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On October 7, 2015, the Senate Judiciary Committee held a hearing on the “Standard Merger and Acquisition Reviews Through Equal Rules” (SMARTER) Act of 2015.  As former Antitrust Modernization Commission Chair (and former Acting Assistant Attorney General for Antitrust) Deborah Garza explained in her testimony, “t]he premise of the SMARTER Act is simple:  A merger should not be treated differently depending on which antitrust enforcement agency – DOJ or the FTC – happens to review it.  Regulatory outcomes should not be determined by a flip of the merger agency coin.”

Ms. Garza is clearly correct.  Both the U.S. Justice Department (DOJ) and the U.S. Federal Trade Commission (FTC) enforce the federal antitrust merger review provision, Section 7 of the Clayton Act, and employ a common set of substantive guidelines (last revised in 2010) to evaluate merger proposals.  Neutral “rule of law” principles indicate that private parties should expect to have their proposed mergers subject to the same methods of assessment and an identical standard of judicial review, regardless of which agency reviews a particular transaction.  (The two agencies decide by mutual agreement which agency will review any given merger proposal.)

Unfortunately, however, that is not the case today.  The FTC’s independent ability to challenge mergers administratively, combined with the difference in statutory injunctive standards that apply to FTC and DOJ merger reviews, mean that a particular merger application may face more formidable hurdles if reviewed by the FTC, rather than DOJ.  These two differences commendably would be eliminated by the SMARTER Act, which would subject the FTC to current DOJ standards.  The SMARTER Act would not deal with a third difference – the fact that DOJ merger consent decrees, but not FTC merger consent decrees, must be filed with a federal court for “public interest” review.  This commentary briefly addresses those three issues.  The first and second ones present significant “rule of law” problems, in that they involve differences in statutory language applied to the same conduct.  The third issue, the question of judicial review of settlements, is of a different nature, but nevertheless raises substantial policy concerns.

  1. FTC Administrative Authority

The first rule of law problem stems from the broader statutory authority the FTC possesses to challenge mergers.  In merger cases, while DOJ typically consolidates actions for a preliminary and permanent injunction in district court, the FTC merely seeks a preliminary injunction (which is easier to obtain than a permanent injunction) and “holds in its back pocket” the ability to challenge a merger in an FTC administrative proceeding – a power DOJ does not possess.  In short, the FTC subjects proposed mergers to a different and more onerous method of assessment than DOJ.  In Ms. Garza’s words (footnotes deleted):

“Despite the FTC’s legal ability to seek permanent relief from the district court, it prefers to seek a preliminary injunction only, to preserve the status quo while it proceeds with its administrative litigation.

This approach has great strategic significance. First, the standard for obtaining a preliminary injunction in government merger challenges is lower than the standard for obtaining a permanent injunction. That is, it is easier to get a preliminary injunction.

Second, as a practical matter, the grant of a preliminary injunction is typically sufficient to end the matter. In nearly every case, the parties will abandon their transaction rather than incur the heavy cost and uncertainty of trying to hold the merger together through further proceedings—which is why merging parties typically seek to consolidate proceedings for preliminary and permanent relief under Rule 65(a)(2). Time is of the essence. As one witness testified before the [Antitrust Modernization Commission], “it is a rare seller whose business can withstand the destabilizing effect of a year or more of uncertainty” after the issuance of a preliminary injunction.

Third, even if the court denies the FTC its preliminary injunction and the parties close their merger, the FTC can still continue to pursue an administrative challenge with an eye to undoing or restructuring the transaction. This is the “heads I win, tails you lose” aspect of the situation today. It is very difficult for the parties to get to the point of a full hearing in court given the effect of time on transactions, even with the FTC’s expedited administrative procedures adopted in about 2008. . . . 

[Moreover,] [while] [u]nder its new procedures, parties can move to dismiss an administrative proceeding if the FTC has lost a motion for preliminary injunction and the FTC will consider whether to proceed on a case-by-case basis[,] . . . th[is] [FTC] policy could just as easily change again, unless Congress speaks.”

Typically time is of the essence in proposed mergers, so substantial delays occasioned by extended reviews of those transactions may prevent many transactions from being consummated, even if they eventually would have passed antitrust muster.  Ms. Garza’s testimony, plus testimony by former Assistant Deputy Assistant Attorney General for Antitrust Abbott (Tad) Lipsky, document cases of substantial delay in FTC administrative reviews of merger proposals.  (As Mr. Lipsky explained, “[a]ntitrust practitioners have long perceived that the possibility of continued administrative litigation by the FTC following a court decision constitutes a significant disincentive for parties to invest resources in transaction planning and execution.”)  Congress should weigh these delay-specific costs, as well as the direct costs of any additional burdens occasioned by FTC administrative procedures, in deciding whether to require the FTC (like DOJ) to rely solely on federal court proceedings.

