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Patent Thickets: Lessons from the Sewing Machine War

Posted by Josh Wright on November 2, 2010

My colleague Adam Mossoff’s wonderful paper, A Stitch in Time: The Rise and Fall of the Sewing Machine Patent Thicket, was featured in a WSJ article focused on drawing implications for the smartphone market by studying our experience with the sewing machine patent pool.  Professor Mossoff is optimistic about the opportunities for players in the smartphone market to overcome any “anticommons” problem:

Mossoff takes several lessons from this historical example. First, he notes that despite the litigation, the smartphone market isn’t caught in a patent thicket yet, with production and marketing held up indefinitely as happened with the sewing machine. There are, of course, thousands of smartphones for sale, and new ones being developed.

Second, even if it gets to that point, it wouldn’t necessarily be cause for alarm. “If our intuition says, ‘The sky is falling,’ we can say, ‘OK, but did the sky fall in the 1850s?’” Though anti-trust legislation today would likely render a smartphone patent pool an impossibility, the fact remains that lawsuits are often no more than an invitation to negotiation. “Oftentimes the way a party signals to another party in one’s industry, ‘I’m serious about this–you need to speak with me,’ is by filing a lawsuit,” says Mossoff.

And most companies do reach amicable licensing agreements where they use one another’s technology for a fee. “The average cell phone has thousands of patents owned by entities that have licenses with each other,” says Mossoff. Earlier this month, for instance, Microsoft licensed patents by Palm, Palmsource, Bell Communications Research, and Geoworks.

So while the maze of patent lawsuits might seem like wasteful litigation, Mossoff cautions that the opposite might very well be true. Those who defend the patent system and intellectual property rights argue that it encourages innovation by ensuring that inventors get their due. “What the patent system is about is not what’s happening today or yesterday, but what’s going to happen tomorrow,” says Mossoff.

For those who would like the full length version of the paper, which is highly recommend, see here.

Posted in business, economics, intellectual property, patent, technology | 1 Comment »

Antitrust and the Dynamics of Competition in High-Tech Industries

Posted by Josh Wright on October 18, 2010

On Friday, I will be participating at an event at Technology Policy Institute, where I will be discussing the titular question along with Bob Crandall, Charles Jackson, Christopher Yoo, and Bruce Owen.  Discussants are Joe Farrell, Tim Brennan, Carl Shapiro and Michael Salinger.  As suggested below, my topic will be the recent antitrust enforcement actions against Intel (and the proposed FTC settlement).  Should be a fun event.

Here is the program:

Registration – 8:30, Program – 9:00
October 22, 2010
Polaris Suite
Ronald Reagan Building and International Trade Center
1300 Pennsylvania Avenue, NW
Washington DC

Antitrust enforcement in technology industries is complex, in part because the sector is characterized by more or less continuous innovation.  The global nature of the sector, combined with oversight by multiple enforcement agencies, also presents its own unique issues for antitrust policy.  Given these complexities, how can antitrust policy be formulated to promote innovation in these dynamic sectors?

Please join the Technology Policy Institute for a half-day event on antitrust policy in the technology sector on October 22 at the Ronald Reagan Building.  The event is part of the TPI project “Maintaining U.S. Leadership in Information and Communications Technology: Antitrust and the Dynamics of Competition in ‘New Economy’ Industries.”  Academic experts will discuss their papers prepared for the project on such topics as recent enforcement actions, vertical integration, and antitrust implications for cloud computing.

8:30 AM Registration and Continental Breakfast 

 
9:00 AM Panel 1: 

Thomas Lenard, Technology Policy Institute (moderator)

Robert Crandall, Senior Fellow, Economic Studies, Brookings Institution and

Charles Jackson, Adjunct Professor of Electrical Engineering, George Washington University

Antitrust in High-Tech Industries: The Three Major Recent Monopolization Cases

Joshua Wright, Associate Professor of Law, George Mason University Law School

Does Antitrust Enforcement in High Tech Markets Benefit Consumers? Stock Price Evidence from FTC v. Intel

Discussants:

Timothy Brennan, Professor, Public Policy and Economics University of Maryland, Baltimore County, and Senior Fellow, Resources for the Future

Joseph Farrell, Director, Bureau of Economics, Federal Trade Commission

 
10:30 AM Panel 2: 

