Zywicki & Stringham find both demand-side and supply-side factors that tend to promote efficiency in the common law, but note that the supply-side factors (e.g., competitive courts for litigants) have changed over time in ways that may result in diminished incentives for efficiency.[10] Their central argument is that the re-litigation of inefficient rules eventually leads to the adoption of more efficient ones.[11] Efficiency itself, they argue, is also best understood as the ability to coordinate plans, rather than as wealth maximization.[12]

In contrast to common law, there is a relative paucity of literature on whether constitutional law follows a pattern of efficiency. For example, one scholar notes that citations to Coase’s work in the corpus of constitutional-law scholarship are actually exceedingly rare.[13] This brief seeks to contribute to the law & economics literature by examining how the Supreme Court appears implicitly to have adopted one version of efficiency—the least-cost-avoider principle—in its First Amendment reviews of parental-consent and age-verification laws under the compelling-government-interest and least-restrictive-means tests.

B.     Applying the Coase Theorem to Teenage Social-Media Usage

The Coase theorem’s basic insights are useful in evaluating not only legal decisions, but also legislation. Here, this means considering issues related to children and teenagers’ online social-media usage. Social-media platforms, teenage users, and their parents are the parties at-issue in this example. While social-media platforms create incredible value for their users,[14] they also arguably impose negative externalities on both teens and their parents.[15] The question here, as it was for Coase, is how to deal with those externalities.

The common-law framework of rights in this scenario is to allow minors to enter into enforceable agreements, except where they are void for public-policy reasons. As Adam Candeub points out:

Contract law is a creature of state law, and states require parental consent for minors entering all sorts of contracts for services or receiving privileges, including getting a tattoo, obtaining a driver’s license, using a tanning facility, purchasing insurance, and signing liability waivers. As a general rule, all contracts with minors are valid, but with certain exceptions they are voidable. And even though a minor can void most contracts he enters into, most jurisdictions have laws that hold a minor accountable for the benefits he received under the contract. Because children can make enforceable contracts for which parents could end up bearing responsibility, it is a reasonable regulation to require parental consent for such contracts. The few courts that have addressed the question of the enforceability of online contracts with minors have held the contracts enforceable on the receipt of the mildest benefit.[16]

Of course, many jurisdictions have passed laws requiring age-verification for various transactions prohibited to minors, such as laws for buying alcohol or tobacco,[17] obtaining driver’s licenses,[18] and buying lottery tickets or pornography.[19] Through the Children’s Online Privacy Protection Act and its regulations, the federal government also requires that online platforms obtain verifiable parental consent before they are permitted to collect certain personal information regarding children under age 13.[20]

The First Amendment, however, has been found to protect minors’ ability to receive speech, including through commercial transactions.[21] The question therefore arises: how should the law regard minors’ ability to access information on social-media platforms? In recent years, multiple jurisdictions have responded to this question by proposing or passing age-verification and parental-consent laws for teens’ social-media usage.[22]

As will be detailed below,[23] while the internet has contributed to significant reductions in transaction costs, they are still present. Thus, in order to maximize social-media platforms’ benefits while minimizing the negative externalities they impose, policymakers should endeavor to place the burden of avoiding the harms associated with teen use on the least-cost avoider. I argue that the least-cost avoider is parents and teens working together to make marginal decisions about social-media use, including by exploiting relatively low-cost practical and technological tools to avoid harmful content. The thesis of this issue brief is that this finding is consistent with the implicit Coasean reasoning in the Supreme Court’s major First Amendment cases on parental consent and age verification.

III.   Major Supreme Court Cases on Parent Consent and Age Verification

Parental-consent and age-verification laws that seek to protect minors from harmful content are not new. The Supreme Court has had occasion to review several of them, while applying First Amendment scrutiny. An interesting aspect of this line of cases is that the Court appears implicitly to have used Coasean analysis in understanding who should bear the burden of avoiding harms associated with speech platforms.

Specifically, in each case, after an initial finding that the restrictions were content-based, the Court applied strict scrutiny. Thus, the burden was placed on the government to prove the relevant laws were narrowly tailored to a compelling government interest using the least-restrictive means. The Court’s transaction-cost analysis is implicit throughout the descriptions of the problem in each case. But the main area of analysis below will be from each case’s least-restrictive-means test section, with a focus on the compelling-state-interest test in Part III.C. Parts III.A, III.B, and III.C will deal with each of these cases in turn.

A.    United States v Playboy Entertainment Group

In United States v. Playboy Entertainment Group,[24] the Supreme Court reviewed § 505 of the Telecommunications Act of 1996, which required “cable television operators who provide channels ‘primarily dedicated to sexually-oriented programming’ either to ‘fully scramble or otherwise fully block’ those channels or to limit their transmission to hours when children are unlikely to be viewing, set by administrative regulation as the time between 10 p.m. and 6 a.m.”[25] Even prior to the regulations promulgated pursuant to the law, cable operators used technological means called “scrambling” to blur sexually explicit content for those viewers who didn’t explicitly subscribe to such content, but there were reported problems with “signal bleed” that allowed some audio and visual content to be obtained by nonsubscribers.[26] Following the regulation, cable operators responded by shifting the hours when such content would be aired—i.e., by making it unavailable for 16 hours a day. This prevented cable subscribers from viewing purchased content of their choosing at times they would prefer.[27]

The basic Coasean framework is present right from the description of the problems that the statute and regulations were trying to solve. As the Court put it:

Two essential points should be understood concerning the speech at issue here. First, we shall assume that many adults themselves would find the material highly offensive; and when we consider the further circumstance that the material comes unwanted into homes where children might see or hear it against parental wishes or consent, there are legitimate reasons for regulating it. Second, all parties bring the case to us on the premise that Playboy’s programming has First Amendment protection. As this case has been litigated, it is not alleged to be obscene; adults have a constitutional right to view it; the Government disclaims any interest in preventing children from seeing or hearing it with the consent of their parents; and Playboy has concomitant rights under the First Amendment to transmit it. These points are undisputed.[28]

In Coasean language, the parties at-issue were the cable operators, content-providers of sexually explicit programming, adult cable subscribers, and their children. Cable television provides tremendous value to its customers, including sexually explicit subscription content that is valued by those subscribers. There is, however, a negative externality to the extent that such programming may become available to children whose parents find it inappropriate. The Court noted that some parents may allow their children to receive such content, and the government disclaimed an interest in preventing such reception with parental consent. Given imperfect scrambling technology, this possible negative externality was clearly present. The question that arose was whether the transaction costs imposed by time-shifting requirements in Section 505 have the effect of restricting adults’ ability to make such viewing decisions for themselves and on behalf of their children.

After concluding that Section 505 was a content-based restriction, due to the targeting of specific adult content and specific programmers, the Court stated that when a content-based restriction is designed “to shield the sensibilities of listeners, the general rule is that the right of expression prevails, even where no less restrictive alternative exists. We are expected to protect our own sensibilities ‘simply by averting [our] eyes.’” [29]

This application of strict scrutiny does not change, the court noted, because we are dealing in this instance with children or the issue of parental consent:

No one suggests the Government must be indifferent to unwanted, indecent speech that comes into the home without parental consent. The speech here, all agree, is protected speech; and the question is what standard the Government must meet in order to restrict it. As we consider a content-based regulation, the answer should be clear: The standard is strict scrutiny. This case involves speech alone; and even where speech is indecent and enters the home, the objective of shielding children does not suffice to support a blanket ban if the protection can be accomplished by a less restrictive alternative.[30]

Again, using our Coasean translator, we can read the opinion as saying the least-cost way to avoid the negative externality of unwanted adult content is by just not looking at it, or for parents to use the means available to them to prevent their children from viewing it.

In fact, that is exactly where the Court goes, by comparing, under the least-restrictive-means test, the targeted blocking mechanism made available in Section 504 of the statute to the requirements imposed by Section 505:

[T]argeted blocking enables the Government to support parental authority without affecting the First Amendment interests of speakers and willing listeners—listeners for whom, if the speech is unpopular or indecent, the privacy of their own homes may be the optimal place of receipt. Simply put, targeted blocking is less restrictive than banning, and the Government cannot ban speech if targeted blocking is a feasible and effective means of furthering its compelling interests. This is not to say that the absence of an effective blocking mechanism will in all cases suffice to support a law restricting the speech in question; but if a less restrictive means is available for the Government to achieve its goals, the Government must use it.[31]

Moreover, the Court found that the fact that parents largely eschewed the available low-cost means to avoid the harm was not necessarily sufficient for the government to prove that it is the least-restrictive alternative:

When a plausible, less restrictive alternative is offered to a content-based speech restriction, it is the Government’s obligation to prove that the alternative will be ineffective to achieve its goals. The Government has not met that burden here. In support of its position, the Government cites empirical evidence showing that § 504, as promulgated and implemented before trial, generated few requests for household-by-household blocking. Between March 1996 and May 1997, while the Government was enjoined from enforcing § 505, § 504 remained in operation. A survey of cable operators determined that fewer than 0.5% of cable subscribers requested full blocking during that time. Id., at 712. The uncomfortable fact is that § 504 was the sole blocking regulation in effect for over a year; and the public greeted it with a collective yawn.[32]

This is because there were, in fact, other market-based means available for parents to use to avoid the harm of unwanted adult programming,[33] and the government had not proved that Section 504 could be effective with more adequate notice.[34] The Court concluded its least-restrictive means analysis by saying:

Even upon the assumption that the Government has an interest in substituting itself for informed and empowered parents, its interest is not sufficiently compelling to justify this widespread restriction on speech. The Government’s argument stems from the idea that parents do not know their children are viewing the material on a scale or frequency to cause concern, or if so, that parents do not want to take affirmative steps to block it and their decisions are to be superseded. The assumptions have not been established; and in any event the assumptions apply only in a regime where the option of blocking has not been explained. The whole point of a publicized § 504 would be to advise parents that indecent material may be shown and to afford them an opportunity to block it at all times, even when they are not at home and even after 10 p.m. Time channeling does not offer this assistance. The regulatory alternative of a publicized § 504, which has the real possibility of promoting more open disclosure and the choice of an effective blocking system, would provide parents the information needed to engage in active supervision. The Government has not shown that this alternative, a regime of added communication and support, would be insufficient to secure its objective, or that any overriding harm justifies its intervention.[35]

In Coasean language, the government’s imposition of transaction costs through time-shifting channels is not the least-cost way to avoid the harm. By publicizing the blocking mechanism of Section 504, as well as promoting market-based alternatives like VCRs to record programming for playback later or blue-screen technology that blocks scrambled video, adults would be able to effectively act as least-cost avoiders of harmful content, including on behalf of their children.

B.     Ashcroft v ACLU

In Ashcroft v. ACLU,[36] the Supreme Court reviewed a U.S. District Court’s preliminary injunction of the age-verification requirements imposed by the Children Online Protection Act (COPA), which was designed to “protect minors from exposure to sexually explicit materials on the Internet.”^[37] The law created criminal penalties “of a $50,000 fine and six months in prison for the knowing posting” for ‘commercial purposes’ of World Wide Web content that is ‘harmful to minors.’”[38] The law did, however, provide an escape hatch, through:

…an affirmative defense to those who employ specified means to prevent minors from gaining access to the prohibited materials on their Web site. A person may escape conviction under the statute by demonstrating that he

“has restricted access by minors to material that is harmful to minors—

“(A) by requiring use of a credit card, debit account, adult access code, or adult personal identification number;

“(B) by accepting a digital certificate that verifies age; or

“(C) by any other reasonable measures that are feasible under available technology.” § 231(c)(1).[39]

Here, the Coasean analysis of the problem is not stated as explicitly as in Playboy, but it is still apparent. The internet clearly provides substantial value to users, including those who want to view pornography. But there is a negative externality in internet pornography’s broad availability to minors for whom it would be inappropriate. Thus, to prevent these harms, COPA established a criminal regulatory scheme with an age-verification defense. The threat of criminal penalties, combined with the age-verification regime, imposed high transaction costs on online publishers who post content defined as harmful to minors. This leaves adults (including parents of children) and children themselves as the other relevant parties. Again, the question is: who is the least-cost avoider of the possible negative externality of minor access to pornography? The adult-content publisher or the parents, using technological and practical means?

The Court immediately went to an analysis of the least-restrictive-means test, defining the inquiry as follows:

In considering this question, a court assumes that certain protected speech may be regulated, and then asks what is the least restrictive alternative that can be used to achieve that goal. The purpose of the test is not to consider whether the challenged restriction has some effect in achieving Congress’ goal, regardless of the restriction it imposes. The purpose of the test is to ensure that speech is restricted no further than necessary to achieve the goal, for it is important to ensure that legitimate speech is not chilled or punished. For that reason, the test does not begin with the status quo of existing regulations, then ask whether the challenged restriction has some additional ability to achieve Congress’ legitimate interest. Any restriction on speech could be justified under that analysis. Instead, the court should ask whether the challenged regulation is the least restrictive means among available, effective alternatives.[40]

The Court then considered the available alternative to COPA’s age-verification regime: blocking and filtering software. They found that such tools are clearly less-restrictive means, focusing not only on the software’s granting parents the ability to prevent their children from accessing inappropriate material, but also that adults would retain access to any content blocked by the filter by simply turning it off.[41] In fact, the Court noted that the evidence presented to the District Court suggested that filters, while imperfect, were probably even more effective than the age-verification regime.[42] Finally, the Court noted that, even if Congress couldn’t require filtering software, it could encourage it through parental education, by providing incentives to libraries and schools to use it, and by subsidizing development of the industry itself. Each of these, the Court argued, would be clearly less-restrictive means of promoting COPA’s goals.[43]

In Coasean language, the Court found that parents using technological and practical means are the least-cost avoider of the harm of exposing children to unwanted adult content. Government promotion and support of those means were held up as clearly less-restrictive alternatives than imposing transaction costs on publishers of adult content.

C.    Brown v Entertainment Merchants Association

In Brown v. Entertainment Merchants Association,[44] the Court considered California Assembly Bill 1179, which prohibited the sale or rental of “violent video games” to minors.[45] The Court first disposed of the argument that the government could create a new category of speech that it considered unprotected, just because it is directed at children, stating:

The California Act is something else entirely. It does not adjust the boundaries of an existing category of unprotected speech to ensure that a definition designed for adults is not uncritically applied to children. California does not argue that it is empowered to prohibit selling offensively violent works to adults—and it is wise not to, since that is but a hair’s breadth from the argument rejected in Stevens. Instead, it wishes to create a wholly new category of content-based regulation that is permissible only for speech directed at children.

That is unprecedented and mistaken. “[M]inors are entitled to a significant measure of First Amendment protection, and only in relatively narrow and well-defined circumstances may government bar public dissemination of protected materials to them.” Erznoznik v. Jacksonville, 422 U.S. 205, 212-213, 95 S.Ct. 2736*2736 2268, 45 L.Ed.2d 125 (1975) (citation omitted). No doubt a State possesses legitimate power to protect children from harm, Ginsberg, supra, at 640-641, 88 S.Ct. 1274; Prince v. Massachusetts, 321 U.S. 158, 165, 64 S.Ct. 438, 88 L.Ed. 645 (1944), but that does not include a free-floating power to restrict the ideas to which children may be exposed. “Speech that is neither obscene as to youths nor subject to some other legitimate proscription cannot be suppressed solely to protect the young from ideas or images that a legislative body thinks unsuitable for them.” Erznoznik, supra, at 213-214, 95 S.Ct. 2268.[46]

The Court rejected that there was any “longstanding tradition” of restricting children’s access to depictions of violence, as demonstrated by copious examples of violent content in children’s books, high-school reading lists, motion pictures, radio dramas, comic books, television, music lyrics, etc. Moreover, to the extent there was a time when government enforced such regulations, the courts have eventually overturned them.[47] The fact that video games were interactive did not matter either, the Court found, as all literature is potentially interactive, especially genres like choose-your-own-adventure stories.[48]

Thus, because the law was clearly content-based, the Court applied strict scrutiny. The Court was skeptical even of whether the government had a compelling state interest, finding the law to be both seriously over- and under-inclusive. The same effects of exposure to violent content, the Court noted, could be found from covered video games and cartoons not subject to the law’s provisions. Moreover, the law allowed a parent or guardian (or any adult) to buy violent video games for their children.[49]

The Court then gets to the law’s real justification, which it summarily rejected as inconsistent with the First Amendment:

California claims that the Act is justified in aid of parental authority: By requiring that the purchase of violent video games can be made only by adults, the Act ensures that parents can decide what games are appropriate. At the outset, we note our doubts that punishing third parties for conveying protected speech to children just in case their parents disapprove of that speech is a proper governmental means of aiding parental authority.[50]

In Coasean language, the Court is saying that video games—even violent ones—are subjectively valued by those who play them, including minors. There may be negative externalities from playing such games, in that exposure to violence could be linked to psychological harm, and that they are interactive, but these content and design features are still protected speech. Placing the transaction costs on parents/adults to buy such games on behalf of minors, just in case some parents disapprove of their children playing them, is not a compelling state interest.