  1. Differences Between FTC and DOJ Injunctive Standards

The second rule of law problem arises from the lighter burden the FTC must satisfy to obtain injunctive relief in federal court.  Under Section 13(b) of the FTC Act, an injunction shall be granted the FTC “[u]pon a proper showing that, weighing the equities and considering the Commission’s likelihood of success, such action would be in the public interest.”  The D.C. Circuit (in FTC v. H.J. Heinz Co. and in FTC v. Whole Foods Market, Inc.) has stated that, to meet this burden, the FTC need merely have raised questions “so serious, substantial, difficult and doubtful as to make them fair ground for further investigation.”  By contrast, as Ms. Garza’s testimony points out, “under Section 15 of the Clayton Act, courts generally apply a traditional equities test requiring DOJ to show a reasonable likelihood of success on the merits—not merely that there is ‘fair ground for further investigation.’”  In a similar vein, Mr. Lipsky’s testimony stated that “[t]he cumulative effect of several recent contested merger decisions has been to allow the FTC to argue that it needn’t show likelihood of success in order to win a preliminary injunction; specifically these decisions suggest that the Commission need only show ‘serious, substantial, difficult and doubtful’ questions regarding the merits.”  Although some commentators have contended that, in reality, the two standards generally will be interpreted in a similar fashion (“whatever theoretical difference might exist between the FTC and DOJ standards has no practical significance”), there is no doubt that the language of the two standards is different – and basic principles of statutory construction indicate that differences in statutory language should be given meaning and not ignored.  Accordingly, merging parties face the real prospect that they might fare worse under federal court review of an FTC challenge to their merger proposal than they would have fared had DOJ challenged the same transaction.  Such an outcome, even if it is rare, would be at odds with neutral application of the rule of law.

  1. The Tunney Act

Finally, helpful as it is, the SMARTER Act does not entirely eliminate the disparate treatment of proposed mergers by DOJ and the FTC.  The Tunney Act, 15 U.S.C. § 16, enacted in 1974, which applies to DOJ but not to the FTC, requires that DOJ submit all proposed consent judgments under the antitrust laws (including Section 7 of the Clayton Act) to a federal district court for 60 days of public comment prior to being entered.

a.  Economic Costs (and Potential Benefits) of the Tunney Act

The Tunney Act potentially interjects uncertainty into the nature of the “deal” struck between merging parties and DOJ in merger cases.  It does this by subjecting proposed DOJ merger settlements (and other DOJ non-merger civil antitrust settlements) to a 60 day public review period, requiring federal judges to determine whether a proposed settlement is “in the public interest” before entering it, and instructing the court to consider the impact of the entry of judgment “upon competition and upon the public generally.”  Leading antitrust practitioners have noted that this uncertainty “could affect shareholders, customers, or even employees. Moreover, the merged company must devote some measure of resources to dealing with the Tunney Act review—resources that instead could be devoted to further integration of the two companies or generation of any planned efficiencies or synergies.”  More specifically:

“[W]hile Tunney Act proceedings are pending, a merged company may have to consider how its post-close actions and integration could be perceived by the court, and may feel the need to compete somewhat less aggressively, lest its more muscular competitive actions be taken by the court, amici, or the public at large to be the actions of a merged company exercising enhanced market power. Such a distortion in conduct probably was not contemplated by the Tunney Act’s drafters, but merger partners will need to be cognizant of how their post-close actions may be perceived during Tunney Act review. . . .  [And, in addition,] while Tunney Act proceedings are pending, a merged company may have to consider how its post-close actions and integration could be perceived by the court, and may feel the need to compete somewhat less aggressively, lest its more muscular competitive actions be taken by the court, amici, or the public at large to be the actions of a merged company exercising enhanced market power.”

Although the Tunney Act has been justified on traditional “public interest” grounds, even its scholarly supporters (a DOJ antitrust attorney), in praising its purported benefits, have acknowledged its potential for abuse:

“Properly interpreted and applied, the Tunney Act serves a number of related, useful functions. The disclosure provisions and judicial approval requirement for decrees can help identify, and more importantly deter, “influence peddling” and other abuses. The notice-and-comment procedures force the DOJ to explain its rationale for the settlement and provide its answers to objections, thus providing transparency. They also provide a mechanism for third-party input, and, thus, a way to identify and correct potentially unnoticed problems in a decree. Finally, the court’s public interest review not only helps ensure that the decree benefits the public, it also allows the court to protect itself against ambiguous provisions and enforcement problems and against an objectionable or pointless employment of judicial power. Improperly applied, the Tunney Act does more harm than good. When a district court takes it upon itself to investigate allegations not contained in a complaint, or attempts to “re-settle” a case to provide what it views as stronger, better relief, or permits lengthy, unfocused proceedings, the Act is turned from a useful check to an unpredictable, costly burden.”