Scott Wallsten, Technology Policy Institute (moderator)

Bruce Owen, Director, Public Policy Program, Stanford University and Senior Fellow, Stanford Institute for Economic Policy Research

Antitrust and Vertical Integration in “New Economy” Industries

Christopher Yoo, Professor of Law, Communication, and Computer and Information Science and Director, Center for Technology, Innovation, and Competition, University of Pennsylvania Law School

Cloud Computing:  Architectural and Policy Implications

Discussants:

Michael Salinger, Professor/Everett W. Lord Distinguished Faculty Scholar, Markets, Public Policy and Law, Boston University School of Management

Carl Shapiro, Deputy Assistant Attorney General for Economics, U.S. Department of Justice
Questions should be directed to Ashley Creel at acreel@techpolicyinstitute.org.  Members of the press should contact Amy Smorodin at asmorodin@techpolicyinstitute.org.

Registration

If you would like to register to attend this event, please use our online form for immediate confirmation. You may also contact us at the Technology Policy Institute offices to request and confirm your attendance.

Posted in antitrust, economics, federal trade commission, intellectual property, monopolization, patent, technology | Comments Off

FTC v. Ovation Opinion

Posted by Josh Wright on September 9, 2010

The opinion in Ovation (i.e. FTC v. Lundbeck) is now available.  Commentary to follow.

UPDATE: The first footnote in Judge Ericksen’s opinion notes that “the FTC and Minnesota began their closing argument by disclaiming the notion that these cases were ‘about unhappiness about the high price of Indocin.’  Nevertheless, the FTC and Minnesota cited in their post-trial response a press release issued by the FTC to announce the action’s commencement.  The press release asserts that the acquisition of NeoProfen resulted in the increase of Indocin IV’s price by almost 1300%; characterizes the prices charged by Lundbeck as ‘artificially high;’ and notes one commissioner’s view that Lundbeck’s ‘profiteering on the backs of critically ill premature babies is not only immoral, it is illegal.”

The morality line belongs to Chairman Leibowitz.  These cases certainly would be less complicated if they were easy enough to cast them accurately by assigning positions that are pro and anti- the health of premature babies.  Though I suspect that line renders it fair game to ask what the Chairman might think about the morality of antitrust policy that reduces the incentive to innovate new drugs for premature babies or other conditions.  Judge Ericksen also singles out the press release, which takes a similar heartstring-tugging approach:

Because there are no other drugs available to treat patent ductus arteriosus, hospitals treating babies with this critical condition have no choice but to pay Ovation’s monopoly price. And ultimately, the artificially high prices paid by hospitals are passed on to families, government programs such as Medicaid, and other public and private purchasers.

My critique of the FTC enforcement theory in Ovation is here; though it should be noted that Judge Ericksen’s opinion turns on market definition.

The FTC has not yet issued a new press release.  Not even a webcast.

Posted in antitrust, intellectual property, patent, technology | Comments Off

The FTC Loses in Ovation Pharmaceuticals

Posted by Josh Wright on September 2, 2010

There are some new developments in the Federal Trade Commission’s consummated merger case brought against Ovation.  Namely, the FTC has lost.  TOTM readers may recall that I spent some time criticizing the Federal Trade Commission’s complaint, back in 2008, in FTC v. Ovation in federal district court in Minnesota.  As I described the stylized facts back then:

There are two transactions here.  In the first, Ovation purchased the rights to Indocin from Merck.  In the second transaction, Ovation purchased the rights to NeoProfen from Abbott while NeoProfen was awaiting FDA approval.  NeoProfen was apparently the only potential substitute for Indocin with respect to treatment of PDA in premature babies.  The press release emphasizes the apparent and remarkable 1300% price hike that occurred after the second transaction.