While the Court is only truly focused on whether there is a compelling state interest in California’s statutory scheme regulating violent video games, some of the language would equally apply to a least-restrictive means analysis:

But leaving that aside, California cannot show that the Act’s restrictions meet a substantial need of parents who wish to restrict their children’s access to violent video games but cannot do so. The video-game industry has in place a voluntary rating system designed to inform consumers about the content of games. The system, implemented by the Entertainment Software Rating Board (ESRB), assigns age-specific ratings to each video game submitted: EC (Early Childhood); E (Everyone); E10 + (Everyone 10 and older); T (Teens); M (17 and older); and AO (Adults Only—18 and older). App. 86. The Video Software Dealers Association encourages retailers to prominently display information about the ESRB system in their stores; to refrain from renting or selling adults-only games to minors; and to rent or sell “M” rated games to minors only with parental consent. Id., at 47. In 2009, the Federal Trade Commission (FTC) found that, as a result of this system, “the video game industry outpaces the movie and music industries” in “(1) restricting target-marketing of mature-rated products to children; (2) clearly and prominently disclosing rating information; and (3) restricting children’s access to mature-rated products at retail.” FTC, Report to Congress, Marketing Violent Entertainment to Children 30 (Dec.2009), online at http://www. ftc.gov/os/2009/12/P994511violent entertainment.pdf (as visited June 24, 2011, and available in Clerk of Court’s case file) (FTC Report). This system does much to ensure that minors cannot purchase seriously violent games on their own, and that parents who care about the matter can readily evaluate the games their children bring home. Filling the remaining modest gap in concerned parents’ control can hardly be a compelling state interest.

And finally, the Act’s purported aid to parental authority is vastly overinclusive. Not all of the children who are forbidden to purchase violent video games on their own have parents who care whether they purchase violent video games. While some of the legislation’s effect may indeed be in support of what some parents of the restricted children actually want, its entire effect is only in support of what the State thinks parents ought to want. This is not the narrow tailoring to “assisting parents” that restriction of First Amendment rights requires.[51]

In sum, the Court suggests that the law would not be narrowly tailored, because there are already market-based systems in place to help parents and minors make informed decisions about which video games to buy—most importantly from the rating system that judges appropriateness by age and offers warnings about violence. Government paternalism is simply insufficient to justify imposing new transaction costs on parents and minors who wish to buy even violent video games.

Interestingly, the concurrence of Justice Samuel Alito, joined by Chief Justice John Roberts, also contains some language that could be interpreted through a Coasean lens. The concurrence allows, in particular, the possibility that harms from interactive violent video games may differ from other depictions of violence that society has allowed children to view, although it concludes that reasonable minds may differ.[52] In other words, the concurrence basically notes that the negative externalities may be greater than the majority opinion would allow, but nonetheless, that Justices Alito and Roberts agreed the law was not drafted in a constitutional manner that comports with the obscenity exception to the First Amendment.

Nonetheless, it appears the Court applies an implicit Coasean framework when it rejects the imposition of transaction costs on parents and minors to gain access to protected speech—in this case, violent video games. Parents and minors remain the least-cost avoiders of the potential harms of violent video games.

IV.   Coase Theorem Applied to Age-Verification and Verifiable-Consent Laws

As outlined above, the issue is whether social media needs age-verification and parental-consent laws in order to address negative externalities to minor users. This section will analyze this question under the Coasean framework introduced in Part II.

The basic argument proceeds as follows:

1. Transaction costs for age verification and verifiable consent from parents and/or teens are sufficient large to prevent a bargain from being struck;
2. The lowest-cost avoiders are parents and teens working together, using practical and technological means, including low-cost monitoring and filtering services, to make marginal decisions about minors’ social-media use; and
3. Placing the transaction costs on social-media companies to obtain age verification and verifiable consent from parents and/or teens would actually reduce their ability to make marginal decisions about minors’ social-media use, as social-media companies will respond by investing more in excluding minors from access than in creating safe and vibrant spaces for interaction.

Part IV.A will detail the substantial transaction costs associated with obtaining age verification and verifiable parental consent. Part IV.B argues that parents and teens working together using practical and technological means are the lowest-cost avoiders of the harms of social-media use. Part IV.C will consider the counterfactual scenario of placing the transaction costs on social-media companies and argue that the result would be teens’ exclusion from social media, to their detriment, as well as the detriment of parents who would have made different choices.

A.    Transaction Costs, Age Verification, and Verifiable Parental Consent[53]

As Coase taught, in a world without transaction costs (or where such costs are sufficiently low), age-verification laws or mandates to obtain verifiable parental consent would not matter, because the parties would bargain to arrive at an efficient solution. Because there are high transaction costs that prevent such bargains from being easily struck, making the default that teens cannot join social media without verifiable parental consent could have the effect of excluding them from the great benefits of social media usage altogether.[54]

There is considerable evidence that, even despite the internet and digital technology serving to reduce transaction costs considerably across a wide range of fronts,[55] transaction costs remain high when it comes to age verification and verifiable parental consent. A data point that supports this conclusion is the experience of social-media platforms under the Children’s Online Privacy Protection Act (COPPA).[56] In their working paper “COPPAcalypse? The YouTube Settlement’s Impact on Kids Content,”[57] Garrett Johnson, Tesary Lin, James C. Cooper, & Liang Zhong summarized the issue as follows:

The Children’s Online Privacy Protection Act (COPPA), and its implementing regulations, broadly prohibit operators of online services directed at children under 13 from collecting personal information without providing notice of its data collection and use practices and obtaining verifiable parental consent. Because obtaining verifiable parental consent for free online services is difficult and rarely cost justified, COPPA essentially acts as a de facto ban on the collection of personal information by providers of free child-directed content. In 2013, the FTC amended the COPPA rules to include in the definition of personal information “persistent identifier that can be used to recognize a user over time and across different Web sites or online services,” such as a “customer number held in a cookie . . . or unique device identifier.” This regulatory change meant that, as a practical matter, online operators who provide child-directed content could no longer engage in personalized advertising.

On September 4, 2019, the FTC entered into a consent agreement with YouTube to settle charges that it had violated COPPA. The FTC’s allegations focused on YouTube’s practice of serving personalized advertising on child-directed content at children without obtaining verifiable parental consent. Although YouTube maintains it is a general audience website and users must be at least 13 years old to obtain a Google ID (which makes personalized advertising possible), the FTC complaint alleges that YouTube knew that many of its channels were popular with children under 13, citing YouTube’s own claims to advertisers. The settlement required YouTube to identify child-directed channels and videos and to stop collecting personal information from visitors to these channels. In response, YouTube required channel owners producing [“made-for-kids”] MFK content to designate either their entire channels or specific videos as MFK, beginning on January 1, 2020. YouTube supplemented these self-designations with an automated classifier designed to identify content that was likely directed at children younger than 13.9 In so doing, YouTube effectively shifted liability under COPPA to the channel owners, who could face up to $42,530 in fines per video if they fail to self-designate and are not detected by YouTube’s classifier.[58]

The rule change and settlement increased the transaction costs imposed on social-media platforms by requiring verifiable parental consent. YouTube’s economically rational response was to restrict the content creators’ ability to benefit from (considerably more lucrative) personalized advertising. The end result was less content created for children, with competitive effects to boot:

Consistent with a loss in personalized ad revenue, we find that child-directed content creators produce 13% less content and pivot towards producing non-child-directed content. On the demand side, views of child-directed channels fall by 22%. Consistent with the platform’s degraded capacity to match viewers to content, we find that content creation and content views become more concentrated among top child-directed YouTube channels.[59]

This is not the only finding regarding COPPA’s role in reducing the production of content for children. The president of the App Association, a global trade association for small and medium-sized technology companies, presented extensively at the Federal Trade Commission’s (FTC) 2019 COPPA Workshop.[60] The testimony from App Association President Morgan Reed detailed that the transaction costs associated with obtaining verifiable parental consent did little to enhance parental control, but much to reduce the quality and quantity of content directed to children. But it is worth highlighting Reed’s constant use of the words “friction,” “restriction,” and “cost” to describe how the institutional environment of COPPA affects the behavior of the social media platforms, parents, and children. While noting that general audience content is “unfettered, meaning that you don’t feel restricted by what you can get to, how you do it. It’s easy, it’s low friction. Widely available. I can get it on any platform, in any case, in any context and I can get to it rapidly,” COPPA-regulated apps and content are, Reed said, all about:

Friction, restriction, and cost. Every layer of friction you add alters parent behavior significantly. We jokingly refer to it as the over the shoulder factor. If a parent wants access to something and they have to pass it from the back seat to the front seat of the car more than one time, the parent moves on to the next thing. So the more friction you add to an application directed at children the less likely it is that the parent is going to take the steps necessary to get through it because the competition, of course, is as I said, free, unfettered, widely available. Restriction. Kids balk against some of the restrictions. I can’t get to this, I can’t do that. And they say that to the parent. And from the parent’s perspective, fine, I’ll just put in a different age date. They’re participating, they’re parenting but they’re not using the regulatory construction that we all understand. …

The COPPA side, expensive, onerous or friction full. We have to find some way around that. Restrictive, fewer features, fewer capabilities, less known or available, and it’s entertaining-ish. …

Is COPPA the barrier? I thought this quote really summed it up. “Seamlessness is expected. But with COPPA, seamlessness is impossible.” And that has been one of the single largest areas of concern. Our folks are looking to provide a COPPA compliant environment. And they’re finding doing VPC is really hard. We want to make it this way, we just walked away. And why do they want to do it? We wanted to create a hub for kids to promote creativity. So these are not folks who are looking to take data and provide interest based advertising. They’re trying to figure out how to do it so they can build an engaging product. Parental consent makes the whole process very complicated. And this is the depressing part. …

We say that VPC is intentional friction. It’s clear from everything we’ve heard in the last two panels that the authors of COPPA, we don’t really want information collected on kids. So friction is intentional. And this is leading to the destruction of general audience applications basically wiping out COPPA apps off the face of the map.[61]

Reed’s use of the word “friction” is particularly enlightening. Mike Munger has often described transaction costs as frictions, explaining that, to consumers, all costs are transaction costs.[62] When higher transaction costs are imposed on social-media platforms, end users feel the impact. In this case, the result is that children and parents receive less quality children’s apps and content.

A similar example can be seen in the various battles between traditional media and social-media companies in Australia, Canada, and the EU, where laws have been passed that would require platforms to pay for linking to certain news content.[63] Because these laws raise transaction costs, social-media platforms have responded by restricting access to news links,[64] to the detriment of users and the news-media organizations themselves. In other words, much like with verifiable parental consent, the intent of these laws is thwarted by the underlying economics.

More evidence that imposing transaction costs on social-media companies can have the effect of diminishing the user experience can be found in the preliminary injunction issued by the U.S. District Court in Austin, Texas in Free Speech Coalition Inc. v. Colmenero.[65] The court cited evidence from the plaintiff’s complaint that included bills for “several commercial verification services, showing that they cost, at minimum, $40,000.00 per 100,000 verifications.”[66] The court also noted that “[Texas law] H.B. 1181 imposes substantial liability for violations, including $10,000.00 per day for each violation, and up to $250,000.00 if a minor is shown to have viewed the adult content.”[67]

Moreover, the transaction costs in this example also include the subjective costs borne by those who actually go through with verifying their age to access pornography. As the court noted “the law interferes with the Adult Video Companies’ ability to conduct business, and risks deterring adults from visiting the websites.”[68] The court issued a preliminary injunction against the law’s age-verification provision, finding that other means—such as content-filtering software—are clearly more effective than age verification to protect children from unwanted content.[69]

In sum, transaction costs for age verification and verifiable parental consent are sufficiently high as to prevent an easy bargain from being struck. Thus, which party bears the burden of those costs will determine the outcome. The lessons from COPPA, news-media laws, and online-pornography age-verification laws are clear: if the transaction costs are imposed on the online platforms and apps, it will lead to access restrictions on the speech those platforms provide, almost all of which is protected speech. This is the type of collateral censorship that the First Amendment is designed to avoid.[70]

B.     Parents and Teens as the Least-Cost Avoiders of Negative Externalities

If transaction costs due to online age-verification and verifiable-parent-consent laws are substantial, the question becomes which party or parties should be subject to the burden of avoiding the harms arising from social-media usage.

It is possible, in theory, that social-media platforms are the best-positioned to monitor and control content posted to their platforms—for instance, when it comes to harms associated with anonymous or pseudonymous accounts imposing social costs on society.[71] In such cases, a duty of care that would allow for intermediary liability against social-media companies may make sense.[72]

On the other hand, when it comes to online age-verification and parental-consent laws, widely available practical and technological means appear to be lowest-cost way to avoid the negative externalities associated with social-media usage. As NetChoice put it in their complaint against Arkansas’ social-media age-verification law, “[p]arents have myriad ways to restrict their children’s access to online services and to keep their children safe on such services.”[73]

In their complaint, NetChoice recognizes the subjective nature of negative externalities, stating:

Just as people inevitably have different opinions about what books, television shows, and video games are appropriate for minors, people inevitably have different views about whether and to what degree online services are appropriate for minors. While many minors use online services in wholesome and productive ways, online services, like many other technologies, can be abused in ways that may harm minors.[74]

They then expertly list all the ways that parents can take control and help their children avoid online harms, including with respect to the decisions to buy devices for their children and to set terms for how and when they are permitted to use them.[75] Parents can also choose to use tools from cell-phone carriers and broadband providers to block certain apps and sites from their children’s devices, or to control with whom their children can communicate and for how long they can use the devices.[76] They also point to wireless routers that allow for parents to filter and monitor online content;[77] parental controls at the device level;[78] third-party filtering applications;[79] and numerous tools offered by NetChoice members that all allow for relatively low-cost monitoring and control by parents and even teen users acting on their own behalf.[80] Finally, they note that NetChoice members, in response to market demand,[81]expend significant resources curating content to make sure it’s appropriate.[82]

The recent response from the Australian government to the proposed “Roadmap for Age Verification”[83] buttresses this analysis. The government pulled back from plans to “force adult websites to bring in age verification following concerns about privacy and the lack of maturity of the technology.”[84] In particular, the government noted that:

It is clear from the Roadmap that at present, each type of age verification or age assurance technology comes with its own privacy, security, effectiveness and implementation issues. For age assurance to be effective, it must:

• work reliably without circumvention;
• be comprehensively implemented, including where pornography is hosted outside of Australia’s jurisdiction; and
• balance privacy and security, without introducing risks to the personal information of adults who choose to access legal pornography.

Age assurance technologies cannot yet meet all these requirements. While industry is taking steps to further develop these technologies, the Roadmap finds that the age assurance market is, at this time, immature.

The Roadmap makes clear that a decision to mandate age assurance is not ready to be taken.[85]

As a better solution, the government offered “[m]ore support and resources for families,”[86] including promoting tools already available in the marketplace to help prevent children from accessing inappropriate content like pornography,[87] and promoting education for both parents and children on how to avoid online harms.[88]

In sum, this is all about transaction costs. The least-cost avoider from negative externalities imposed by social-media usage are the parents and teens themselves, working together to make marginal decisions about how to use these platforms through the use of widely available practical and technological means.

C.    Teen Exclusion Online and Reduced Parental Involvement in Social-Media Usage Decisions

If the burden of avoiding negative externalities is placed on social-media platforms, the result could be considerable collateral censorship of protected speech. This is because of transaction costs, as explained above in Part IV.A. Thus, while one could argue that the externalities imposed by social-media platforms on teen users and their parents represent a market failure, this is not the end of the analysis. Transaction costs help to explain that the institutional environment we create fosters the rules of the game that platforms, parents, and teens follow. If transaction costs are too high and placed incorrectly on social-media platforms, parents and teens’ ability to control how they use social media will actually suffer.