The justifications presented by the author are open to serious question.  Whether “influence peddling” can be detected merely from the filing of proposed decree terms is doubtful – corrupt deals to settle a matter presumably would be done “behind the scenes” in a manner not available to public scrutiny.  The economic expertise and detailed factual knowledge that informs a DOJ merger settlement cannot be fully absorbed by a judge (who may fall prey to his or her personal predilections as to what constitutes good policy) during a brief review period.  “Transparency” that facilitates “third-party input” can too easily be manipulated by rent-seeking competitors who will “trump up” justifications for blocking an efficient merger.  Moreover, third parties who are opposed to mergers in general may also be expected to file objections to efficient arrangements.  In short, the “sunshine” justification for Tunney Act filings is more likely to cloud the evaluation of DOJ policy calls than to provide clarity.

b.  Constitutional Issues Raised by the Tunney Act

In addition to potential economic inefficiencies, the judicial review feature of the Tunney Act raises serious separation of powers issues, as emphasized by the DOJ Office of Legal Counsel (OLC, which advises the Attorney General and the President on questions of constitutional interpretation) in a 1989 opinion regarding qui tam provisions of the False Claims Act:

“There are very serious doubts as to the constitutionality . . . of the Tunney Act:  it intrudes into the Executive power and requires the courts to decide upon the public interest – that is, to exercise a policy discretion normally reserved to the political branches.  Three Justices of the Supreme Court questioned the constitutionality of the Tunney Act in Maryland v. United States, 460 U.S. 1001 (1983) (Rehnquist, J., joined by Burger, C.J., and White, J., dissenting).”

Notably, this DOJ critique of the Tunney Act was written before the 2004 amendments to that statute that specifically empower courts to consider the impact of proposed settlements “upon competition and upon the public generally” – language that significantly trenches upon Executive Branch prerogatives.  Admittedly, the Tunney Act has withstood judicial scrutiny – no court has ruled it unconstitutional.   Moreover, a federal judge can only accept or reject a Tunney Act settlement, not rewrite it, somewhat ameliorating its affront to the separation of powers.  In short, even though it may not be subject to serious constitutional challenge in the courts, the Tunney Act is problematic as a matter of sound constitutional policy.

c.  Congressional Reexamination of the Tunney Act

These economic and constitutional policy concerns suggest that Congress may wish to carefully reexamine the merits of the Tunney Act.  Any such reexamination, however, should be independent of, and not delay expedited consideration of, the SMARTER Act.  The Tunney Act, although of undoubted significance, is only a tangential aspect of the divergent legal standards that apply to FTC and DOJ merger reviews.  It is beyond the scope of current legislative proposals but it merits being taken up at an appropriate time – perhaps in the next Congress.  When Congress turns to the Tunney Act, it may wish to consider four options:  (1) repealing the Act in its entirety; (2) retaining the Act as is; (3) partially repealing it only with respect to merger reviews; or, (4) applying it in full force to the FTC.  A detailed evaluation of those options is beyond the scope of this commentary.


In sum, in order to eliminate inconsistencies between FTC and DOJ standards for reviewing proposed mergers, Congress should give serious consideration to enacting the SMARTER Act, which would both eliminate FTC administrative review of merger proposals and subject the FTC to the same injunctive standard as the DOJ in judicial review of those proposals.  Moreover, if the SMARTER Act is enacted, Congress should also consider going further and amending the Tunney Act to make it apply to FTC as well as to DOJ merger settlements – or, alternatively, to have it not apply at all to any merger settlements (a result which would better respect the constitutional separation of powers and reduce a potential source of economic inefficiency).

Applying antitrust law to combat “hold-up” attempts (involving demands for “anticompetitively excessive” royalties) or injunctive actions brought by standard essential patent (SEP) owners is inherently problematic, as explained by multiple scholars (see here and here, for example).  Disputes regarding compensation to SEP holders are better handled in patent infringement and breach of contract lawsuits, and adding antitrust to the mix imposes unnecessary costs and may undermine involvement in standard setting and harm innovation.  What’s more, as FTC Commissioner Maureen Ohlhausen and former FTC Commissioner Joshua Wright have pointed out (citing research), empirical evidence suggests there is no systematic problem with hold-up.  Indeed, to the contrary, a recent empirical study by Professors from Stanford, Berkeley, and the University of the Andes, accepted for publication in the Journal of Competition Law and Economics, finds that SEP-reliant industries have the fastest quality-adjusted price declines in the U.S. economy – a result totally at odds with theories of SEP-related competitive harm.  Thus, application of a cost-benefit approach that seeks to maximize the welfare benefits of antitrust enforcement strongly militates against continuing to pursue “SEP abuse” cases.  Enforcers should instead focus on more traditional investigations that seek to ferret out conduct that is far more likely to be welfare-inimical, if they are truly concerned about maximizing consumer welfare.

But are the leaders at the U.S. Department of Justice Antitrust Division (DOJ) and the Federal Trade paying any attention?  The most recent public reports are not encouraging.

In a very recent filing with the U.S. International Trade Commission (ITC), FTC Chairwoman Edith Ramirez stated that “the danger that bargaining conducted in the shadow of an [ITC] exclusion order will lead to patent hold-up is real.”  (Comparable to injunctions, ITC exclusion orders preclude the importation of items that infringe U.S. patents.  They are the only effective remedy the ITC can give for patent infringement, since the ITC cannot assess damages or royalties.)  She thus argued that, before issuing an exclusion order, the ITC should require an SEP holder to show that the infringer is unwilling or unable to enter into a patent license on “fair, reasonable, and non-discriminatory” (FRAND) terms – a new and major burden on the vindication of patent rights.  In justifying this burden, Chairwoman Ramirez pointed to Motorola’s allegedly excessive SEP royalty demands from Microsoft – $6-$8 per gaming console, as opposed to a federal district court finding that pennies per console was the appropriate amount.  She also cited LSI Semiconductor’s demand for royalties that exceeded the selling price of Realtek’s standard-compliant product, whereas a federal district court found the appropriate royalty to be only .19% of the product’s selling price.  But these two examples do not support Chairwoman Ramirez’s point – quite the contrary.  The fact that high initial royalty requests subsequently are slashed by patent courts shows that the patent litigation system is working, not that antitrust enforcement is needed, or that a special burden of proof must be placed on SEP holders.  Moreover, differences in bargaining positions are to be expected as part of the normal back-and-forth of bargaining.  Indeed, if anything, the extremely modest judicial royalty assessments in these cases raise the concern that SEP holders are being undercompensated, not overcompensated.