The Complaint came along with some interesting separate statements that drew my attention, and criticism, including one from Commissioner Rosch suggesting the both transactions would violate Section 7, and suggesting the possibility of a Section 2 violation.  Recall Rosch’s articulation of the theory:

There is reason to believe that the sale of Indocin to Ovation had the effect of eliminating the reputational constraints on Merck that had existed prior to the sale. There is evidence that Ovation lacked Merck’s large product portfolio and thus arguably was not concerned, as Merck had been, that the sale of Indocin at a monopoly price would damage its reputation and sales of more profitable products. More specifically, there is evidence that after the transaction, Ovation began charging roughly 1300 percent more than the price at which Merck sold the same product. Put differently, there is reason to believe that Merck’s sale of Indocin to Ovation had the effect of enabling Ovation to exercise monopoly power in its pricing of Indocin, which Merck could not profitably do prior to the transaction. Moreover, there is also reason to believe that the transaction had the effect of substituting Ovation, a firm that had an incentive to protect its ability to engage in monopoly pricing, for Merck, which lacked the same incentive. It is arguable that Merck had no incentive to acquire NeoProfen, but Ovation had an incentive to do so in order to maintain its monopoly pricing in the PDA market. That, in my judgment, would be a violation of Section 7.

I was critical of this theory (as was TOTM guest blogger Mary Coleman in this post), and noting that while the Commission scored plenty of creativity points with the Complaint, it contained critical weaknesses in the underlying economic logic:

The idea is that Merck was a multi-product monopolist who was constrained in its pricing of Indocin because it was concerned at a reduction in demand for its other products because consumers would be upset if it priced this life-saving drug at “too high” a level.  Under the theory, Merck is setting a profit-maximizing price and figures out that Indocin’s profit-maximizing price would be higher because it is unconstrained by these reputational considerations.

As an initial matter, its seems like everybody here agrees that the the monopoly power associated with Indocin is lawfully acquired and it would not be a violation of the antitrust laws if Merck charged the monopoly price and appropriated the monopoly rate of return to their innovation.  Assuming it is correct that there decision to lower the price is to do with these reputational demand concerns, why does it become a violation if they assign something that they were entitled to do under the antitrust laws to a third party?

The implicit answer is that the antitrust laws condemn evasion of pricing constraints.  …

Well, if that’s all that the antitrust laws are about, this is easy.  Here are a few examples of conduct the FTC could go after that satisfy the “evading a constraint” theory.  Why not a monopolist whose pricing is constrained by current demand.  That is, the profit-maximizing monopoly price is $20 but the monopolist would REALLY like to charge $25.  It is only the fact that current demand is not high enough to support that price that prevents the monopolist from charging it.  So, our monopolist comes up with a plan (lets call it a scheme, it sounds worse) to evade the pricing constraint created by current demand by advertising its product to consumers and touting its virtues.  Or perhaps its going to invest in the quality of the product.  In either event, the purpose of the advertising is to shift the demand to the right and result in higher prices.  No matter that output increases, it doesn’t matter because the monopolist is evading a pricing constraint and presumably has violated Section 2.  Evading reputational constraints on demand for X is not analytically any different evasion of the constraints imposed on demand by consumer preferences.

And I wrote:

Simply describing Merck’s fear of raising its price as an economic constraint does not render Ovation consistent with the modern “economic approach” to antitrust anymore than my awkward and usually unsuccessful attempts to tell jokes during law school lectures converts my teaching style to a “comedic approach.”  In either event, the objection to the “evasion” of any constraint approach is not that it condemns behavior that could otherwise be achieved in other forms without antitrust scrutiny, but that it opens the door to enforcement actions applied to business conduct that is not likely to harm competition and might be welfare increasing.

My critique drew a response from former Commissioner Leary in Antitrust Magazine, defending Commissioner Rosch’s analysis and views on economics, which in turn drew a further reply from me here.  I stand by my view that the Ovation complaint suffered from serious economic flaws.

I raise all of this now because the Deal is reporting that the:

Federal Trade Commission suffered a significant loss in a case against a company that bought the only two treatments for a geneticdisorder in infants and then raised prices dramatically, according to sources who have seen the sealed opinion.  The decision of U.S. District Court Judge Joan Ericksen in Minnesota was issued Tuesday under seal to give the parties time to redact confidential business information. But the crux of the judge’s opinion was that the FTC had not proved that the drugs serve the same market, according to the sources, who asked not to be identified.

Evidence presented at trial showed most doctors used one drug or the other but rarely alternated between the two, suggesting that the choice was a doctor preference, not a medical necessity, the FTC told the court. One source said that the judge’s opinion suggested she “didn’t accept the FTC’s fundamental economic story.”