As can be seen most prominently in the COPPA examples discussed above,[89] the burden of obtaining verifiable parental consent leads to platforms reallocating investments into the exclusion of the protected class—in that case, children under age 13—that could otherwise go toward creating a safe and vibrant community from which children could benefit. Thus, proposals like COPPA 2.0,[90] which would extend the need for verifiable consent to teens, could yield an equivalent result of greater exclusion of teens. State laws that would require age verification and verifiable parental consent for teens are likely to produce the same result, as well. The irony, of course, is that parental consent laws would actually reduce the available choices for those parents who see the use value for their teenagers.

In sum, the economics of transaction costs explains why age-verification and verifiable-parental-consent laws will not satisfy their proponents’ stated objectives. As with minimum-wage laws[91] and rent control,[92] economics helps to explain the counterintuitive finding that well-intentioned laws can actually produce the exact opposite end result. Here, that means age-verification and verifiable-parental-consent laws lead to parents and teens being less able to make meaningful and marginal decisions about the costs and benefits of their own social-media usage.

V.     The Unconstitutionality of Social-Media Verification and Verifiable-Consent Laws

Bringing this all together, Part V will consider the constitutionality of the enacted and proposed laws on age verification and verifiable parental consent under the First Amendment. As several courts have already suggested, these laws will not survive First Amendment scrutiny.

The first question is whether these laws will be subject to strict scrutiny (because they are content-based) or instead to intermediate scrutiny as content-neutral regulations. There is a possibility that it will not matter, because a court could find—as one already has—that such laws burden more speech than necessary anyway. Part V.A will take up these questions.

The second set of questions is whether, assuming strict scrutiny applies, these enacted and proposed laws could survive the least-restrictive-means test. Part V.B will consider this set of questions and argue that, as the lowest-cost avoiders, parents and teens working together using widely available practical and technological means to avoid negative externalities also represents the least-restrictive means to promote the government’s interest in protecting minors from the harms of social media.

A.    Questions of Content Neutrality

The first important question is whether laws that attempt to protect minors from externalities associated with social-media usage are content-neutral. One argument that has been forwarded is that they are simply content-neutral contract laws that shift the consent default to parents before teens can establish an ongoing contractual relationship with a social-media company by creating a profile.[93]

Before delving into whether that argument could work, it is worth considering laws that are clearly content-based to help tell the difference. For instance, the Texas law challenged in Free Speech Coalition v. Colmenero is clearly content-based, because “the regulation is based on whether content contains sexual material.”[94]

Similarly, laws like the Kids Online Safety Act (KOSA)[95] are content-based, in that they require covered platforms to take:

reasonable measures in its design or operation of products and services to prevent or mitigate the following:

• Consistent with evidence-informed medical information, the following mental health disorders: anxiety, depression, eating disorders, substance use disorders, and suicidal behaviors.

• Patterns of use that indicate or encourage addiction-like behaviors.

• Physical violence, online bullying, and harassment of the minor.

• Sexual exploitation and abuse.

• Promotion and marketing of narcotic drugs (as defined in section 102 of the Controlled Substances Act (21 U.S.C. 802)), tobacco products, gambling, or alcohol.

• Predatory, unfair, or deceptive marketing practices, or other financial harms.[96]

While parts 4-6 and actual physical violence all constitute either unprotected speech or conduct, decisions about how to present information from part 2 is arguably protected speech.[97] Even true threats like online bullying and harassment are speech subject to at least some First Amendment scrutiny, in that they would require some type of mens rea to be constitutional.[98] Part 1 may be unconstitutionally vague as written.[99] Moreover, 1-3 are clearly content-based, in that it is necessary to consider the content presented, which will include at least some protected speech. This equally applies to the California Age Appropriate Design Code,[100] which places an obligation on covered companies to identify and mitigate speech that is harmful or potentially harmful to users under 18 years old, and to prioritize speech that promotes such users’ well-being and best interests.[101]

In each of these cases, it would be difficult to argue that strict scrutiny ought not apply. On the other hand, some have argued that the Utah and Arkansas laws requiring age verification and verifiable parental consent are simply content-neutral regulations of contract formation, which can be considered independently of speech.[102] Arkansas has argued that Act 689’s age-verification requirements are “merely a content-neutral regulation on access to speech at particular ‘locations,’ so intermediate scrutiny should apply.”[103]

But even in NetChoice v. Griffin,[104] the U.S. District Court in Arkansas, while skeptical that the law was content-neutral,[105] proceeded as if it was and still found, in granting a preliminary injunction, that the age-verification law “is likely to unduly burden adult and minor access to constitutionally protected speech.”[106] Similarly, the U.S. District Court for the Northern District of California found that all major provisions of California’s AADC were likely unconstitutional under a lax commercial-speech standard.[107]

Nonetheless, there are strong arguments that these laws are content-based. As the court in Griffin put it:

Deciding whether Act 689 is content-based or content-neutral turns on the reasons the State gives for adopting the Act. First, the State argues that the more time a minor spends on social media, the more likely it is that the minor will suffer negative mental health outcomes, including depression and anxiety. Second, the State points out that adult sexual predators on social media seek out minors and victimize them in various ways. Therefore, to the State, a law limiting access to social media platforms based on the user’s age would be content-neutral and require only intermediate scrutiny.

On the other hand, the State points to certain speech-related content on social media that it maintains is harmful for children to view. Some of this content is not constitutionally protected speech, while other content, though potentially damaging or distressing, especially to younger minors, is likely protected nonetheless. Examples of this type of speech include depictions and discussions of violence or self-harming, information about dieting, so-called “bullying” speech, or speech targeting a speaker’s physical appearance, race or ethnicity, sexual orientation, or gender. If the State’s purpose is to restrict access to constitutionally protected speech based on the State’s belief that such speech is harmful to minors, then arguably Act 689 would be subject to strict scrutiny.

During the hearing, the State advocated for intermediate scrutiny and framed Act 689 as “a restriction on where minors can be,” emphasizing it was “not a speech restriction” but “a location restriction.” The State’s briefing analogized Act 689 to a restriction on minors entering a bar or a casino. But this analogy is weak. After all, minors have no constitutional right to consume alcohol, and the primary purpose of a bar is to serve alcohol. By contrast, the primary purpose of a social media platform is to engage in speech, and the State stipulated that social media platforms contain vast amounts of constitutionally protected speech for both adults and minors. Furthermore, Act 689 imposes much broader “location restrictions” than a bar does. The Court inquired of the State why minors should be barred from accessing entire social media platforms, even though only some of the content was potentially harmful to them, and the following colloquy ensued:

THE COURT: Well, to pick up on Mr. Allen’s analogy of the mall, I haven’t been to the Northwest Arkansas mall in a while, but it used to be that there was a restaurant inside the mall that had a bar. And so certainly minors could not go sit at the bar and order up a drink, but they could go to the Barnes & Noble bookstore or the clothing store or the athletic store. Again, borrowing Mr. Allen’s analogy, the gatekeeping that Act 689 imposes is at the front door of the mall, not the bar inside the mall; yes?

THE STATE: The state’s position is that the whole mall is a bar, if you want to continue to use the analogy.

THE COURT: The whole mall is a bar?

THE STATE: Correct.

Clearly, the state’s analogy is not persuasive.

NetChoice argues that Act 689 is not a content-neutral restriction on minors’ ability to access particular spaces online, and the fact that there are so many exemptions to the definitions of “social media company” and “social media platform” proves that the State is targeting certain companies based either on a platform’s content or its viewpoint. Indeed, Act 689’s definitions and exemptions do seem to indicate that the State has selected a few platforms for regulation while ignoring all the rest. The fact that the State fails to acknowledge this causes the Court to suspect that the regulation may not be content neutral. “If there is evidence that an impermissible purpose or justification underpins a facially content-neutral restriction, for instance, that restriction may be content-based.” City of Austin v. Reagan Nat’l Advertising of Austin, LLC, 142 S. Ct. 1464, 1475 (2022).[108]

Utah’s laws HB 311 and 152 would also seem to suffer from a similar defect as KOSA and AADC,[109] though they have not yet been litigated.

B.     Least-Restrictive Means Is to Promote Monitoring and Filtering

Assuming that courts do, in fact, find that these laws are content-based, strict scrutiny would apply, including the least-restrictive-means test.[110] In that case, the caselaw is clear: the least-restrictive means to achieve the government’s interest of protecting minors from social media’s speech and design problems is to promote low-cost monitoring and filtering.

First, however, it is also worth inquiring whether the government would be able to establish a compelling state interest, as the Court discussed in Brown. The Court’s strong skepticism of government paternalism[111] applies equally to the verifiable-parental-consent laws enacted in Arkansas and Utah, as well as COPPA 2.0. Aiding parental consent likely fails to “meet a substantial need of parents who wish to restrict their children’s access”[112] to social media, but can’t do so, to use the late Justice Antonin Scalia’s language. Moreover, the “purported aid to parental authority” is likely to be found to be “vastly overinclusive” because “[n]ot all of the children who are forbidden” to join social media on “their own have parents who care whether” they do so.[113] While such laws “may indeed be in support of what some parents of the restricted children actually want, its entire effect is only in support of what the State thinks parents ought to want. This is not the narrow tailoring to ‘assisting parents’ that restriction of First Amendment rights requires.”[114]

As argued clearly above, Ashcroft is strong precedent that promoting the practical and technological means available in the marketplace, outlined by NetChoice in its brief in Griffin, is less restrictive than age-verification laws to protect minors from harms associated with social-media usage.[115] In fact, there is a strong argument that the market has subsequently produced more and more effective tools than were available even then. This makes it exceedingly unlikely that the Supreme Court will change its mind.

While some have argued that Justice Clarence Thomas’ dissent in Brown offers roadmap to reject these precedents,[116] there is little basis for that conclusion. First, Thomas’ dissent in Brown was not joined by any other members of the Supreme Court.[117] Second, Justice Thomas joined the majority in Ashcroft v. ACLU, suggesting he probably still sees age-verification laws as unconstitutional.[118] Even Associate Justice Samuel Alito issued a concurrence to the majority in that case,[119] expressing skepticism of Justice Thomas’ approach.[120]  Third, it seems unlikely that the newer conservative justices, whose jurisprudence has been more speech-protective by nature,[121] would join Justice Thomas in his opinion on the right of children to receive speech. And far from being vague on the issue of whether a minor has a right to receive speech, [122] Justice Scalia’s majority opinion clearly stated that:

[M]inors are entitled to a significant measure of First Amendment protection, and only in relatively narrow and well-defined circumstances may government bar public dissemination of protected materials to them… but that does not include a free-floating power to restrict the ideas to which children may be exposed.[123]

Precedent is strong against age-verification and parental-consent laws, and there is no reason to think the personnel changes on the Supreme Court would change the analysis.

In sum, straightforward applications of Brown and Ashcroft doom these new social-media laws.

VI.   Conclusion

This issue brief has two main conclusions, one of interest to the scholarship of applying law & economics to constitutional law, and the other to the policy and legal questions surrounding social-media age-verification and parental-consent laws:

1. The Supreme Court appears to implicitly adopt a Coasean framework in its approach to parental-consent and age-verification laws in the three major precedents of Playboy, Ashcroft, and Brown; and
2. The application of this least-cost avoider analysis in the least-restrictive-means test, in particular, is likely to doom these laws constitutionally, but also as a matter of economically grounded policy.

In conclusion, these online age-verification laws should be rejected. Why? The answer is transaction costs.

[1] See, e.g., Kirsten Weir, Social Media Brings Benefits and Risks to Teens. Here’s How Psychology Can Help Identify a Path Forward, 54 Monitor on Psychology 46 (Sep. 1, 2023), https://www.apa.org/monitor/2023/09/protecting-teens-on-social-media.

[2] See, e.g., Khara Boender, Jordan Rodell, & Alex Spyropoulos, The State of Affairs: What Happened in Tech Policy During 2023 State Legislative Sessions?, Project Disco (Jul. 25, 2023), https://www.project-disco.org/competition/the-state-of-affairs-state-tech-policy-in-2023 (noting laws passed and proposed addressing children’s online safety at the state level, including California’s Age-Appropriate Design Code and age-verification laws in both Arkansas and Utah, all of which will be considered below).

[3] With apologies to Mike Munger for borrowing the title of his excellent podcast, invoked several times in this issue brief; see The Answer Is Transaction Costs, https://podcasts.apple.com/us/podcast/the-answer-is-transaction-costs/id1687215430 (last accessed Sept. 28, 2023).

[4] Steven G. Medema, “Failure to Appear”: The Use of the Coase Theorem in Judicial Opinions, at 4, Dep’t of Econ. Duke Univ., Working Paper No. 2.1 (2019), available at https://hope.econ.duke.edu/sites/hope.econ.duke.edu/files/Medema%20workshop%20paper.pdf.

[5] Fred R. Shapiro & Michelle Pearse, The Most Cited Law Review Articles of All Time, 110 Mich. L. Rev. 1483, 1489 (2012).

[6] R.H. Coase, The Problem of Social Cost, 3 J. L. & Econ. 1 (1960).

[7] See generally Steven G. Medema, The Coase Theorem at Sixty, 58 J. Econ. Lit. 1045 (2020).

[8] Todd J. Zywicki & Edward Peter Stringham, Common Law and Economic Efficiency, Geo. Mason Univ.. L. & Econ. Rsch., Working Paper No. 10-43 (2010), available at https://www.law.gmu.edu/assets/files/publications/working_papers/1043CommonLawandEconomicEfficiency.pdf.

[9] See id. at 4.

[10] See id. at 3.

[11] See id. at 10.

[12] See id. at 34.

[13] Medema, supra note 4, at 39.

[14] See, e.g., Matti Cuorre & Andrew K. Przybylski, Estimating the Association Between Facebook Adoption and Well-Being in 72 Countries, 10 Royal Soc’y Open Sci. 1 (2023), https://royalsocietypublishing.org/doi/epdf/10.1098/rsos.221451; Sabrina Cipoletta, Clelia Malighetti, Chiara Cenedese, & Andrea Spoto, How Can Adolescents Benefit from the Use of Social Networks? The iGeneration on Instagram, 17 Int. J. Environ. Res. Pub. Health 6952 (2020), https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7579040.

[15] See Jean M. Twenge, Thomas E. Joiner, Megan L Rogers, & Gabrielle N. Martin, Increases in Depressive Symptoms, Suicide-Related Outcomes, and Suicide Rates Among U.S. Adolescents After 2010 and Links to Increased New Media Screen Time, 6 Clinical Psych. Sci. 3 (2018), available at https://courses.engr.illinois.edu/cs565/sp2018/Live1_Depression&ScreenTime.pdf.

[16] Adam Candeub, Age Verification for Social Media: A Constitutional and Reasonable Regulation, FedSoc Blog (Aug. 7, 2023), https://fedsoc.org/commentary/fedsoc-blog/age-verification-for-social-media-a-constitutional-and-reasonable-regulation.

[17] See Wikipedia, List of Alcohol Laws of the United States, https://en.wikipedia.org/wiki/List_of_alcohol_laws_of_the_United_States (last accessed Sep. 28, 2023); Wikipedia, U.S. History of Tobacco Minimum Purchase Age by State, https://en.wikipedia.org/wiki/U.S._history_of_tobacco_minimum_purchase_age_by_state (last accessed Sep. 28, 2023).

[18] See Wikipedia, Driver’s Licenses in the United States, https://en.wikipedia.org/wiki/Driver%27s_licenses_in_the_United_States (last accessed Sep. 28, 2023).

[19] See Wikipedia, Gambling Age, https://en.wikipedia.org/wiki/Gambling_age (last accessed Sep. 28, 2023) (table on minimum age for lottery tickets and casinos by state). As far as this author is aware, every state and territory requires identification demonstrating the buyer is at least 18 years old to make a retail purchase of a pornographic magazine or video.

[20] See 15 U.S.C. § 6501, et seq. (2018); 16 CFR Part 312.

[21] See infra Part III. See Brown v. Ent. Merch. Ass’n, 564 U.S. 786, 794 (2011) (“California does not argue that it is empowered to prohibit selling offensively violent works to adults—and it is wise not to, since that is but a hair’s breadth from the argument rejected in Stevens. Instead, it wishes to create a wholly new category of content-based regulation that is permissible only for speech directed at children. That is unprecedented and mistaken. ‘[M]inors are entitled to a significant measure of First Amendment protection, and only in relatively narrow and well-defined circumstances may government bar public dissemination of protected materials to them…’ No doubt a State possesses legitimate power to protect children from harm… but that does not include a free-floating power to restrict the ideas to which children may be exposed. ‘Speech that is neither obscene as to youths nor subject to some other legitimate proscription cannot be suppressed solely to protect the young from ideas or images that a legislative body thinks unsuitable for them.’”) (internal citations omitted).