A recent speech by DOJ Assistant Attorney General for Antitrust (AAG) William J. Baer, delivered at the International Bar Association’s Competition Conference, suffers from the same sort of misunderstanding as Chairman Ramirez’s ITC filing.  Stating that “[h]old up concerns are real”, AAG Baer cited the two examples described by Chairwoman Ramirez.  He also mentioned the fact that Innovatio requested a royalty rate of over $16 per smart tablet for its SEP portfolio, but was awarded a rate of less than 10 cents per unit by the court.  While admitting that the implementers “proved victorious in court” in those cases, he asserted that “not every implementer has the wherewithal to litigate”, that “[s]ometimes implementers accede to licensors’ demands, fearing exclusion and costly litigation”, that “consumers can be harmed and innovation incentives are distorted”, and that therefore “[a] future of exciting new products built atop existing technology may be . . . deferred”.  These theoretical concerns are belied by the lack of empirical support for hold-up, and are contradicted by the recent finding, previously noted, that SEP-reliant industries have the fastest quality-adjusted price declines in the U.S. economy.  (In addition, the implementers of patented technology tend to be large corporations; AAG Baer’s assertion that some may not have “the wherewithal to litigate” is a bare proposition unsupported by empirical evidence or more nuanced analysis.)  In short, DOJ, like FTC, is advancing an argument that undermines, rather than bolsters, the case for applying antitrust to SEP holders’ efforts to defend their patent rights.

Ideally the FTC and DOJ should reevaluate their recent obsession with allegedly abusive unilateral SEP behavior and refocus their attention on truly serious competitive problems.  (Chairwoman Ramirez and AAG Baer are both outstanding and highly experienced lawyers who are well-versed in policy analysis; one would hope that they would be open to reconsidering current FTC and DOJ policy toward SEPs, in light of hard evidence.)  Doing so would benefit consumer welfare and innovation – which are, after all, the goals that those important agencies are committed to promote.

On Thursday I will be participating in an ABA panel discussion on the Apple e-books case, along with Mark Ryan (former DOJ attorney) and Fiona Scott-Morton (former DOJ economist), both of whom were key members of the DOJ team that brought the case. Details are below. Judging from the prep call, it should be a spirited discussion!

Readers looking for background on the case (as well as my own views — decidedly in opposition to those of the DOJ) can find my previous commentary on the case and some of the issues involved here:

Other TOTM authors have also weighed in. See, e.g.:


ABA Section of Antitrust Law

Federal Civil abaantitrustEnforcement Committee, Joint Conduct, Unilateral Conduct, and Media & Tech Committees Present:

“The 2d Cir.’s Apple E-Books decision: Debating the merits and the meaning”

July 16, 2015
12:00 noon to 1:30 pm Eastern / 9:00 am to 10:30 am Pacific

On June 30, the Second Circuit affirmed DOJ’s trial victory over Apple in the Ebooks Case. The three-judge panel fractured in an interesting way: two judges affirmed the finding that Apple’s role in a “hub and spokes” conspiracy was unlawful per se; one judge also would have found a rule-of-reason violation; and the dissent — stating Apple had a “vertical” position and was challenging the leading seller’s “monopoly” — would have found no liability at all. What is the reasoning and precedent of the decision? Is “marketplace vigilantism” (the concurring judge’s phrase) ever justified? Our panel — which includes the former DOJ head of litigation involved in the case — will debate the issues.


  • Ken Ewing, Steptoe & Johnson LLP


  • Geoff Manne, International Center for Law & Economics
  • Fiona Scott Morton, Yale School of Management
  • Mark Ryan, Mayer Brown LLP

Register HERE

As I explained in a recent Heritage Foundation Legal Memorandum, the Institute of Electrical and Electronics Engineers’ (IEEE) New Patent Policy (NPP) threatens to devalue patents that cover standards; discourage involvement by innovative companies in IEEE standard setting; and undermine support for strong patents, which are critical to economic growth and innovation.  The Legal Memorandum focused on how the NPP undermines patentees’ rights and reduces returns to patents that “read on” standards (“standard essential patents” or “SEPs”).  It did not, however, address the merits of the Justice Department Antitrust Division’s (DOJ) February 2 Business Review Letter (BRL), which found no antitrust problems with the NPP.

Unfortunately, the BRL does little more than opine on patent policy questions, such as the risk of patent “hold-up” that the NPP allegedly is designed to counteract.  The BRL is virtually bereft of antitrust analysis.  It states in conclusory fashion that the NPP is on the whole procompetitive, without coming to grips with the serious risks of monopsony and collusion, and reduced investment in standards-related innovation, inherent in the behavior that it analyzes.  (FTC Commissioner Wright and prominent economic consultant Greg Sidak expressed similar concerns about the BRL in a March 12 program on standard setting and patents hosted by the Heritage Foundation.)