Its rude to say I told you so.  So I won’t.  And perhaps that would be premature.  In the same story, Cecile Kohrs Lindell also reports that an appeal might be in the works:

The case was referred to the FTC by Sen. Amy Klobuchar, D-Minn., who was besieged by doctors in Minnesota complaining of the scale of the price hikes.  The interest in the case is a key reason why the agency is likely to launch an appeal to the U.S. Court of Appeals for the 8th Circuit, according to Mike Sohn, a former FTC general counsel, now a lawyer at Davis Polk & Wardwell LLP. Sohn has not read the sealed opinion, but noted that the case is likely destined for an appeal for several reasons. “The agency alleged that this was a merger to monopoly of the only two branded drugs which were available to treat premature babies with a life-threatening heart condition and that prices rose dramatically as a result of the acquisition,” Sohn said. “Given those allegations, an adverse ruling either on market definition or competitive effects would have ramifications for other pharmaceutical industry mergers which follow.

The unsealed opinion should be made available soon. I will post it here with further commentary once I’ve had time to digest Judge Ericksen’s opinion.

Posted in antitrust, economics, intellectual property, patent | 1 Comment »

The FTC Gets in Intel’s Business

Posted by Josh Wright on August 4, 2010

One of the first reactions I had when reading the settlement is that it is quite striking how much and at what level of detail the settlement micro-manages Intel’s business decisions.  Lets consider a just a handful of provisions and look at the language in the settlement.  Again, I think these provisions should be read with the benefit of some perspective in market performance during the relevant time period.

First, Dan already noted this, but it is worth repeating.  The “predatory design” aspects of the settlement are incredibly problematic and I predict will cause more harm to consumers than good in the short, medium, and long-run. Here’s the language:

Respondent shall not make any engineering or design change to a Relevant Product if that change (1) degrades the performance of a Relevant Product sold by a competitor of Respondent and (2) does not provide an actual benefit to the Relevant Product sold by Respondent, including without limitation any improvement in performance, operation, cost, manufacturability, reliability, compatibility, or ability to operate or enhance the operation of another product; provided, however, that any degradation of the performance of a competing product shall not itself be deemed to be a benefit to the Relevant Product sold by Respondent. Respondent shall have the burden of demonstrating that any engineering or design change at issue complies with Section V. of this Order.

As Dan pointed out in his post, it really is hard to stomach this provision.   Note that the settlement provision requires Intel, upon any “engineering or design change” to have the burden of demonstrating that it does not degrade rival performance and that it provides “actual” benefits.  This provision gets the Commission into the chip design business.  But hey, the government can make a Cadillac…

A few more provisions caught my eye for the potential to micro-manage the competitive process.  Consider the restrictions on Intel’s distribution contracts.  In Section IV.A of the settlement includes a list of activities that Intel cannot engage in: “Respondent shall not invite, enter into, implement, continue, enforce, or attempt to enter into, implement, continue or enforce, any condition, policy, practice, agreement, contract, understanding, or any other requirement that….” and proceeds down a long list of subjects, including use of exclusivity.  Section IV. B creates some exceptions.  Here is where things get interesting — and completely bizarre.

So, what can Intel do to compete for distribution?  Intel is not prohibited from:

offering a Benefit, including a price discount, reasonably similar to one Respondent reasonably believes is being offered by a rival supplier; provided, however, that in such circumstance:

Let’s stop there — “reasonably similar to one Respondent reasonably believes is being offered by a rival supplier”?  Quite a test.  And with lots of wiggle room for the Commission to determine whether Intel’s beliefs are reasonable or its discount is within the reasonable range of similarity to competitors.  But perhaps this could work — I mean, the Commission doesn’t really want to tie Intel’s hands behind its back vis-a-vis other competitors, right?  Well, maybe it does:

Respondent may not condition its Benefit upon receipt of exclusivity or a minimum Market Segment Share, regardless of whether or not the rival supplier has so conditioned its offer

So, the use of exclusivity or market share discounts are fair game for competitors but Intel may not use them even if it can demonstrate to the price-controller that its offer is reasonably similar to that offered by a rival.  The very fact that the settlement operates on the premise that Intel should not be able to use contracts that its rivals can informs how it is likely to interpret the “reasonable” requirements in the for the “meeting competition” exception excerpted above.