[22] See infra Part V.

[23] See infra Part IV.

[24] 529 U.S. 803 (2000).

[25] Id. at 806.

[26] See id.

[27] See id. at 806-807.

[28] Id. at 811.

[29] Id. at 813 (internal citation omitted).

[30] Id. at 814.

[31] Id. at 815.

[32] Id. at 816.

[33] See id. at 821 (“[M]arket-based solutions such as programmable televisions, VCR’s, and mapping systems []which display a blue screen when tuned to a scrambled signal[] may eliminate signal bleed at the consumer end of the cable.”).

[34] See id. at 823 (“The Government also failed to prove § 504 with adequate notice would be an ineffective alternative to § 505.”).

[35] Id. at 825-826.

[36] 542 U.S. 656 (2004).

[37] Id. at 659.

[38] Id. at 661.

[39] Id. at 662.

[40] Id. at 666.

[41] See id. at 667 (“Filters are less restrictive than COPA. They impose selective restrictions on speech at the receiving end, not universal restrictions at the source. Under a filtering regime, adults without children may gain access to speech they have a right to see without having to identify themselves or provide their credit card information. Even adults with children may obtain access to the same speech on the same terms simply by turning off the filter on their home computers. Above all, promoting the use of filters does not condemn as criminal any category of speech, and so the potential chilling effect is eliminated, or at least much diminished. All of these things are true, moreover, regardless of how broadly or narrowly the definitions in COPA are construed.”).

[42] See id. at 667-669.

[43] See id. at 669-670.

[44] 564 U.S. 786 (2011).

[45] See id. at 787.

[46] Id. at 793-795.

[47] See id. at 794-797.

[48] See id. at 796-799.

[49] See id. at 799-802.

[50] Id. at 801.

[51] Id. at 801-804.

[52] See id. at 812 (J. Alito, concurring):

“There is a critical difference, however, between obscenity laws and laws regulating violence in entertainment. By the time of this Court’s landmark obscenity cases in the 1960’s, obscenity had long been prohibited, See Roth v. U.S., 354 U.S. 476, at 484-485, and this experience had helped to shape certain generally accepted norms concerning expression related to sex.

There is no similar history regarding expression related to violence. As the Court notes, classic literature contains descriptions of great violence, and even children’s stories sometimes depict very violent scenes.

Although our society does not generally regard all depictions of violence as suitable for children or adolescents, the prevalence of violent depictions in children’s literature and entertainment creates numerous opportunities for reasonable people to disagree about which depictions may excite “deviant” or “morbid” impulses. See Edwards & Berman, Regulating Violence on Television, 89 Nw. U.L.Rev. 1487, 1523 (1995) (observing that the Miller test would be difficult to apply to violent expression because “there is nothing even approaching a consensus on low-value violence”).

Finally, the difficulty of ascertaining the community standards incorporated into the California law is compounded by the legislature’s decision to lump all minors together. The California law draws no distinction between young children and adolescents who are nearing the age of majority.”

See also id. at 819 (Alito, J., concurring) (“If the technological characteristics of the sophisticated games that are likely to be available in the near future are combined with the characteristics of the most violent games already marketed, the result will be games that allow troubled teens to experience in an extraordinarily personal and vivid way what it would be like to carry out unspeakable acts of violence.”).

[53] The following sections are adapted from Ben Sperry, Right to Anonymous Speech, Part 3: Anonymous Speech and Age-Verification Laws, Truth on the Market (Sep. 11, 2023), https://truthonthemarket.com/2023/09/11/right-to-anonymous-speech-part-3-anonymous-speech-and-age-verification-laws.

[54] See Ben Sperry, Online Safety Bills Will Mean Kids Are No Longer Seen or Heard Online, The Hill (May 12, 2023), https://thehill.com/opinion/congress-blog/4002535-online-safety-bills-will-mean-kids-are-no-longer-seen-or-heard-online;  Ben Sperry, Bills Aimed at ‘Protecting’ Kids Online Throw the Baby out with the Bathwater, The Hill (Jul. 26, 2023), https://thehill.com/opinion/congress-blog/4121324-bills-aimed-at-protecting-kids-online-throw-the-baby-out-with-the-bathwater; Przybylski & Vuorre, supra note 14; Mesfin A. Bekalu, Rachel F. McCloud, & K. Viswanath, Association of Social Media Use With Social Well-Being, Positive Mental Health, and Self-Rated Health: Disentangling Routine Use From Emotional Connection to Use, 42 Sage J. 69S, 69S-80S (2019), https://journals.sagepub.com/doi/full/10.1177/1090198119863768.

[55] See generally Michael Munger, Tomorrow 3.0: Transaction Costs and the Sharing Economy, Cambridge University Press (Mar. 22, 2018).

[56] The Future of the COPPA Rule: An FTC Workshop Part 2, Federal Trade Commission (Oct. 7, 2019), available at https://www.ftc.gov/system/files/documents/public_events/1535372/transcript_of_coppa_workshop_part_2_1.pdf.

[57] Garrett A. Johnson, Tesary Lin, James C. Cooper, & Liang Zhong, COPPAcalypse? The YouTube Settlement’s Impact on Kids Content, SSRN (Apr. 26, 2023), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4430334.

[58] Id. at 6-7 (emphasis added).

[59] Id. at 1.

[60] FTC, supra note 56.

[61] Id. at 6 (emphasis added).

[62] See Michael Munger, To Consumers, All Costs are Transaction Costs, Am. Inst. Econ. Rsch. (June 13, 2023), https://www.aier.org/article/to-consumers-all-costs-are-transaction-costs.

[63] See Katie Robertson, Meta Begins Blocking News in Canada, N.Y. Times (Aug. 2, 2023), https://www.nytimes.com/2023/08/02/business/media/meta-news-in-canada.html; Mark Collom, Australia Made a Deal to Keep News on Facebook. Why Couldn’t Canada?, CBC News (Aug. 3, 2023), https://www.cbc.ca/news/world/meta-australia-google-news-canada-1.6925726.

[64] See id.

[65] Free Speech Coal. Inc. v. Colmenero, No. 1:23-CV-917-DAE, 2023 U.S. Dist. LEXIS 154065 (W.D. Tex. 2023), available at https://storage.courtlistener.com/recap/gov.uscourts.txwd.1172751222/gov.uscourts.txwd.1172751222.36.0.pdf.

[66] Id. at 10.

[67] Id.

[68] Id.

[69] Id. at 44.

[70] Geoffrey A. Manne, Ben Sperry, & Kristian Stout, Who Moderates the Moderators?: A Law & Economics Approach to Holding Online Platforms Accountable Without Destroying the Internet, 49 Rutgers Comput. & Tech. L.J. 26 (2022), https://laweconcenter.org/resources/who-moderates-the-moderators-a-law-economics-approach-to-holding-online-platforms-accountable-without-destroying-the-internet; Geoffrey A. Manne, Kristian Stout, & Ben Sperry, Twitter v. Taamneh and the Law & Economics of Intermediary Liability, Truth on the Market (Mar. 8, 2023), https://truthonthemarket.com/2023/03/08/twitter-v-taamneh-and-the-law-economics-of-intermediary-liability; Ben Sperry, The Law & Economics of Children’s Online Safety: The First Amendment and Online Intermediary Liability, Truth on the Market (May 12 2023), https://truthonthemarket.com/2023/05/12/the-law-economics-of-childrens-online-safety-the-first-amendment-and-online-intermediary-liability.

[71] See Manne, Stout, & Sperry, Twitter v. Taamneh and the Law & Economics of Intermediary Liability, supra note 70; Ben Sperry, Right to Anonymous Speech, Part 2: A Law & Economics Approach, Truth on the Market. (Sep. 6, 2023), httsps://truthonthemarket.com/2023/09/06/right-to-anonymous-speech-part-2-a-law-economics-approach; Manne, Sperry, & Stout, Who Moderates the Moderators?: A Law & Economics Approach to Holding Online Platforms Accountable Without Destroying the Internet, supra note 70.

[72] See Manne, Stout, & Sperry, Who Moderates the Moderators?: A Law & Economics Approach to Holding Online Platforms Accountable Without Destroying the Internet, supra note 70, at 28 (“To the extent that the current legal regime permits social harms online that exceed concomitant benefits, it should be reformed to deter those harms, provided it can be done so at sufficiently low cost.”); Sperry, Right to Anonymous Speech, Part 2: A Law & Economics Approach, supra note 71.

[73] See NetChoice Complaint, NetChoice LLC v. Griffin, NO. 5:23-CV-05105, available at 2023 U.S. Dist. LEXIS 154571 (W.D. Ark. 2023), https://netchoice.org/wp-content/uploads/2023/06/NetChoice-v-Griffin_-Complaint_2023-06-29.pdf.

[74] Id. at para. 13.

[75] See id. at para. 14

[76] See id.

[77] See id. at para 15.

[78] See id. at para 16.

[79] See id.

[80] See id. at para. 17, 19-21

[81] See Ben Sperry, Congress Should Focus on Protecting Teens from Real Harms, Not Targeted Ads, The Hill (Feb. 12, 2023), https://thehill.com/opinion/congress-blog/3862238-congress-should-focus-on-protecting-teens-from-real-harms-not-targeted-ads.

[82] See NetChoice Complaint, supra note 73 at para. 18.

[83] Government Response to the Roadmap for Age Verification, Australian Gov’t Dep’t of Infrastructure, Transp., Reg’l Dev., Commc’ns and the Arts (Aug. 2023), available at https://www.infrastructure.gov.au/sites/default/files/documents/government-response-to-the-roadmap-for-age-verification-august2023.pdf.

[84] See Josh Taylor, Australia Will Not Force Adult Websites to Bring in Age Verification Due To Privacy And Security Concerns, The Guardian (Aug. 30, 2023), https://www.theguardian.com/australia-news/2023/aug/31/roadmap-for-age-verification-online-pornographic-material-adult-websites-australia-law.

[85] See NetChoice Complaint, supra note 73 at 2.

[86] Id. at 6.

[87] See id.

[88] See id. at 6-8.

[89] Supra Part IV.A.

[90] See Children and Teen’s Online Privacy Protection Act, S. 1418, 118^th Cong. (2023), as amended Jul. 27, 2023, available at https://www.congress.gov/bill/118th-congress/senate-bill/1418/text (last accessed Oct. 2, 2023). Other similar bills have been proposed as well. See Protecting Kids on Social Media Act, S. 1291, 118th Cong. (2023); Making Age-Verification Technology Uniform, Robust, and Effective Act, S. 419, 118th Cong. (2023); Social Media Child Protection Act, H.R. 821, 118th Cong. (2023).

[91] See David Neumark & Peter Shirley, Myth or Measurement: What Does the New Minimum Wage Research Say About Minimum Wages and Job Loss in the United States? (Nat’l Bur. Econ. Res. Working Paper 28388, Mar. 2022), available at https://www.nber.org/papers/w28388 (concluding that “(i) there is a clear preponderance of negative estimates in the literature; (ii) this evidence is stronger for teens and young adults as well as the less-educated; (iii) the evidence from studies of directly-affected workers points even more strongly to negative employment effects; and (iv) the evidence from studies of low-wage industries is less one-sided.”).

[92] See Lisa Sturtevant, The Impacts of Rent Control: A Research Review and Synthesis, at 6-7, Nat’l Multifamily Hous. Coun’cl Res. Found. (May 2018), available at https://www.nmhc.org/globalassets/knowledge-library/rent-control-literature-review-final2.pdf (“1. Rent control and rent stabilization policies do a poor job at targeting benefits. While some low-income families do benefit from rent control, so, too, do higher-income households. There are more efficient and effective ways to provide assistance to lower-income individuals and families who have trouble finding housing they can afford. 2. Residents of rent-controlled units move less often than do residents of uncontrolled housing units, which can mean that rent control causes renters to continue to live in units that are too small, too large or not in the right locations to best meet their housing needs. 3. Rent-controlled buildings potentially can suffer from deterioration or lack of investment, but the risk is minimized when there are effective local requirements and/or incentives for building maintenance and improvements. 4. Rent control and rent stabilization laws lead to a reduction in the available supply of rental housing in a community, particularly through the conversion to ownership of controlled buildings. 5. Rent control policies can hold rents of controlled units at lower levels but not under all circumstances. 6. Rent control policies generally lead to higher rents in the uncontrolled market, with rents sometimes substantially higher than would be expected without rent control. 7. There are significant fiscal costs associated with implementing a rent control program.”).

[93] See Candeub, supra note 16.

[94] Colmenero, supra note 65, at 22.

[95] See Kids Online Safety Act, S. 1409, 118th Cong. (2023), as amended and posted by the Senate Committee on Commerce, Science , and Transportation on July 27, 2023, available at https://www.congress.gov/bill/118th-congress/senate-bill/1409/text#toc-id6fefcf1d-a1ae-4949-a826-23c1e1b1ef26 (last accessed Oct. 2, 2023).

[96] See id. at Section 3.

[97] Cf. Manhattan Community Access Corp. v. Halleck, 139 S. Ct. 1921, 1930-31 (2019):

[M]erely hosting speech by others is not a traditional, exclusive public function and does not alone transform private entities into state actors subject to First Amendment constraints…

If the rule were otherwise, all private property owners and private lessees who open their property for speech would be subject to First Amendment constraints and would lose the ability to exercise what they deem to be appropriate editorial discretion within that open forum. Private property owners and private lessees would face the unappetizing choice of allowing all comers or closing the platform altogether.

[98] See Counterman v. Colorado, 600 U.S. 66 (2023); Ben Sperry (@RBenSperry), Twitter (June 28, 2023, 4:46 PM), https://twitter.com/RBenSperry/status/1674157227387547648.

[99] Cf. HØEG v. Newsom, 2023 WL 414258 (E.D. Cal. Jan. 25, 2023); Sperry, The Law & Economics of Children’s Online Safety: The First Amendment and Online Intermediary Liability, supra note 70.

[100] California Age-Appropriate Design Code Act, AB 2273 (2022), https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=202120220AB2273.

[101] See id. at § 1798.99.32(d)(1), (2), (4).

[102] See Candeub, supra note 16.

[103] NetChoice LLC. v. Griffin, Case No. 5:23-CV-05105 at 25 (Aug. 31, 2023), slip op., available at https://netchoice.org/wp-content/uploads/2023/08/GRIFFIN-NETCHOICE-GRANTED.pdf.

[104] Id.

[105] Id. at 38 (“Having considered both sides’ positions on the level of constitutional scrutiny to be applied, the Court tends to agree with NetChoice that the restrictions in Act 689 are subject to strict scrutiny. However, the Court will not reach that conclusion definitively at this early stage in the proceedings and instead will apply intermediate scrutiny, as the State suggests.”).

[106] Id. at 48 (“In sum, NetChoice is likely to succeed on the merits of the First Amendment claim it raises on behalf of Arkansas users of member platforms. The State’s solution to the very real problems associated with minors’ time spent online and access to harmful content on social media is not narrowly tailored. Act 689 is likely to unduly burden adult and minor access to constitutionally protected speech. If the legislature’s goal in passing Act 689 was to protect minors from materials or interactions that could harm them online, there is no compelling evidence that the Act will be effective in achieving those goals.”).

[107] See NetChoice v. Bonta, Case No. 22-cv-08861-BLF (N.D. Cal. Sept. 18, 2023), slip op., available at https://netchoice.org/wp-content/uploads/2023/09/NETCHOICE-v-BONTA-PRELIMINARY-INJUNCTION-GRANTED.pdf; Ben Sperry, What Does NetChoice v. Bonta Mean for KOSA and Other Attempts to Protect Children Online?, Truth on the Market (Sep. 29, 2023), https://truthonthemarket.com/2023/09/29/what-does-netchoice-v-bonta-mean-for-kosa-and-other-attempts-to-protect-children-online.

[108] Id. at 36-38.

[109] See Carl Szabo, NetChoice Sends Veto Request to Utah Gov. Spencer Cox on HB 311 and SB 152, NetChoice (Mar. 3, 2023),  https://netchoice.org/netchoice-sends-veto-request-to-utah-gov-spencer-cox-on-hb-311-and-sb-153.

[110] See, e.g., Sable Commcn’s v. FCC, 492 U.S. 115, 126 (1989) (“The Government may, however, regulate the content of constitutionally protected speech in order to promote a compelling interest if it chooses the least restrictive means to further the articulated interest.”).