Let’s examine the BRL in a bit more detail, drawing from a recent scholarly commentary by Stuart Chemtob.  The BRL eschews analyzing the risk that by sharply constraining expected returns to SEPs, the NPP’s requirements may disincentivize technology contributions to standards, harming innovation.  The BRL focuses on how the NPP may reduce patentee “hold-up” by effectively banning injunctions and highlighting three factors that limit royalties – basing royalties on the value of the smallest saleable unit, the value contributed to that unit in light of all the SEPs practiced the unit, and existing licenses covering the unit that were not obtained under threat of injunction.  The BRL essentially ignores, however, the very real problem of licensee “hold-out” by technology implementers who may gain artificial bargaining leverage over patentees.  Thus there is no weighing of the NPP’s anticompetitive risks against its purported procompetitive benefits.  This is particularly unfortunate, given the absence of hard evidence of hold-up.  (Very recently, the Federal Circuit in Ericsson v. D-Link denied jury instructions citing the possibility of hold-up, given D-Link’s failure to provide any evidence of hold-up.)   Also, by forbidding injunctive actions prior to first level appellate review, the NPP effectively precludes SEP holders from seeking exclusion orders against imports that infringe their patents, under Section 337 of the Tariff Act.  This eliminates a core statutory protection that helps shield American patentees from foreign anticompetitive harm, further debasing SEPs.  Furthermore, the BRL fails to assess the possible competitive harm firms may face if they fail to accede to the IEEE’s NPP.

Finally, and most disturbingly, the BRL totally ignores the overall thrust of the NPP – which is to encourage potential licensees to insist on anticompetitive terms that reduce returns to SEP holders below the competitive level.  Such terms, if jointly agreed to by potential licensees, could well be deemed a monopsony buyers’ cartel (with the potential licensees buying license rights), subject to summary antitrust condemnation in line with such precedents as Mandeville Island Farms and Todd v. Exxon.

In sum, the BRL is an embarrassingly one-sided document that would merit a failing grade as an antitrust exam essay.  DOJ would be wise to withdraw the letter or, at the very least, rewrite it from scratch, explaining that the NPP raises serious antitrust questions that merit close examination.  If it fails to do so, one can only conclude that DOJ has decided that it is suitable to use business review letters as vehicles for unsupported statements of patent policy preferences, rather than as serious, meticulously crafted memoranda of guidance on difficult antitrust questions.

American standard setting organizations (SSOs), which are private sector-based associations through which businesses come together to set voluntary industrial standards, confer great benefits on the modern economy.  They enable virtually all products we rely upon in modern society (including mechanical, electrical, information, telecommunications, and other systems) to interoperate, thereby spurring innovation, efficiency, and consumer choice.

Many SSO participants hold “standard essential patents” (SEPs) that may be needed to implement individual SSO standards.  Thus, in order to promote widespread adoption and application of standards, SSOs often require participants to agree in advance to reveal their SEPs and to license them on “fair, reasonable, and non-discriminatory” (FRAND) terms.  Historically, however, American SSOs have not sought to micromanage the details of licensing negotiations between holders of SEPs and other patents on the one side, and manufacturers that desire access to those patents on the other.   These have been left up to free market processes, which have led to an abundance of innovative products and services (smartphones, for example) that have benefited consumers and spurred the rapid development of high technology industries.

Unfortunately, this salutary history of non-intervention in licensing negotiations may be about to come to an end, if the Institute of Electrical and Electronics Engineers (IEEE), one of the largest and most influential SSOs in the world (“the world’s largest technical professional society”), formally votes on February 9 to change its patent policy.  As detailed below, the new policy would, if adopted, reduce the value of SEPs, discourage involvement by innovative companies in IEEE standard setting, and undermine support for strong patents, which are critical to economic growth and innovation.

In a February 2, 2015 business review letter, the U.S. Department of Justice’s Antitrust Division (DOJ) informed the IEEE that it had no plans to bring an antitrust enforcement action regarding that SSO’s proposed patent policy changes.  Although it may not constitute an antitrust violation, the new policy would greatly devalue SEPs and thereby undermine incentives to make patents available for use in IEEE standards.  Key features of the proposed policy change are as follows.  The new IEEE policy requires a patentee to provide the IEEE with a letters of assurance waiving its right to seek an injunction against an infringer, in order to have its patents included in an IEEE standard.  The new policy also specifies that an analysis of comparable licenses for purposes of determining a FRAND royalty can only consider licenses for which the SEP holder had relinquished the right to seek and enforce an injunction against an unlicensed implementer.  Moreover, under the change, an SEP holder may seek an injunction only after having fully litigated its claims against an unlicensed implementer through the appeals stage – a process which would essentially render injunctive relief highly impractical if not futile.  In addition, the new policy precludes an SEP holder from conditioning a license on reasonable reciprocal access to non-SEP patents held by the counterparty licensee.  Finally, the new policy straitjackets licensing negotiations by specifying that royalty negotiations must be based on the value of the “relevant functionality of the smallest saleable compliant implementation that practices the essential patent claim.”  This ignores the fact that the benefit that a claimed invention provides to an end product – which is often key to determining reasonable licensing terms – depends on the specific patent and product to be licensed, and not necessarily the “smallest saleable compliant implementation” (for example, a small microchip).  All told, the new IEEE policy creates an imbalance between the rights of innovators (whose patents lose value) and implementers of technologies, and interferes in market processes by inappropriately circumscribing the terms of licensing negotiations.