[111] Brown, 564 U.S. at 801 (“California claims that the Act is justified in aid of parental authority: By requiring that the purchase of violent video games can be made only by adults, the Act ensures that parents can decide what games are appropriate. At the outset, we note our doubts that punishing third parties for conveying protected speech to children just in case their parents disapprove of that speech is a proper governmental means of aiding parental authority.”).

[112] Brown, 564 U.S. at 801.

[113] Id. at 803

[114] Id.

[115] See supra IV.B.

[116] See Clare Morrell, Adam Candeub, & Michael Toscano, No, Big Tech Doesn’t Have A Right To Speak To Kids Without Their Parent’s Consent, The Federalist (Sept. 21, 2023), https://thefederalist.com/2023/09/21/no-big-tech-doesnt-have-a-right-to-speak-to-kids-without-their-parents-consent (noting “Justice Clarence Thomas wrote in his dissent in the Brown case that “the ‘freedom of speech,’ as originally understood, does not include a right to speak to minors (or a right of minors to access speech) without going through the minors’ parents or guardians.”).

[117] Brown, 564 U.S. at 821.

[118] Id. at 822.

[119] Id. at 805.

[120] Id. at 813.

[121] See, e.g., Ben Sperry, There’s Nothing ‘Conservative’ About Trump’s Views on Free Speech and the Regulation of Social Media, Truth on the Market (Jul. 12, 2019), https://truthonthemarket.com/2019/07/12/theres-nothing-conservative-about-trumps-views-on-free-speech (noting Kavanaugh’s majority opinion in Halleck on compelled speech included all the conservative justices; at the time he and Gorsuch were relatively new Trump appointees); Justice Amy Comey Barrett has also joined the majority opinion in 303 Creative LLC v. Elenis, 600 U.S. 570 (2023), written by Gorsuch and joined by all the conservatives, which found public-accommodations laws are subject to strict scrutiny if they implicate expressive activity.

[122] Clare Morell (@ClareMorellEPPC), Twitter (Sept. 7, 2023, 8:27 PM), https://twitter.com/ClareMorellEPPC/status/1699942446711357731.

[123] Brown, 564 U.S. at 786.

Amazon against the DSA ad database duty: The new Digital Services Act (DSA) includes a duty for very large online platforms (VLOPs) to “compile and make publicly available an advertisement repository.” Amazon challenged this duty before the EU’s General Court, which made a preliminary decision to temporarily suspend the application of that duty to Amazon.

Read the full piece here.

The European Commission late last month published the full list of its “gatekeeper” designations under the Digital Markets Act (DMA). Alphabet, Amazon, Apple, ByteDance, Meta, and Microsoft—the six designated gatekeepers—now have six months to comply with the DMA’s list of obligations and restrictions with respect to their core platform services (CPS), or they stand to face hefty fines and onerous remedies (see here and here for our initial reactions).

Read the full piece here.

In order to promote competition in digital markets,^[1] Latin American countries should not copy and paste “solutions” from other jurisdictions, but rather design their own set of policies. In short, Latin American countries—like my own, Peru—should not “put the cart before the horse” and regulate markets that are not yet mature.

Read the full piece here.

Abstract

In this article, we examine one mechanism through which enforcement innovation occurs and is passed into practice at the U.S. antitrust agencies. Our main thesis is that agency economists are uniquely situated to produce, adapt, and disseminate new methodologies that improve enforcement accuracy because of the multiple and conflicting roles they play. Agency economists are trained in academic PhD programs to value methodology above application, and to read and publish in academic journals. They know how to narrow questions, so that they can be answered precisely, using theoretical and/or empirical models. But when they arrive at the agencies, these economists trained in academic PhD programs are thrust into decision-making roles where they must render judgments on messy, real-world cases, typically with imperfect knowledge, and often in conflict with agency attorneys, political appointees, and/or the economists and attorneys who appear on behalf of parties. How to manage this process in a way that produces growth (useful innovation) is a primary institutional challenge for the antitrust agencies.

We focus on the organizational structure of the U.S. antitrust agencies with an eye toward isolating the factors that encourage or discourage the development and application of useful, innovative economic tools. Specifically, we examine how the relationship between academia and the agencies and the dual responsibilities of research and casework serve to encourage what has become known as “enforcement R&D,” the development and application of new methodologies for screening and evaluating mergers, and for quantifying the expected harm to competition of various behaviors.

See at SSRN.

ICLE Director of Innovation Policy Kristian Stout joined fellow panelists Timothy B. Lee and Pamela Samuelson and moderator Brent Skorup to discuss the emerging legal issues surrounding artificial intelligence and its use of works protected under copyright law on a recent episode of the Federalist Society Regulatory Transparency Project’s Fourth Branch Podcast. The full episode is embedded below.

We thank the International Trade Administration (ITA), the National Institute of Standards and Technology (NIST) and the U.S. Patent and Trademark Office (USPTO) for this opportunity to comment on its call for evidence concerning a new framework for standard-essential patents.[1] The International Center for Law and Economics (ICLE) is a nonprofit, nonpartisan research center whose work promotes the use of law & economics methodologies to inform public-policy debates. We believe that intellectually rigorous, data-driven analysis will lead to efficient policy solutions that promote consumer welfare and global economic growth. ICLE’s scholars have written extensively on competition, intellectual property, and consumer-protection policy.

In this comment, we express concerns about global regulatory developments in the standard-essential patent (SEP) industry. The European Union is in the process of considering legislation that would fundamentally alter the landscape of global standards setting, making it more difficult for inventors to enforce their intellectual-property rights.[2] Not only will this legislation have profound ramifications for companies located all over the globe but—as the USPTO’s call for comments recognizes—the EU risks kicking off a global race to the bottom in regulating SEPs that will ultimately harm innovation and slow the diffusion of groundbreaking technologies.

We are concerned that a tit-for-tat response intended to counteract bad policies in the EU (and among other allied nations) is doomed to do more harm than good. Erecting what amount to protectionist barriers—even if in response to similar regulations abroad—would diminish U.S. interests, as well as those of our partners. Instead, the agencies should be seeking opportunities to influence the policy decisions made in foreign jurisdictions, in the hope that those entities will pursue better policies.

For obvious reasons, the way intellectual-property disputes are resolved has tremendous ramifications for firms that operate in standard-reliant industries. Not only do many of the firms in this space derive a large share of their revenue from patents but, perhaps more importantly, the prospect of litigation dictates how firms structure the transfer of intellectual-property assets. In simple terms, ineffectual judicial remedies for IP infringements and uncertainty concerning the resolution of IP disputes discourage firms from concluding license agreements in the first place.

The key role that IP plays in these industries should impel policymakers to proceed with caution. By virtually all available metrics, the current system works. The development of innovative technologies through standards development organizations (SDOs) has led to the emergence of some of the most groundbreaking technologies that consumers use today;[3] and recent empirical evidence suggests that many of the alleged ills that have been associated with the overenforcement of intellectual-property rights simply fail to materialize in industries that rely on standard-essential patents.[4]

At the same time, “there is no empirical evidence of structural and systematic problems of holdup and royalty stacking affecting standard-essential patent (“SEP”) licensing.”[5] Indeed, “[t]he notion that implementers in such innovation–driven industries are being suffocated by an insurmountable patent royalty stack has turned out to be nothing more than horror fiction.”[6] Yet, without a sound basis, the anti-injunctions approach increasingly espoused by policymakers unnecessarily “adds a layer of additional legal complexity and alters bargaining processes, unduly favoring implementers.”[7]

Licensing negotiations involving complex technologies are legally intricate. It is simply not helpful for a regulatory body to impose a particular vision of licensing negotiations if the goal is more innovation and greater ultimate returns to consumers. Instead, where possible, policy should prefer allowing parties to negotiate at arm’s length and to resolve disputes through courts. In addition to maintaining the sometimes-necessary remedy of injunctive relief against bad-faith implementers, this approach allows courts to explore when injunctive relief is appropriate on a case-by-case basis. Thus, over the course of examining actual cases, courts can refine the standards that determine when an injunctive remedy is inappropriate. Indeed, the very exercise of designing ex ante rules and guidelines to inform F/RAND licensing is antagonistic to optimal policymaking, as judges are far better situated and equipped to make the necessary marginal adjustments to the system.

Against this backdrop, our comments highlight several factors that should counsel preserving the rules that currently govern SEP-licensing agreements:

To start, the SEP space is far more complex than many recognize. Critics often assume that collaborative standards development creates significant scope for opportunistic behavior—notably, patent holdup. The tremendous growth of SEP-reliant industries and market participants’ strong preference for this form of technological development, however, suggest these problems are nowhere near as widespread as many believe.

Second, it is important not to overlook the important benefits conferred by existing IP protections. This includes the advantages inherent in pursuing injunctions rather than damages awards.

Third, weakening the protections afforded to SEP holders would also erode the West’s technological leadership over economies that are heavily reliant on manufacturing, and whose policymakers routinely undermine foreign firms’ intellectual-property rights. In short, while IP promotes innovation, weakened patent protection has second-order effects that are often overlooked, such as ceding advantages to China’s manufacturing sector and thereby exacerbating U.S.-China tensions.

Fourth, while mandated transparency in SEP negotiations may appear beneficial, the reality is more complex, as disclosure requirements can have mixed effects. Further, transparency mandates would likely require government interventions, such as essentiality checks, which can be very costly.

Finally, collective SEP rate-setting raises antitrust issues that stem from firms’ need to share sensitive data in order to determine a standard’s value. Vertically integrated SEP holders setting collective royalties on the inputs they manufacture could enable price-fixing and collusion. Safeguards like third-party mediation in patent pools may be needed so that joint SEP rate negotiation does not violate antitrust rules barring competitors from fixing prices.

I.        Regulatory Developments in Foreign Jurisdictions

In their call for comments, the agencies essentially ask whether regulatory developments in foreign jurisdictions threaten U.S. technological leadership in industries that rely on standard-essential patents and, if so, how the United States should respond:

Do the intellectual property rights policies of foreign jurisdictions threaten any of U.S. leadership in international standard setting, U.S. participation in international standard setting, and/or the growth of U.S. SMEs that rely on the ability to readily license standard essential patents?

If responding affirmatively to question 1, what can the Department of Commerce do to mitigate the effects of any adverse foreign policies relating to intellectual property rights and standards? Please clearly identify any such adverse foreign policies with specificity.[8]

Recent regulatory developments in the European Union loom large over the agencies’ two questions. On April 27, the European Commission published its Proposal for a Regulation on Standard Essential Patents (“SEP Regulation”). The SEP Regulation’s proclaimed aims are to ensure that end users—including small businesses and EU consumers—benefit from products based on the latest standardized technologies; make the EU attractive for standards innovation; and encourage both SEP holders and implementers to innovate in the EU, make and sell products in the EU, and be competitive in non-EU markets.[9]

While we share the agencies’ concern, responding to this foreign legislation (and other international responses that are likely to arise) by enacting similar policies would only exacerbate the situation and further erode U.S. technological leadership. In fact, several of the EU legislation’s shortcomings that would be rendered more destructive if the United States responded in kind.

As ICLE-affiliated scholars have explained in comments on the draft European legislation,[10]  the available evidence does not support a finding of market failure in SEP-licensing markets that would justify intrusive regulatory oversight. Instead, the Commission’s own evidence points to the low incidence of SEP litigation and no systemic negative effects on SEP owners and implementers. The mobile-telecommunication market, which is claimed to have the most SEP litigation and licensing inefficiencies, has over the years seen rapid growth, expansion, declining consumer prices, and new market entry.

Some market imperfections are necessary-but-not-sufficient conditions for regulatory intervention. Regulation might not be necessary or proportionate if its aims could be achieved with less costly instruments.

The EU’s proposed SEP Regulation appears to pursue the value-redistributive function of imposing costs on only one group (SEP owners), while accruing all benefits to non-EU (or US)-based standard implementers. It is difficult to find justification for such value redistribution from the evidence presented on the functioning of SEP licensing markets.

The proposed EU SEP Regulation applies to all standards licensed on FRAND terms. It is unclear how many standards would be caught and why all standards licensed on FRAND terms are presumed to be inefficient, requiring regulatory intervention. One early study identified 148 standards licensed on FRAND terms in a 2010 laptop. No evidence was presented that licensing inefficiencies of these standards caused harms in laptop markets.

The EU legislation would require evaluators and conciliators that need to be qualified and experienced experts in relevant fields. There are unlikely to be enough evaluators to conduct essentiality checks reliably on such a massive scale.

To make matters worse, the proposed SEP Regulation raises competition concerns, as it requires SEP owners to agree on global aggregate royalty rates. No safeguards are provided against the exchange of sensitive commercial information and possible cartelization.

There is also a risk that legislation seeking to make the standardization space more transparent, by mandating aggregate royalty-rate notifications and nonbinding expert opinions on global aggregate royalty rates, may lead to even more confusion for implementers.

Finally, the EU’s proposed SEP Regulation would have extraterritorial effects. Indeed, while the SEP Register and system of “essentiality checks” created by the regulation would apply only for patents in force in EU Member States, its system of nonbinding opinions on aggregate royalties and FRAND determination would apply worldwide, covering portfolios in other countries. Other countries—including the United States—may follow suit and introduce their own regulations on SEPs. Such regulations may be used as a strategic and protectionist tool to devaluate the royalties of innovative SEP owners. The proliferation of regulatory regimes would make SEP licensing even more costly, with unknown effects on the viability of the current system of collaborative and open standardization.

Considering the above, it would appear unwise for the United States to mimic the EU’s draft SEP regulation. In its current form, the regulation is likely to harm both U.S. and European innovators. In turn, this threatens the west’s technological leadership on a global stage and will serve the interests of jurisdictions whose economies rely heavily on implementing standard-essential technologies and that generally have weaker IP protection than either the United States or the EU.

Instead, the agencies should look for opportunities to work with their foreign counterparts to improve the proposed EU legislation (and other similar measures in other jurisdictions). Neither EU nor U.S. interests will be well-served by these sorts of regulatory endeavors, least of all if both areas enact ill-advised SEP policies. Sound policy should be focused on ensuring that the successful SEP ecosystem continues to perform as impressively as it has to date. Enacting defensive measures against the EU legislation will create a tit-for-tat dynamic that will double the obstacles faced by innovators in both the EU and the United States, allowing foreign rivals to take advantage of the situation.

II.      Regulatory Restraint

In their call for comments, the agencies ask what private entities can do to boost America’s participation in international standard-setting efforts:

What more can other entities do, such as standards development organizations, industry or consumer associations, academia, or U.S. businesses to help improve American leadership, participation in international standard setting, and/or increased participation of small to medium-sized enterprises that rely on the ability to readily license standard essential patents?[11]

While this is a good way to look at the issue (today’s standardization practices were born of spontaneous market interactions, rather than government fiat, which leaves private entities with a clearly significant role to play in this space), one should not overestimate the extent to which governments can identify inefficiencies that may afflict standard-reliant industries and nudge private parties to resolve them—e.g., by asking SDOs to curb the use of injunctions or encourage collective royalty-setting agreements.

It’s tempting for lawmakers to look at the complex SEP licensing process as a Gordian Knot to be solved through regulatory fiat. But pursuing Alexander’s solution, though expedient, would similarly leave the SEP licensing ecosystem in tatters.

Consider smartphones: Tens of thousands of patents are essential to making smartphone technology work.^[12] Some critics posit that this makes it extremely difficult to market smartphones effectively, but no evidence supports this claim, and the proliferation of smartphones suggests otherwise.[13] It is worth considering that cellphone technology marks the culmination of research efforts spanning the entire globe. The coordinated efforts of these numerous firms are not the result of government coercion, but the free play of competitive forces.

Coordination on such a vast scale is no simple task. And yet, of the vast array of options available to them, an increasing number of firms have settled on one particular paradigm to solve these coordination problems: the development of new technologies and open standards within SDOs. These organizations and their members are responsible not only for wireless cellular technologies (e.g., 3G, 4G, 5G) but also for such high-profile technologies as Wi-Fi, USB, and Blu-ray, among many others.[14]

Throughout history, economic actors have sought to reap the benefits of specialization and interoperability. This has led to the emergence of various standardization practices, ranging from de facto standards and competition for the market, to complex standard-setting procedures within SDOs.

Ultimately, because interoperability standards rely on firms being able to coordinate their behavior, standardization necessarily implies a degree of incentive compatibility. That is, parties will coordinate their behavior only if they expect that doing so will be mutually beneficial. “This mutuality of considerations has been at the heart of the voluntary FRAND bargain from the outset, given that any risks of holdup or misappropriation of information are bilateral—that is, such risks work in both directions.”[15] This implies that SDOs must design balanced internal rules that bring both patent holders and implementers to the table through mutually agreeable interoperability standards, and guarantee that they will continue to work together into the future as new technologies emerge.[16]

Establishment of SDO interoperability standards typically follows a process by which interested parties come together and identify technological problems that they might be able to solve cooperatively.^[17] SDO members include a wide range of stakeholders, including (among others): companies that manufacture products implementing the technology, companies that market services that use the standards, companies that operate networks that practice the standards, technology firms that create technologies that are included in the standards, academic institutions, and government agencies.[18]

The SDO provides information to interested parties about the standard-setting project and a forum for collaboration.[19] Members attend standard-setting meetings, vote on standardization decisions, and make technological contributions. Participation in standard setting can be subject to a substantial fee and always entails considerable time. There are policies and procedures (“bylaws”) that govern the process of adoption and standard development. Participation in SDOs is voluntary and is subject to acceptance of the terms and conditions set out in the bylaws. These aim to allow the most appropriate technology to become standardized, based on several factors. This is a democratic and consensus-based process designed to ensure that no single participant can manipulate it. Many SDOs also allow for post-adoption appeals by dissenting members. This ultimately leads to a series of technical specifications upon which implementers can build products.

Throughout this process, a critical challenge for SDOs is to ensure that their internal regulations remain “incentive compatible.” To optimize their technological output and ensure the success of their standards, SDOs must attract the right mix of both implementers and innovators. “Most succinctly, the ‘right membership’ comprises a significant portion of each class of stakeholder whose active support is needed to achieve broad adoption.”[20] They thus need to design internal procedures that strike a balance between the sometimes-diverging interests of these stakeholders.

This is no simple task. Although there are numerous ways in which these rules may favor a particular group of participants, allocating the profits of standardization is perhaps the most salient. To a first approximation, SEP holders will tend to favor internal rules that allow them to charge prices that are close to the monopoly benchmark (though not the double-marginalization one). Conversely, implementers will generally prefer policies that limit SEP holders’ returns (so long as this does not dry up the supply of inventions). However, these first-order incentives may not always hold true in the real world. Practical considerations may, for instance, urge SEP holders to accept a pricing structure that is not “profit maximizing” in the short run, but which may incentivize further cooperation or the adoption of an underlying technology.^[21]

The above has important consequences for patent and antitrust policy in SEP-reliant industries. As we have explained, collaborative standard development gives rise to complex incentives, as well as a web of heterogeneous and deliberately incomplete contracts (i.e., where the parties choose not to specify some aspects of their agreement).[22] Given this diversity, uniform and centralized policies that needlessly constrain the range of negotiation—such as a federal-enforcement presumption against injunctions—would likely lead to fewer agreements and inefficient outcomes in numerous cases, especially compared to case-by-case adjudication of F/RAND commitments under the common law of contract.[23]

In short, “standards organizations and market participants are better than regulators at balancing the interests of patent holders and implementers.”[24] Interfering with the emergent norms of the standard-development industry thus risks undermining innovators’ expectations of a reasonable return on their investments:

Each of the innovative companies that agrees to be an SSO participant does so with the understanding of the investments they have made in research, development, and participation, as well as the risks that their innovations may not be selected for incorporation in the standard. They bear these investments and risk with the further understanding that they will receive adequate and fair remuneration as part of the FRAND commitment they have made to the SSO.

Unfortunately, the actions of the courts and the proposals by commentators are greatly undermining the value and benefits of SSO participation that are expected….[25]

III.    The Importance of Injunctions

The agencies’ call for comments appears concerned that current standardization practices may be hindering U.S. innovation and the creation of startups in the SEP space:

Are current fair, reasonable, and non-discriminatory (FRAND) licensing practices adequate to sustain U.S. innovation and global competitiveness? Are there other international models which would better serve U.S. innovation in the future?

Are there specific U.S. intellectual property laws or policies that inhibit participation in standards development?

Are there specific U.S. intellectual property laws or policies that inhibit growth of SMEs that rely on licensing and implementing standards? [26]

While they are not mentioned explicitly in the agencies’ call for comments, the role of injunctions sought against implementers by SEP holders looms large over the above questions. The use of injunctions is arguably one of the most contentious—and widely misunderstood—topics in SEP policy debates. While often portrayed as a means for inventors to extract unreasonable royalties from helpless implementors injunctions are, in fact, a critical legal tool that encourages all parties in the standardization space to come to the negotiation table. In fact, even the EU’s draft regulation on SEPs—which in many other respects reduces the protections afforded to inventors—implicitly recognizes the crucial role that injunctions play, by ensuring that the various proposed SEP transparency and arbitration procedures do not undermine parties’ ability to obtain an injunction:

The obligation to initiate FRAND determination should not be detrimental to the effective protection of the parties’ rights. In that respect, the party that commits to comply with the outcome of the FRAND determination while the other party fails to do so should be entitled to initiate proceedings before the competent national court pending the FRAND determination. In addition, either party should be able to request a provisional injunction of a financial nature before the competent court.[27]

A.   The Fundamental Value of Injunctions

Historically, one of the most important features of property rights in general, and patents in particular, is that they provide owners with the power to exclude unauthorized use by third parties and thus enable them to negotiate over the terms on which instances of use or sale will be authorized.^[28] While the ability to exclude is important in creating the incentive to innovate, it is equally—and perhaps more—important in facilitating the licensing of inventions.^[29]

There are many reasons that someone may invent a new product or process. But if they are to be optimally encouraged to distribute that product and thus generate the associated social welfare, it is crucial that they retain the ability to engage supply chains to commercialize the invention fully.^[30] “[T]he patent system encourages and enables not just invention but also innovation by providing the basic, enforceable property rights that facilitate (theoretically) efficient organizations of economic resources and the negotiations necessary to coordinate production among them.”[31] If a patent holder believes that the path to commercialization and remuneration is hindered by infringers, she will have less incentive to invest fully in the commercialization process (or in the innovation in the first place).

Removing the injunction option… not only changes the bargaining range (and makes infringement a valid business option), but, by extension, it lowers the expected returns of investing in the creation and commercialization of patents, in the first place…. With a no-injunction presumption…, as long as the expected cost of litigation is less than the expected gain from infringing without paying any royalties, potential licensees will always have an incentive to pursue this strategy. The net result is a shift in bargaining power so that, even when license agreements are struck, royalty rates are lower than they would otherwise be, as well as an increased likelihood of infringement.[32]

Because infringement affects both the initial incentive to innovate as well as the complex process of commercialization, courts have historically granted injunctions against those who have used a patent without proper authorization.

B.   Damages Alone Are Often Insufficient

Injunctions are almost certainly the most powerful means to enforce property rights and remedy breaches. Nonetheless, courts may sometimes award damages, either in addition to or as an alternative to awarding an injunction.^[33] It is often difficult to establish the appropriate size of an award of damages, however, when intangible property—such as invention and innovation, in the case of patents—is the core property being protected.

In this respect, a key feature of patents is that they possess uncertain value ex ante. The value of a particular invention or discovery cannot be known until it is either integrated into the end-product that will be distributed to consumers, or actually used by consumers.[34] This massive upfront uncertainty creates the need for technology designers to carefully structure their investments such that the risk/reward ratio remains sufficiently low. This, in turn, means ensuring that their inventions’ commercialization can reasonably be expected to generate sufficient profits.

Commercializing highly complex innovations, such as pharmaceuticals and advanced technologies, requires a large degree of risk taking and capital investment, as well as massive foregone opportunities. As such, it will often be difficult, or even impossible, to adequately calculate appropriate monetary damages for the unauthorized use of a patent, even if the patent’s ex post value is knowable. Put differently, the inability to bargain effectively for royalties post-standardization may “deter investment… and ultimately harm consumers.”[35]

While it is necessary to establish damages for violations after the fact, it will nearly always be appropriate to award injunctions to deter ongoing violations. This would further allow the property owner to do their own value calculations, based on their investments, sunk costs, and—critically—lost opportunities that were foregone in order to realize the particular invention. “[A] property rule is superior to a liability rule when ‘the court lacks information about both damages and benefits.’ Without accurate information, the damages may be set below the actual level of harm, encouraging the ‘injurer’ (or infringer) to engage in an excessive level of activity—in our case, increased infringement.”[36]

C.   Injunctions Encourage Efficient Licensing Negotiations

In addition to the concerns outlined in the previous section, it is worth noting that curbs on injunctions pertaining to SEPs would make inventors bear the risk of opportunistic behavior, thus enabling  firms to opt out of commercial negotiations and wait for potential litigation. In turn, this would tilt the bargaining scale in their favor in subsequent royalty negotiations undertaken in the shadow of prior court proceedings.[37]

The U.S. Supreme Court’s 2006 decision in eBay v. MercExchange offers a case in point. The court rejected the “general rule” that a prevailing patentee is entitled to an injunction.[38] In the aftermath of the decision, courts refused to grant injunctions in considerably more cases.[39]

Nearly two decades later, however, questions remain regarding eBay’s effect on patent licensing, negotiation, and litigation.[40] In particular, it is likely that eBay systematically distorted the relative bargaining positions in SEP licensing in favor of implementers, at the expense of patent holders. One post-eBay assessment argues that limiting injunctions to prevent holdup results in more “false positives”—where patent holders with no designs of patent holdup are nonetheless denied injunctive relief—than it does deterrence of actual holdups.[41] The result is a reduction in the cost of willful infringement and “under-compensation” for innovation.[42]

One of the important features of injunctions that critics miss is that they are not solely a tool for simple exclusion from property, but a tool that promotes efficient bargaining.[43] If a property holder ultimately has the right to exclude infringers, there is relatively more weight placed on the importance of initial bargaining for licenses. “It is the very threat of the injunction right—and its associated high transaction costs—that brings the parties to the negotiating table and motivates them to draw upon the full scope of their knowledge and creativity in forming contractual and institutional solutions to the perceived holdup problem.”[44]

Post-eBay, “efficient infringement” becomes a viable choice for firms seeking to maximize profits. Thus, implementing firms seeking to pay as little as possible for use of an invention have incentive to disregard the bargaining process with a patent holder altogether. The relative decline in the importance of injunctions narrows the bargaining range. The narrower range of prices that an implementing firm will offer means that, even where it does bargain, agreement will be less likely. Where rightsholders can be reasonably expected to enforce their patent rights, by contrast, the bargaining range is expanded and agreement is more likely, because the initial cost of negotiating for a license is relatively less than always (or usually) opting for “efficient infringement”; that is, infringement becomes less efficient.

The ultimate tension is not between seeking damages or an injunction, but between whether a firm opts to negotiate or to litigate, while facing the risk of some combination of damages and injunction on the back end.

This reality is particularly important in the context of SDOs, where implementers and innovators are in a constant dance both to maximize their own profits as well as to facilitate the product of an incomplete, joint agreement that binds each party. “The seminal example of intentional contractual incompleteness is the F/RAND commitment common in many [SDO’s] IPR policies.”[45] Permitting one party, through weakened legal doctrine, to circumvent or artificially constrain the bargaining process inappropriately imbalances the careful commercial relationships that should otherwise exist.

In the SEP context, furthermore, it is rarely mentioned that “an implementer’s decision to reject a certifiably F/RAND license and continue to infringe is contrary to the spirit of the F/RAND framework as well.”^[46]

Moreover, it is not typically the case that a negotiation process would end with an injunction and a refusal to license, as critics sometimes allege. Rather, the threat of an injunction is important in hastening an infringing implementer to the table and ensuring that protracted litigation to determine the appropriate royalty (which is how such disputes do actually end) is costly not only to the patentee, but also to the infringer. As James Ratliff and Daniel Rubinfeld explain:

[T]he existence of that threat does not lead to holdup as feared by those who propose that a RAND pledge implies (or should embody) a waiver of seeking injunctive relief. If RAND terms are reached by negotiation, the negotiation is not conducted in the shadow of an injunctive threat but rather in the shadow of knowledge that the court will impose a set of terms if the parties do not reach agreement themselves. The crucial element of this model that substantially diminishes the likelihood that the injunctive threat will have real bite against an implementer willing to license on RAND terms is the assumption that an SEP owner maintains its obligation to offer a RAND license even if its initial offer is challenged by the implementer and, further, even if the court agrees with the SEP owner that its initial offer was indeed RAND. Thus any implementer that is willing to license on court-certified RAND terms can avoid an injunction by accepting those RAND terms without eschewing any of its challenges to the RAND-ness of the SEP owner’s earlier offers.[47]

Ultimately, this means that an implementer that accepts nominally F/RAND terms need not be an actual “willing licensee,” but instead can gain that designation as a matter of law without ever accepting a royalty rate within the true bargaining range that includes the licensor’s valid injunction threat. “[B]y stripping the SEP holder’s right to injunctive relief, [a no-injunction rule] may enable a potential licensee to delay good faith negotiation of a F/RAND license and the patent holder could be forced to accept less than fair market value for the use of the patent…. Undermining this bargaining outcome using antitrust rules runs a significant risk of doing more harm than good.”[48]

For the purposes of this proceeding, the lesson is clear: U.S. policy needs to return to a neutral position in which both parties in a F/RAND negotiation are encouraged to reach mutually agreeable terms in arm’s length licensing transactions. The effects of eBay and its progeny have distorted that bargaining process. Here, the agencies have an important role to play in pressing the need for this change.

IV.    Increased Transparency Is No Free Lunch

The agencies’ call for comments asks whether increased transparency requirements in the SEP space could make SEP licensing more efficient:

What can the Department of Commerce do to mitigate emergence or facilitate the resolution of FRAND licensing disputes? Can requiring further transparency concerning patent ownership make standard essential patent (SEP) licensing more efficient? What are other impediments to reaching a FRAND license that the Department of Commerce could address through policy or regulation?[49]

But while fostering transparency may appear to be a win-win proposition for all parties in the standardization space, the reality is far more complex. In many instances, inventors are already required to disclose their standard essential patents—and these requirements have ambiguous effects.[50] Given this, demands for further transparency would almost certainly entail some form of government intervention, such as the creation of SEP registers and government-run essentiality checks, which seek to verify whether the patents that firms declare as standard-essential are truly so.

Unfortunately, these attempts to make SEP-reliant industries more transparent are anything but costless. The EU’s draft SEP regulation offers a case in point. The regulation would create a system of government-run essentiality checks and nonbinding royalty arbitrations that seek to make the process easier for implementers. But as ICLE scholars have written, this scheme will prove extremely difficult and costly to operate in practice.[51] Much the same would be true of attempts to introduce similar measures in the United States.

The proposed EU regulation would rely on qualified experts to work as evaluators and conciliators. Evaluators will need specialized knowledge of the particular technological area in which they will conduct essentiality checks. The European Commission estimates that there are about 1,500 experts (650 patent attorneys and 800 patent examiners) qualified to do essentiality checks in the EU.[52]

The sheer magnitude of the task, however, will require many more evaluators and it is very doubtful that the optimal number of potential qualified experts are even available to join this process. For certain, special arrangements would need to be made with patent offices to grant patent examiners leave to conduct essentiality checks. Each year, evaluators would need to test a random sample of up to 100 SEPs if requested by each SEP owner or an implementer per standard. Thus, the amount of work may exponentially increase depending on how many standards are caught by the regulation.

If 148 FRAND-licensed standards per laptop are to serve as a rough proxy, then we might expect more than 100-200 standards to be checked for essentiality every year. In addition, if SEP owners and implementers regularly use the possibility of testing up to 100 SEPs per standard and per SEP owner, the sheer magnitude of work may exceed the capacity of patent attorneys. Patent attorneys may find it challenging to regularly engage in such high volumes of essentiality checks while also serving other clients. And why should they do it at all unless the rate of pay is at least what they could earn in a patent law firm? To be blunt, the work would not be as much fun as acting for real clients, so the pay would probably have to be even higher to attract applicants.

Consequently, it is very unlikely that the capability even exists to annually perform a large number of essentiality checks of registered SEPs. If the requirements to become an evaluator were relaxed to address this workload, this would cast doubt on the reliability of the whole system. There is no point in building a battleship unless you are sure you can get a competent crew.