The press release accompanying the release of the February 2 business review letter included this statement by the letter’s author, Renata Hesse, DOJ’s Acting Assistant Attorney General for the Antitrust Division regarding this matter:  “IEEE’s decision to update its policy, if adopted by the IEEE Board, has the potential to help patent holders and standards implementers to reach mutually beneficial licensing agreements and to facilitate the adoption of pro-competitive standards.”  Regrettably, this may fairly be read as a DOJ endorsement of the new IEEE policy, and, thus, as implicit DOJ support for devaluing SEPs.  As such, it threatens to encourage other SSOs to adopt policies that sharply limit the ability of SEP holders to obtain reasonable returns on their patents.  Individual contract negotiations, that take into account the full set of matter-specific factors that bear on value, are more likely to enhance welfare when they are not artificially constrained by “ground rules” that tilt in favor of one of the two sets of interests represented at the negotiating table.

In its future pronouncements on the patent-antitrust interface, DOJ should bear in mind its 2013 joint policy statement with the U.S. Patent and Trademark Office, in which it stated that “DOJ and USPTO strongly support the protection of intellectual property rights and believe that a patent holder who makes . . . a F/RAND commitment should receive appropriate compensation that reflects the value of the technology contributed to the standard.  It is important for innovators to continue to have incentives to participate in standards-setting activities and for technological breakthroughs in standardized technologies to be fairly rewarded.”  Consistent with this pronouncement, DOJ would be well-advised to clarify its views and explain that it does not support policies that prevent SEP holders from obtaining a fair return on their patents.  Such a statement might be accompanied by a critique of SSO policy changes that place ex ante limitations on SEP holders and thus threaten to undermine welfare-enhancing participation in standard setting.  It would also be helpful, of course, if the IEEE would take note of these concerns and not adopt (or, if it is too late for that, reconsider and rescind) its proposed new patent policy.

During the 2008 presidential campaign Barack Obama criticized the Bush Administration for “the weakest record of antitrust enforcement of any administration in the last half century” and promised “to reinvigorate antitrust enforcement.”  In particular, he singled out allegedly lax monopolization and merger enforcement as areas needing improvement, and also vowed “aggressive action to curb the growth of international cartels.”

The Obama Administration has now been in office for six years.  Has its antitrust enforcement record been an improvement over the Bush record, more of the same, or is its record worse?  Most importantly, have the Obama Administration’s enforcement initiatives been good or bad for the free market system, and the overall American economy?

On January 29 a Heritage Foundation Conference will address these questions.  You can register to attend this conference in person or watch it live at Heritage’s website.

The conference will feature an all start lineup of top antitrust enforcers and scholars, including four former Justice Department Assistant Attorneys General for Antitrust; a former Federal Trade Commission Chairman; two current Federal Trade Commissioners; five former senior antitrust enforcement officials; a distinguished federal appellate judge famous for his antitrust opinions; and a leading comparative antitrust law expert.  Separate panels will address FTC, Justice Department, and international developments.  Our leadoff speaker will be GWU Law School Professor and former FTC Chairman Bill Kovacic.

As an added bonus, around the time of the conference Heritage will be releasing a new paper by Professor Thom Lambert that analyzes recent Supreme Court jurisprudence and federal antitrust enforcement applying a “limits of antitrust” decision-theoretic framework.  Stay tuned.

In my just-published article in The Antitrust Source, I argue that the law and economics literature on patents and error cost analysis demonstrate that the recent focus by U.S. (and foreign) antitrust enforcers on single-firm patent abuses is misplaced, and may reduce incentives to innovate.  I recommend that antitrust enforcers focus instead on restrictions among competing technologies, which are the primary concern of the 1995 U.S. DOJ-FTC Antitrust-IP Guidelines.  I conclude:

“Patent-antitrust enforcement should “stick to its knitting” and focus on transactions that lessen competition among rival technologies or on wrongful actions (not competition on the merits) designed to artificially inflate the market value of a patent beyond its legitimate scope. New antitrust enforcement initiatives that seek to limit returns within the legitimate scope of the patentare unwise. Even if they appeared to restrain licensing fees in the short term, economic theory and evidence suggests that such “creative antitrust enforcement” would undermine incentives to invest in patenting, thereby weakening the patent system and tending to slow innovation and economic growth. Nations seeking to spur their economies would be well advised to avoid such antitrust adventurism.”

An important new paper was recently posted to SSRN by Commissioner Joshua Wright and Joanna Tsai.  It addresses a very hot topic in the innovation industries: the role of patented innovation in standard setting organizations (SSO), what are known as standard essential patents (SEP), and whether the nature of the contractual commitment that adheres to a SEP — specifically, a licensing commitment known by another acronym, FRAND (Fair, Reasonable and Non-Discriminatory) — represents a breakdown in private ordering in the efficient commercialization of new technology.  This is an important contribution to the growing literature on patented innovation and SSOs, if only due to the heightened interest in these issues by the FTC and the Antitrust Division at the DOJ.

“Standard Setting, Intellectual Property Rights, and the Role of Antitrust in Regulating Incomplete Contracts”

JOANNA TSAI, Government of the United States of America – Federal Trade Commission
JOSHUA D. WRIGHT, Federal Trade Commission, George Mason University School of Law

A large and growing number of regulators and academics, while recognizing the benefits of standardization, view skeptically the role standard setting organizations (SSOs) play in facilitating standardization and commercialization of intellectual property rights (IPRs). Competition agencies and commentators suggest specific changes to current SSO IPR policies to reduce incompleteness and favor an expanded role for antitrust law in deterring patent holdup. These criticisms and policy proposals are based upon the premise that the incompleteness of SSO contracts is inefficient and the result of market failure rather than an efficient outcome reflecting the costs and benefits of adding greater specificity to SSO contracts and emerging from a competitive contracting environment. We explore conceptually and empirically that presumption. We also document and analyze changes to eleven SSO IPR policies over time. We find that SSOs 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 across SSOs, and that contractual incompleteness and ambiguity for certain terms persist both across SSOs and over time, despite many revisions and improvements to IPR policies. We interpret this evidence as consistent with a competitive contracting process. We conclude by exploring the implications of these findings for identifying the appropriate role of antitrust law in governing ex post opportunism in the SSO setting.

The Federal Trade Commission’s (FTC) June 23 Workshop on Conditional Pricing Practices featured a broad airing of views on loyalty discounts and bundled pricing, popular vertical business practices that recently have caused much ink to be spilled by the antitrust commentariat.  In addition to predictable academic analyses featuring alternative theoretical anticompetitive effects stories, the Workshop commendably included presentations by Benjamin Klein that featured procompetitive efficiency explanations for loyalty programs and by Daniel Crane that stressed the importance of (1) treating discounts hospitably and (2) requiring proof of harmful foreclosure.  On balance, however, the Workshop provided additional fuel for enforcers who are enthused about applying new anticompetitive effects models to bring “problematic” discounting and bundling to heel.

Before U.S. antitrust enforcement agencies launch a new crusade against novel vertical discounting and bundling contracts, however, they may wish to ponder a few salient factors not emphasized in the Workshop.

First, the United States has the most efficient marketing and distribution system in the world, and it has been growing more efficient in recent decades (this is the one part of the American economy that has been a bright spot).  Consumers have benefited from more shopping convenience and higher quality/lower priced offerings due to the advent of  “big box” superstores, Internet sales engines (and e-commerce in general), and other improvements in both on-line and “bricks and mortar” sales methods.

Second, and relatedly, the Supreme Court’s recognition of vertical contractual efficiencies in GTE-Sylvania (1977) ushered in a period of greatly reduced potential liability for vertical restraints, undoubtedly encouraging economically beneficial marketing improvements.  A new government emphasis on investigating and litigating the merits of novel vertical practices (particularly practices that emphasize discounting, which presumptively benefits consumers) could inject costly new uncertainty into the marketing side of business planning, spawn risk aversion, and deter marketing innovations that reduce costs, thereby harming welfare.  These harms would mushroom to the extent courts mistakenly “bought into” new theories and incorrectly struck down efficient practices.

Third, in applying new theories of competitive harm, the antitrust enforcers should be mindful of Ronald Coase’s admonition that “if an economist finds something—a business practice of one sort or other—that he does not understand, he looks for a monopoly explanation.  And as in this field we are very ignorant, the number of ununderstandable practices tends to be rather large, and the reliance on a monopoly explanation, frequent.”  Competition is a discovery procedure.  Entrepreneurial businesses constantly seek improvements not just in productive efficiency, but in distribution and marketing efficiencies, in order to eclipse their rivals.  As such, entrepreneurs may experiment with new contractual forms (such as bundling and loyalty discounts) in an effort to expand their market shares and grow their firms.  Business persons may not know ex ante which particular forms will work.  They may try out alternatives, sticking with those that succeed and discarding those that fail, without necessarily being able to articulate precisely the reasons for success or failure.  Real results in the market, rather than arcane economic theorems, may be expected to drive their decision-making.   Distribution and marketing methods that are successful will be emulated by others and spread.  Seen in this light (and relatedly, in light of transaction cost economics explanations for “non-standard” contracts), widespread adoption of new vertical contractual devices most likely indicates that they are efficient (they improve distribution, and imitation is the sincerest form of flattery), not that they represent some new competitive threat.  Since an economic model almost always can be ginned up to explain why some new practice may reduce consumer welfare in theory, enforcers should instead focus on hard empirical evidence that output and quality have been reduced due to a restraint before acting.  Unfortunately, the mere threat of costly misbegotten investigations may chill businesses’ interest in experimenting with new and potentially beneficial vertical contractual arrangements, reducing innovation and slowing welfare enhancement (consistent with point two, above).