Additionally, the patent attorneys most likely to be familiar with these technologies may well also find themselves with conflicts of interest. They will probably have worked for some SEP owners or implementers. Elaborate rules to avoid such conflicts would need to be implemented to prevent patent attorneys who were, or still are, engaged with certain clients from becoming evaluators of those clients’ registered SEPs. The conflicts problem would, of course, apply not just to individual attorneys but to their entire firms.

Conciliators would also need to be experts in the field. They might come from the ranks of retired judges, seasoned former company officials, or experienced lawyers. Conflict-of-interest provisions would also be needed to ensure their independence and impartiality in mandatory FRAND determinations.  But the job would, again, have to be sufficiently attractive, both in remuneration and in work content and culture. The Commission has made no investigation as to whether a sufficiently large pool of credible individuals could be found to make the system work.

Of course, there are well-established voluntary systems of conciliators and mediators, some of which are used now to help resolve FRAND disputes. But the proposal adds the idea of compulsory mediation or conciliation. There is scant evidence that either system works in other commercial disputes around the world, and it is unclear why it should be assumed to work here.

In short, it is doubtful that a government-operated scheme of essentiality checks and SEP-royalty arbitrations could reach satisfactory outcomes, as the expertise to do so is lacking and attracting potentially thousands of professionals from the private sector would be too costly. The result is that any government scheme along these lines is unlikely to have the necessary staffing to conduct its mission to the requisite standard. It would thus risk doing more harm than good.

V.      SEP Rights and China’s ‘Cyber Great Power’ Ambitions

In their call for comments, the agencies express a desire to protect the United States’ leading position in the field of standard development and implementation:

Are there steps that the Department of Commerce can take regarding intellectual property rights policy that will help advance U.S. leadership in standards development and implementation for critical and emerging technologies?[53]

The agencies essentially ask what active steps they could take to preserve the United States’ leading position. This, however, ignores the arguably more important question: What steps should the United States avoid taking? As we explain below, U.S. agencies should be particularly careful not to weaken intellectual-property protection in ways that may, ultimately, favor firms in other jurisdictions, such as China.

Observers often regard intellectual property as merely protecting original creations and inventions, thus boosting investments. But while IP certainly does this, it is important to look beyond this narrow framing. Indeed, by protecting these creations, intellectual-property protection—particularly that of patents—produces beneficial second-order effects in several important policy areas.

Consequently, weakening patent protection could have detrimental ramifications that are routinely overlooked by policymakers. This includes giving a leg up to jurisdictions that are heavily geared toward manufacturing, rather than  R&D, and specifically to  China (with knock-on effects for ongoing political tensions between these two superpowers).

As the USPTO has observed:

Innovation and creative endeavors are indispensable elements that drive economic growth and sustain the competitive edge of the U.S. economy. The last century recorded unprecedented improvements in the health, economic well-being, and overall quality of life for the entire U.S. population. As the world leader in innovation, U.S. companies have relied on intellectual property (IP) as one of the leading tools with which such advances were promoted and realized.[54]

The United States is a world leader in the production and commercialization of IP, and naturally seeks to retain that comparative advantage.[55] IP and its legal protections will become increasingly important if the United States is to maintain its prominence, especially when dealing with international jurisdictions, like China, that don’t offer similar levels of legal protection.[56] By making it harder for patent holders to obtain injunctions, licensees and implementers gain the advantage in the short term, because they are able to use patented technology without having to engage in negotiations to pay the full market price. In the case of many SEPs—particularly those in the telecommunications sector—a great many patent holders are U.S.-based, while the lion’s share of implementers are Chinese. Potential anti-injunction policies may thus amount to a subsidy to Chinese infringers of western technology.

At the same time, China routinely undermines western intellectual-property protections through its industrial policy. The government’s stated goal is to promote “fair and reasonable” international rules, but it is clear that China stretches its power over intellectual property around the world by granting “anti-suit injunctions” on behalf of Chinese smartphone makers, designed to curtail enforcement of foreign companies’ patent rights.[57]

In several recent cases, Chinese courts have claimed jurisdiction over F/RAND issues.[58] In Oppo v. Sharp, the Supreme People’s Court of China determined that Chinese courts can set the global terms of what is a fair and reasonable price for a license,[59] even if that award would be considerably lower than in other jurisdictions. This decision follows Huawei v. Conversant, in which a Chinese court for the first time claimed the ability to issue an anti-suit injunction against the Chinese company.[60]

All of this is part of the Chinese government’s larger approach to industrial policy, which seeks to expand Chinese power in international trade negotiations and in global standards bodies.[61] As one Chinese Communist Party official put it: “Standards are the commanding heights, the right to speak, and the right to control. Therefore, the one who obtains the standards gains the world.”[62] Chinese President Xi Jinping frequently (but only domestically) references China’s “cyber great power” ambitions: “We must accelerate the promotion of China’s international discourse power and rule-making power in cyberspace and make unremitting efforts towards the goal of building a cyber great power.”[63] Chinese leaders are intentionally pursuing a two-track strategy of taking over standards bodies and focusing on building platforms to create path dependencies that cause others to rely on Chinese technology.[64] As a Hinrich Foundation Report notes:

Trade and technical standards are inherently interrelated. They are mutually reinforcing. But Beijing treats standard setting, and standards organizations, as competitive domains. This approach risks distorting global trade. Beijing does not support a neutral architecture where iterative negotiating strives for technical interoperability. Instead, Beijing promotes an architecture that bolsters and cements Chinese competitiveness. Due to China’s size and centralization, the consequences of this approach will reverberate across the international system. Given the nature of emerging technology and standards, the consequences will endure.[65]

Insufficient protections for intellectual property will hasten China’s objective of dominating collaborative standard development in the medium- to long-term.[66] U.S. entrepreneurs are able to engage in the types of research and development that drive innovation because they can monetize those innovations. Reducing the returns for patents that eventually become standards will lead to less investment in those technologies. It will also harm the competitive position of American companies that refrain from collaborating because the benefits don’t outweigh the costs, including “missing the opportunity to steer a standard in the manner most compatible with a company’s product offerings, falling behind competitors, or failing to head off broad adoption of a second standard….”[67]

Simultaneously, this will engender a switch to greater reliance on proprietary, closed standards rather than collaborative, open standards. Proprietary standards (and competition among those standards) are sometimes the most efficient outcome: for instance, when the costs of interoperability outweigh the benefits. The same cannot be said, however, for government policies that effectively coerce firms into adopting proprietary standards by raising the relative costs of the collaborative standard-development process. In other words, there are social costs when firms are artificially prevented from taking part in collaborative standard setting and forced instead to opt for proprietary standards.

Yet this is precisely what will happen to U.S. firms if IP rights are not sufficiently enforceable. Indeed, as explained above, collaborative standardization is an important driver of growth.[68] It is crucial that governments do not needlessly undermine these benefits by preventing American firms from competing effectively in these international markets.

These harmful consequences are magnified in the context of the global technology landscape, and in light of China’s strategic effort to shape international technology standards.[69] With U.S. firms systematically deterred from participating in the development of open technology standards, Chinese companies, directed by their government authorities, will gain significant control of the technologies that will underpin tomorrow’s digital goods and services. The consequences are potentially catastrophic:

The effect of [China’s] approach goes far beyond competitive commercial advantage. The export of Chinese surveillance and censorship technology provides authoritarian governments with new tools of repression. Governments that seek to control their citizens’ access to the internet are supportive of Beijing’s “cyber sovereignty” paradigm, which can lead to a balkanized internet riddled with incompatibilities that impede international commerce and slow technological innovation. And when cyber sovereignty is paired with Beijing’s push to redefine human rights as the “collective” rights of society as defined by the state, authoritarian governments gain a shield of impunity for violations of universal norms.[70]

With Chinese authorities joining standardization bodies and increasingly claiming jurisdiction over F/RAND disputes, there should be careful reevaluation of the ways weakened IP protection would further hamper the U.S. position as  a leader in intellectual property and innovation.

To return to the framing question, yes, there are steps the agencies could take to secure and promote U.S. leadership in intellectual-property-intensive industries. The first step, as noted throughout this comment, is to refrain from promoting policies that unnecessarily imbalance the negotiation process between innovators and implementers. The second step is twofold. First, work with trustworthy partners, like the EU, to make sure that U.S. Allies’ IP policies are in alignment with and are geared  toward promoting neutral standards that allow tech industries to thrive. The second part is to advocate for trade policies that dissuade countries like China from using their domestic courts and regulatory agencies as protectionist entities designed simply to advance China’s national interests.

VI.    Competition Concerns with Aggregate Royalties

In the call for comments, the agencies ask:

Do policy solutions that would require SEP holders to agree collectively on rates or have parties rely on joint negotiation to reach FRAND license agreements with SEP holders create legal risks? Are there other concerns with these solutions?[71]

A host of competition concerns are implicated in this question, in that it requires SEP owners to negotiate and ultimately agree on aggregate royalty rates for standards.  This may require SEP owners to exchange sensitive commercial information relevant to establishing the value that devices derive from using the standardized technology. Competition-sensitive data could include projected revenues on a per-unit basis following the incorporation of connectivity in the end products, the number of end products sold on the market, actual and forecast sales, and price projections.[72] The competitive dangers inherent in this process are more serious for those vertically integrated SEP owners, who simultaneously hold SEPs and manufacture standard-implementing products. They would effectively agree to set the costs (royalties) for their inputs and exchange data about their downstream sales.

Jointly negotiated rates could therefore potentially run afoul of antitrust laws that prohibit companies from engaging in price-fixing and collusion. Requirements to jointly negotiate aggregate royalty rates should thus be accompanied by safeguards and guidance that ensure such negotiations comply with antitrust law. An example would be royalty-rate negotiations in patent pools, where pool administrators take a mediatory role, collecting and protecting confidential information from pool members.[73]

It is also unclear whether these joint royalty negotiations would be of much use to either inventors or implementers. For example, the EU has proposed introducing an aggregate notification regulation along these lines. The regulation appears to allow multiple groups of SEP owners to jointly notify their views concerning the appropriate royalties for a given technology. This could add even more confusion for standard implementers. For example, some SEP owners could announce an aggregate rate of $10 per product, another 5% of the end-product price, while a third group would prefer a lower $1 per-product rate.

Moreover, it is unclear how joint aggregate royalty-rate notifications would change the existing practice of unilateral announcement of licensing terms. Many SEP owners already publicly announce their royalty programs in advance. To be on the safe side, SEP owners may simply notify their maximum preference, knowing that negotiations would lead to different prices depending on the unique details of various licensees. As a result, aggregate royalty rates may not produce meaningful data points.

Nonbinding expert opinions on global aggregate royalty rates could also add to the confusion. Implementers would likely initiate the process, which would then proceed in parallel with SEP owners’ joint notifications of aggregate rates. All these differing and possibly conflicting estimates might lead to even greater uncertainty. Moreover, if those providing nonbinding opinions are not universally regarded as “experts,” the parties are unlikely to respect such opinions.

Aggregate royalty notifications and nonbinding opinions might be used in the top-down method for FRAND-royalty determinations. A top-down method provides that the SEP owner should receive a proportional share of a standard’s total aggregate royalty. It requires establishing a cumulative royalty for a standard and then calculating the share of the total royalty for an individual SEP owner. This may be the reason for having aggregate royalty-rate notifications and opinions. At the same time, essentiality checks would still be needed to filter out which patents are truly essential, and to assess each individual SEP owner’s share.

We caution strongly against relying too heavily on the top-down approach for FRAND-royalty determinations. It is not used in commercial-licensing negotiations, and courts have frequently rejected its application. Industry practice is to use comparable licensing agreements. The top-down approach was applied in Unwired Planet v Huawei only as a cross-check for the rates derived from comparable agreements.[74] TCL v Ericsson relied on this method, but was vacated on appeal.[75] The most recent Interdigital v Lenovo judgment considered and rejected its use, finding “no value in Interdigital’s Top-Down cross-check in any of its guises.”[76] Moreover, the top-down approach, as currently applied, relies solely on patent counting. It fails to consider that not every patent is of equal value, nor that some patents may be invalid or not infringed by a specific device.

In short, there are important legal and practical obstacles to the joint negotiation of aggregate royalty rates. Legal mandates to conduct such negotiations would thus be of dubious added value to players in standard-reliant industries.

 

 

 

 

[1] U.S. Patent and Trademark Office, Joint ITA-NIST-USPTO Collaboration Initiative Regarding Standards, Federal Register (Sep. 27, 2023), https://www.federalregister.gov/documents/2023/09/27/2023-20919/joint-ita-nist-uspto-collaboration-initiative-regarding-standards; U.S. Patent and Trademark Office, Joint ITA–NIST–USPTO Collaboration Initiative Regarding Standards; Notice of Public Listening Session and Request for Comments, Federal Register (Sep. 11, 2023), available at https://www.govinfo.gov/content/pkg/FR-2023-09-11/pdf/2023-19667.pdf (“Call for Comments”).

[2] European Commission, Explanatory Memorandum for Proposal for a Regulation of the European Parliament and of the Council on Standard Essential Patents and Amending Regulation (EU) 2017/1001, COM (2023) 232 Final (“Explanatory Memorandum”).

[3] See, e.g., Dirk Auer & Julian Morris, Governing the Patent Commons, 38 Cardozo Arts & Ent. L.J. 294 (2020).

[4] See, e.g., Alexander Galetovic, Stephen Haber & Ross Levine, An Empirical Examination of Patent Holdup, 11 J. Competition L. & Econ. 549 (2015). This is in keeping with general observations about the dynamic nature of intellectual property protections. See, e.g., Ronald A. Cass & Keith N. Hylton, Laws of Creation: Property Rights in the World of Ideas 42-44 (2013).

[5] Oscar Borgogno & Giuseppe Colangelo, Disentangling the FRAND Conundrum, DEEP-IN Research Paper (Dec. 5, 2019) at 5, available at https://ssrn.com/abstract=3498995.

[6] Richard A. Epstein & Kayvan B. Noroozi, Why Incentives for “Patent Holdout” Threaten to Dismantle FRAND, and Why It Matters, 32 Berkeley Tech. L.J. 1381, 1411 (2017).

[7] Borgogno & Colangelo, supra note 5, at 5.

[8] Call for Comments, supra note 1, Questions 1 and 2.

[9] Proposal for a Regulation of the European Parliament and of the Council on Standard Essential Patents and Amending Regulation (EU) 2017/1001, COM (2023) 232 Final (“Draft SEP Regulation”).

 

[10] Robin Jacob & Igor Nikolic, ICLE Comments Regarding the Draft Regulation on Standard Essential Patents (Jul. 28, 2023), available at https://laweconcenter.org/wp-content/uploads/2023/07/ICLE-Comments-to-the-SEP-Regulation.pdf.

[11] Call for Comments, supra note 1, Question 3.

[12] See, e.g., Jorge Padilla, John Davies, & Aleksandra Boutin, Economic Impact of Technology Standards: The Past and the Road Ahead (2017), available at https://www.compasslexecon.com/wp-content/uploads/2018/04/CL_Economic_Impact_of_Technology_Standards_Report_FINAL.pdf (Section 3 has an in-depth discussion of the adoption of standards and the benefits to the growth of mobile technology); iRunway, Patent & Landscape Analysis of 4G-LTE Technology 9-12 (2012), https://www.i-runway.com/images/pdf/iRunway%20-%20Patent%20&%20Landscape%20Analysis%20of%204G-LTE.pdf.

[13] See, e.g., Galetovic, et al., supra note 4; Keith Mallinson, Don’t Fix What Isn’t Broken: The Extraordinary Record of Innovation and Success in the Cellular Industry under Existing Licensing Practices, 23 Geo. Mason L. Rev. 967 (2016); Damien Geradin, Anne Layne-Farrar, & Jorge Padilla, The Complements Problem within Standard Setting: Assessing the Evidence on Royalty Stacking, 14 B.U. J. Sci. & Tech. L.144 (2008).

[14] Auer & Morris, supra note 3, at 5.

[15] Epstein & Noroozi, supra note 6, at 1394.

[16] See, e.g., Daniel F. Spulber, Standard Setting Organisations and Standard Essential Patents: Voting and Markets, 129 Econ. J. 1477, 1502-03 (2018) (“The interaction between inventors and adopters helps explain the variation of decision rules among SSOs, ranging from majority rule to consensus requirements…. Technology standards will be efficient when SSO decision making reflects the countervailing effects of voting power and market power.”).

[17] See Kirti Gupta, How SSOs Work: Unpacking the Mobile Industry’s 3GPP Standards, in The Cambridge Handbook of Technical Standardization Law: Competition, Antitrust, and Patents (Jorge L. Contreras ed., 2017).