Fourth, decision theoretic considerations should make enforcers particularly wary of pursuing conditional pricing contracts cases.  Consistent with decision theory, optimal antitrust enforcement should adopt an error cost framework that seeks to minimize the sum of the costs attributable to false positives, false negatives, antitrust administrative costs, and disincentive costs imposed on third parties (the latter may also be viewed as a subset of false positives).  Given the significant potential efficiencies flowing from vertical restraints, and the lack of empirical showing that they are harmful, antitrust enforcers should exercise extreme caution in entertaining proposals to challenge new vertical arrangements, such as conditional pricing mechanisms.  In particular, they should carefully assess the cumulative weight of the high risk of false positives in this area, the significant administrative costs that attend investigations and prosecutions, and the disincentives toward efficient business arrangements (see points two and three above).  Taken together, these factors strongly suggest that the aggressive pursuit of conditional pricing practice investigations would flunk a reasonable cost-benefit calculus.

Fifth, a new U.S. antitrust enforcement crusade against conditional pricing could be used by foreign competition agencies to justify further attacks on efficient vertical practices.  This could add to the harm suffered by companies (including, of course, U.S.-based multinationals) which would be deterred from maintaining and creating new welfare-beneficial distribution methods.  Foreign consumers, of course, would suffer as well.

My caveats should not be read to suggest that the FTC should refrain from pursuing new economic learning on loyalty discounting and bundled pricing, nor on other novel business practices.  Nor should it necessarily eschew all enforcement in the vertical restraints area – although that might not be such a bad idea, given error cost and resource constraint issues.  (Vertical restraints that are part of a cartel enforcement scheme should be treated as cartel conduct, and, as such, should be fair game, of course.)  In order optimally to allocate scarce resources, however, the FTC might benefit by devoting relatively greater attention to the most welfare-inimical competitive abuses – namely, anticompetitive arrangements instigated, shielded, or maintained by government authority.  (Hard core private cartel activity is best left to the Justice Department, which can deploy powerful criminal law tools against such schemes.)

In recent years, antitrust enforcers in Europe and the United States have made public pronouncements and pursued enforcement initiatives that undermine the ability of patentees to earn maximum profits through the unilateral exercise of rights within the scope of their patents, as discussed in separate recent articles by me and by Professor Nicolas Petit of the University of Liege. (Similar sorts of concerns have been raised by Federal Trade Commissioner Joshua Wright.) This represents a change in emphasis away from restraints on competition among purveyors of rival patented technologies and toward the alleged “exploitation” of a patentee’s particular patented technology. It is manifested, for example, in enforcers’ rising enthusiasm for limiting patent royalties (based on hypothetical ex ante comparisons to “next best” technologies, or the existence of standards on which patents “read”), for imposing compulsory licensing remedies, and for constraining the terms of private patent litigation settlements involving a single patented technology. (Not surprisingly, given its broader legal mandate to attack abuses of dominant positions, the European Commission has been more aggressive than United States antitrust agencies.) This development has troubling implications for long-term economic welfare and innovation, and merits far greater attention than it has received thus far.

What explains this phenomenon? Public enforcers are motivated by research that purports to demonstrate fundamental flaws in the workings of the patent system (including patent litigation) and the poor quality of many patents, as described, for example, in 2003 and 2011 U.S. Federal Trade Commission (FTC) Reports. Central to this scholarship is the notion that patents are “highly uncertain” and merely “probabilistic” (read “second class”) property rights that should be deemed to convey only a right to try to exclude. This type of thinking justifies a greater role for prosecutors to “look inside” the patent “black box” and use antitrust to “correct” perceived patent “abuses,” including supposed litigation excesses.

This perspective is problematic, to say the least. Government patent agencies, not antitrust enforcers, are best positioned to (and have taken steps to) rein in litigation excesses and improve patent quality, and the Supreme Court continues to issue rulings clarifying patent coverage. More fundamentally, as Professor Petit and I explain, this new patent-specific interventionist trend ignores a robust and growing law and economics literature that highlights the benefits of the patent system in enabling technology commercialization, signaling value to capital markets and innovators, and reducing information and transaction costs. It also fails to confront empirical studies that by and large suggest stronger patent regimes are associated with faster economic growth and innovation. Furthermore, decision theory and error cost considerations indicate that antitrust agencies are ill-equipped to second guess unilateral exercises of property rights that fall within the scope of a patent. Finally, other antitrust jurisdictions, such as China, are all too likely to cite new United States and European constraints on unilateral patent right assertions as justifications for even more intrusive limitations on patent rights.

What, then, should the U.S. antitrust enforcement agencies do? Ideally, they should announce that they are redirecting their emphasis to prosecuting inefficient competitive restraints involving rival patented technologies, the central thrust of the 1995 FTC-U.S. Justice Department Patent-Antitrust Licensing Guidelines. In so doing, they should state publicly that an individual patentee should be entitled to the full legitimate returns flowing from the legal scope of its patent, free from antitrust threat. (The creation of patent-specific market power through deception or fraud is not a legitimate return on patent rights, of course, and should be subject to antitrust prosecution when found.) One would hope that eventually the European Commission (and, dare we suggest, other antitrust authorities as well) would be inspired to adopt a similar program. Additional empirical research documenting the economy-wide benefits of encouraging robust unilateral patent assertions could prove helpful in this regard.