[18] See Kristen Jakobsen Osenga, Ignorance Over Innovation: Why Misunderstanding Standard Setting Organizations Will Hinder Technological Progress, 56 U. Louisville L. Rev. 159, 178 (2018); Andrew Updegrove, Value Propositions, Roles and Strategies: Participating in a SSO, in The Essential Guide to Standards, https://www.consortiuminfo.org/guide (last visited Jan. 23, 2022).

[19] Adapted from Auer & Morris, supra note 3, at 18-19.

[20] Andrew Updegrove, Business Considerations: Forming and Managing a SSO, in The Essential Guide to Standards, https://www.consortiuminfo.org/guide/forming-managing-a-sso/business-considerations (last visited Nov. 6, 2023).

[21] See, e.g., Jonathan M. Barnett, The Host’s Dilemma: Strategic Forfeiture in Platform Markets for Informational Goods, 124 Harv. L. Rev. 1861, 1883 (2010) (showing that firms routinely forfeit their intellectual assets in order to boost the growth of the platform they operate).

[22] See Joanna Tsai & Joshua D. Wright, Standard Setting, Intellectual Property Rights, and the Role of Antitrust in Regulating Incomplete Contracts, 80 Antitrust L.J. 157, 159 (2015) (“SSOs [standard-setting organizations] and their IPR policies appear to be responsive to changes in perceived patent holdup risks and other factors. We find the SSOs’ responses to these changes are varied, and that contractual incompleteness and ambiguity persist across SSOs and over time, despite many revisions and improvements to IPR policies. We interpret the evidence as consistent with a competitive contracting process and with the view that contractual incompleteness is an intended and efficient feature of SSO contracts.”) (emphasis added).

[23] See, e.g., Daniel F. Spulber, Licensing Standard Essential Patents with FRAND Commitments: Preparing for 5G Mobile Telecommunications, 18 Co. Tech. L.J. 79, 147 (2020) (“Adjudication of SEP disputes guided by common law principles and comparable licenses complements SSO FRAND commitments and market negotiation of SEP licenses. Adjudication based on common law and comparable licenses provides general rules for the resolution of SEP disputes that does not restrict SSO IP policies and or interfere with consensus decision making by SSOs. Such adjudication also does not interfere with efficient market negotiation of SEP licenses.”).

[24] Id. at 148.

[25] Osenga, supra note 19, at 213-14.

[26] Call for Comments, supra note 1, Questions 4, 5, 6.

[27] Draft SEP Regulation, preamble at (35).

[28] Richard A. Epstein, The Clear View of The Cathedral: The Dominance of Property Rules, 106 Yale L.J. 2091, 2091 (1996) (“Property rights are, in this sense, made absolute because the ownership of some asset confers sole and exclusive power on a given individual to determine whether to retain or part with an asset on whatever terms he sees fit.”)

[29] See generally Edmund W. Kitch, The Nature and Function of the Patent System, 20 J.L. & Econ. 265 (1977); F. Scott Kieff, Property Rights and Property Rules for Commercializing Inventions, 85 Minn. L. Rev. 697 (2001).

[30] See, e.g., Barnett, supra note 22, at 856 (“Strong patents provide firms with opportunities to disaggregate supply chains through contract-based relationships, which in turn give rise to trading markets in intellectual resources, whereas weak patents foreclose those options.”).

[31] Dirk Auer, Geoffrey A. Manne, Julian Morris, & Kristian Stout, The Deterioration of Appropriate Remedies in Patent Disputes, 21 Federalist Soc’y Rev. 158, 160 (2020).

[32] Id. at 163.

[33] See, e.g., Doris Johnson Hines & J. Preston Long, The Continuing (R)evolution of Injunctive Relief in the District Courts and the International Trade Commission, IP Litigator (Jan./Feb. 2013) (citing Tracy Lee Sloan, The 1988 Trade Act and Intellectual Property Cases Before the International Trade Commission, 30 Santa Clara L. Rev. 293, 302 (1990) (“Out of 221 intellectual property cases between 1974 and 1987, the ITC found that only five failed to establish sufficient injury… for injunctive-type relief.”)), available at https://www.finnegan.com/en/insights/articles/the-continuing-r-evolution-of-injunctive-relief-in-the-district.html.

[34] And even then, the specific contribution of a particular patent to ultimate consumer value will remain uncertain. See Robert P. Merges, Of Property Rules, Coase, and Intellectual Property, 94 Colum. L. Rev. 2655, 2659 (1994) (“The problems with [clearly defining harms/benefits] in the IPR field result from the abstract quality of the benefits conferred by prior works and the cumulative, interdependent nature of works covered by IPRs. Valuation, then, is at least as great a problem as detection.”)

[35] See Richard Epstein, F. Scott Kieff, & Daniel Spulber, The FTC, IP, and SSOs: Government Hold-Up Replacing Private Coordination, 8 J. Competition L. & Econ. 1 (2012) at 21, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1907450 (“The simple reality is that before a standard is set, it just is not clear whether a patent might become more or less valuable. Some upward pressure on value may be created later to the extent that the patent is important to a standard that is important to the market. In addition, some downward pressure may be caused by a later RAND commitment or some other factor, such as repeat play. The FTC seems to want to give manufacturers all of the benefits of both of these dynamic effects by in effect giving the manufacturer the free option of picking different focal points for elements of the damages calculations. The patentee is forced to surrender all of the benefit of the upward pressure while the manufacturer is allowed to get all of the benefit of the downward pressure.”).

[36] Merges, supra note 38, at 2666-67 (quoting A. Mitchell Polinsky, Resolving Nuisance Disputes: The Simple Economics of Injunctive and Damage Remedies, 32 Stan. L. Rev. 1075, 1092 (1980)).

[37] See Auer, et al., supra note 35, at 163 (“It also establishes this lower royalty rate as the ‘customary’ rate, which ensures that subsequent royalty negotiations, particularly in the standard-setting context, are artificially constrained.”).

[38] eBay Inc. v. MercExchange, LLC, 547 U.S. 388 (2006).

[39] See Benjamin Petersen, Injunctive Relief in the Post-eBay World, 23 Berkeley Tech. L.J. 193, 196 (2008), (“In the two years after the Supreme Court’s ruling in eBay, there were thirty-three district court decisions that interpreted eBay when determining whether to grant injunctive relief to a patent holder. Of these decisions, twenty-four have granted permanent injunctions and ten have denied injunctions.”). See also Bernard H. Chao, After eBay, Inc. v. MercExchange: The Changing Landscape for Patent Remedies, 9 Minn. J.L. Sci. & Tech. 543, 572 (2008) (“For the first time, courts are not granting permanent injunctions to many successful patent plaintiffs.”); Robin M. Davis, Failed Attempts to Dwarf the Patent Trolls: Permanent Injunctions in Patent Infringement Cases Under the Proposed Patent Reform Act of 2005 and eBay v. MercExchange, 17 Cornell J.L. & Pub. Pol’y 431, 444 (2008) (“However, the first few district courts deciding patent cases following that decision granted injunctions to patent owners in the majority of cases, at a rate of approximately two-to-one.”).

[40] See generally Epstein & Noroozi, supra note 6, at 1406-08.

[41] Vincenzo Denicolò, Damien Geradin, Anne Layne-Farrar & A. Jorge Padilla, Revisiting Injunctive Relief: Interpreting eBay in High-Tech Industries with Non-Practicing Patent Holders, 4 J. Comp. L. & Econ. 571 (2008).

[42] Id. at 608. See also Vincenzo Denicolò, Do Patents Over-Compensate Innovators?, 22 Econ. Pol’y 681 (2007) (noting that, with respect to patents in general, “a preponderance of what evidence is currently available points against the over-reward hypothesis”).

[43] See, e.g., Mark Schankerman & Suzanne Scotchmer, Damages and Injunctions in Protecting Intellectual Property, 32 RAND J. Econ. 201 (2001).

[44] Epstein & Noroozi, supra note 6, at 1408.

[45] Tsai & Wright, supra note 23, at 163.

^[46] James Ratliff & Daniel L. Rubinfeld, The Use and Threat of Injunctions in the RAND Context, 9 J. Competition L. & Econ. 14 (2013).

^[47] Ratliff & Rubinfeld, supra note 50, at 7 (emphasis added).

[48] Tsai & Wright, supra note 23, at 182.

[49] Call for Comments, supra note 1, Question 9.

[50] See, e.g., Rudi Bekkers, Christian Catalini, Arianna Martinelli, Cesare Righi, and Timothy Simcoe. Disclosure Rules and Declared Essential Patents, 52 Research Policy, 104618, 3 (2023) (“Thus, allowing blanket disclosure can be efficient if the main purpose of a disclosure policy is to reassure prospective implementers that a license will be available. On the other hand, blanket disclosure shifts search costs from the patent holder (who presumably has a comparative advantage at finding its own essential patents) onto other interested parties, such as prospective licensees who wish to evaluate the scope and value of a firm’s dSEPs; other SSO participants seeking to make explicit cost-benefit comparisons of alternative technologies before committing to a standard; and regulators or courts that might use information about relevant dSEPs to determine reasonable royalties.”).

[51] See Jacob & Nikolic, supra note 10.

[52] See European Commission, Impact Assessment Report Accompanying the Document Proposal for a Regulation of the European Parliament and of the Council on Standard Essential Patents and Amending Regulation (EU) 2017/1001, SWD(2023) 124 final (“Impact Assessment”), at 101.

[53] Call for Comments, supra note 1, Question 10.

[54] See, e.g., U.S. Patent Office, Intellectual Property and the U.S. Economy: 2016 Update (2016), available at https://www.uspto.gov/sites/default/files/documents/IPandtheUSEconomySept2016.pdf.

[55] Shayerah Ilias Akhtar, Liana Wong & Ian F. Fergusson, Intellectual Property Rights and International Trade, at 6 (Congressional Research Service, May 12, 2020), available at https://crsreports.congress.gov/product/pdf/RL/RL34292 (“Intellectual property generally is viewed as a long-standing strategic driver of U.S. productivity, economic growth, employment, higher wages, and exports. It also is considered a key source of U.S. comparative advantage, such as in innovation and high-technology products. Nearly every industry depends on it for its businesses. Industries that rely on patent protection include the aerospace, automotive, computer, consumer electronics, pharmaceutical, and semiconductor industries.”).

[56] See, e.g., Martina F. Ferracane & Hosuk Lee-Makiyama, China’s Technology Protectionism and Its Non-negotiable Rationales, ECIPE (Jun. 2017), available at https://ecipe.org/publications/chinas-technology-protectionism. Consider that, even for actual citizens of the People’s Republic of China, individual rights are legally subordinate to “the interests of the state.” Const. of the People’s Rep. of China, Art. 51, available athttp://www.npc.gov.cn/englishnpc/constitution2019/201911/1f65146fb6104dd3a2793875d19b5b29.shtml. One has to imagine that the level of legal protections afforded foreign firms is no better, and surely must be subordinate to the objectives of China’s industrial policy, including the goal of leapfrogging the United States in IP production. See, e.g., Karen M. Sutter, “Made in China 2025” Industrial Policies: Issues for Congress (Congressional Research Service, Aug. 11, 2020), available at https://sgp.fas.org/crs/row/IF10964.pdf.

[57] See China Is Becoming More Assertive in International Legal Disputes, The Economist (Sep. 18, 2021), https://www.economist.com/china/2021/09/18/china-is-becoming-more-assertive-in-international-legal-disputes (“In the past year Chinese courts have issued sweeping orders on behalf of Chinese smartphone-makers that seek to prevent lawsuits against them in other countries over the use of foreign companies’ intellectual property… so that they (rather than foreign courts) can decide how much Chinese firms should pay in royalties to the holders of patents that their products use.”).

[58] See Matthew Laight, Shifting landscape in SEP FRAND litigation – 2021 will see hard fought disputes in China and India, digital business (Dec. 9, 2020), https://digitalbusiness.law/2020/12/shifting-landscape-in-sep-frand-litigation-2021-will-see-hard-fought-disputes-in-china-and-india.

[59] See RPX Corporation, China: Chinese Courts Can Set Global SEP License Terms, Rules Supreme People’s Court, Mondaq (Oct. 21, 2021), https://www.mondaq.com/china/patent/1120114/chinese-courts-can-set-global-sep-license-terms-rules-supreme-people39s-court.

[60] Id.

[61] See Rush Doshi, Emily De La Bruye?re, Nathan Picarsic, & John Ferguson, China as a “Cyber Great Power”: Beijing’s Two Voices in Telecommunications, Brookings Institute Foreign Policy Paper (Apr. 2021) at 16, available at https://www.brookings.edu/wp-content/uploads/2021/04/FP_20210405_china_cyber_power.pdf. (“In March 2018, Beijing launched the China Standards 2035 project, led by the Chinese Academy of Engineering. After a two-year research phase, that project evolved into the National Standardization Development Strategy Research in January 2020. The ‘Main Points of Standardization Work in 2020’ issued by China’s National Standardization Committee in March 2020 outlined intentions to ‘strengthen the interaction between the standardization strategy and major national strategies.’”).

[62] Quoted in id.

[63] Id. “The phrase ‘cyber great power’ is a key concept guiding Chinese strategy in telecommunications as well as IT more broadly. It appears in the title of almost every major speech by President Xi Jinping on China’s telecommunications and network strategy aimed at a domestic audience since 2014. But the phrase is rarely found in messaging aimed at external foreign audiences, appearing only once in six years of remarks by Foreign Ministry spokespersons. This suggests that Beijing intentionally dilutes discussions of its ambitions in order not to alarm foreign audiences.” Id. at 3 (emphasis added).

[64] See Danny Russel & Blake Berger, Is China Stacking the Technology Deck by Setting International Standards?, The Diplomat (Dec. 2, 2021), https://thediplomat.com/2021/12/is-china-stacking-the-technology-deck-by-setting-international-standards.

[65] Emily de la Bruyere, China’s Quest to Shape the World Through Standards Setting, Hinrich Foundation (Jul. 2021), at 11 (emphasis added), available at https://www.hinrichfoundation.com/research/article/tech/china-quest-to-shape-the-world-through-standards-setting.

[66] Although China is currently under-represented in most SDOs, that is already rapidly changing. See Justus Baron & Olia Kanevskaia, Global Competition for Leadership Positions in Standards Development Organizations, Working Paper (Mar. 31, 2021), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3818143. As Baron and Kanevskaia note, “[t]he surge in the number of leadership positions held by Huawei… [have] raised concerns that… Huawei [may] gain an undue competitive advantage over Western commercial and strategic interests.” Id. at 2.

[67] Updegrove, supra note 19.

[68] See id. at 30-36 (surveying the economic benefits from standardization). See also Soon-Yong Choi & Andrew B. Whinston, Benefits and Requirements for Interoperability in the Electronic Marketplace, 2 Tech. in Soc’y 33, 33 (2000) (“Economic benefits of interoperability result in lowered production or transaction costs typically utilizing standardized parts or automated processes. In the networked economy, the need for interoperability extends into an entire commercial processes, market organizations and products.”).

[69] Anna Gross, Madhumita Murgia & Yuan Yang, Chinese Tech Groups Shaping UN Facial Recognition Standards, Financial Times (Dec. 1, 2019), https://www.ft.com/content/c3555a3c-0d3e-11ea-b2d6-9bf4d1957a67 (“‘The drive to shape international standards… reflects longstanding concerns that Chinese representatives were not at the table to help set the rules of the game for the global Internet,’ the authors of the New America report wrote. ‘The Chinese government wants to make sure that this does not happen in other ICT spheres, now that China has become a technology power with a sizeable market and leading technology companies, including in AI.’”).

[70] Russel & Berger, supra note 67.

[71] Request for Comments, supra note 1,  Question 11.

[72] Igor Nikolic, Licensing Negotiations Groups for SEPs: Collusive Technology Buyers Arrangements? Their Pitfalls and Reasonable Alternatives, Les Nouvelles 350 (2021).

[73] Hector Axel Contreras & Julia Brito, Patent Pools: A Practical Perspective – Part II, Les Nouvelles 39 (2022).

[74] Unwired Planet v Huawei [2017] EWHC 711 (Pat).

[75] TCL v Ericsson, Case No. 8:14-cv-003410JVS-DFM (C.D. Cal. 2018); TCL v Ericsson, 943 F.3d 1360 (Fed. Cir. 2019)

[76] Interdigital v Lenovo [2023] EWHC 539 (Pat) 733.