A few more provisions to do with competition for distribution caught my eye.  Here’s another one from the list of exceptions.  Intel is not prohibited from:

winning all of a Customer’s business, so long as Respondent has not bid for more business than a Customer has asked to be bid and so long as Respondent does not engage in conduct otherwise prohibited by this Order to win the business;

Notice that violation of this provision requires the Commission to oversee the discussions between Intel and customers to determine whether the customer asked for the bid, and how much they asked for.  And here is another one.  Intel is allowed to agree:

with a Customer that the Customer will not purchase Relevant Products or Computer Product Chipsets from an Intel competitor where: ….

Respondent has provided Extraordinary Assistance to the Customer; ….. and

Respondent does not (i) enter into more than ten (10) such agreements over the term of this Order (or such additional agreements as the Commission may approve); and (ii) enter into more than two (2) such agreements in any twelve month period (or such additional agreements as the Commission may approve).

Intel may also agree to provide:

a Customer or End User a discount as a flat or lump-sum payment of monies or any other item(s) of pecuniary value based upon a Customer’s sales or purchases of fewer than eleven (11) units of any Relevant Product (such as “buy ten, get one free”). This provision does not apply to sales of greater than 11 units to any one customer (for example, Intel may not use this provision to offer 10,000 free units to an OEM in return for a purchase of 100,000 units).

Fewer than eleven.  Got it?

More to come.  But I think these provisions demonstrate the extent to which the Commission has got itself into Intel’s business decision-making process and even aspects of product design.  My overall impression in light of these terms is that the settlement is more restrictive and, well, controlling, than I thought Intel would agree to.  But more serious analysis would need to be done to compare what is added here relative to the original AMD settlement, how costly compliance with this Commission regulatory oversight into Intel’s distribution, licensing and product design decisions is going to be, versus the expected value of litigation.   As I argue in this paper, I stand by the view that Intel would have likely ultimately prevailed (after appeal) on the Commission’s Section 2 and Section 5 allegations.  Of course, that is a very costly route.  But so is this.

Posted in antitrust, economics, error costs, exclusive dealing, federal trade commission, monopolization, patent, technology | 3 Comments »

Some Perspective on the Intel Settlement

Posted by Josh Wright on August 4, 2010

Let me add on a few brief observations on the Intel settlement to Dan’s earlier comments, with which I largely agree.  There is a lot to say about the settlement: the predatory design aspects, Section 5, the (I found) quite odd self-congratulatory settlement press conference and webcast, and of course, what the settlement means for consumers.  I’m very interested in all of these issues, but perhaps none is more important than the last.   We cannot simply assume that the settlement equates to a victory for consumers.  Readers of this blog will be very familiar with the argument that merely counting cases, or agency activity, and of course settlements, are not reliable measures of the quality of agency performance or meaningful from a consumer welfare perspective.  But problems with this case make that warning especially appropriate here.  Thus, before delving into some first reactions based on language in the settlement over the days and maybe weeks to come, some perspective is in order.

When evaluating the FTC settlement is good for consumers, or reading triumphant FTC claims or press coverage along these lines, or the American Antitrust Institute press release that should come out any second now,  I want you to think about these three pictures (taken from my analysis of the Intel complaint):

The first is a picture of AMD’s financial performance over the relevant time period when Intel was engaged in the allegedly anticompetitive conduct.  Remember, the exclusion theory is that Intel’s discount contracts raised AMD’s costs of distribution, which would ultimately lead to harm to consumers.  The big advantage of monopolization cases from an economic perspective, relative to mergers where the analysis is inherently predictive, is that the disputed conduct has been in the marketplace for some period of time and left its competitive fingerprints.  In this case, the conduct in the complaint had been in the marketplace for about a decade.  That seems long enough.  So — lets take a look at AMD’s sales and operating income:

While the data are not dispositive, they are informative and certainly should give some pause to those who are eager to accept the Commission’s theory.  But forget about AMD, what about Intel’s performance during the relevant time period.  Again, the theory is that during this ten year stretch, Intel’s contracts increased barriers to entry and allowed it to increase its monopoly power to the detriment of consumers.  One place to look for evidence in support of that story is Intel’s financial performance.  Again from the paper — here’s a picture of Intel’s cumulative abnormal returns plotted over time.  Its not a full event study — and you can download the paper for the relevant details, but just look at the picture and try to find evidence supporting the hypothesis that Intel was earning abnormal returns from its distribution strategy (if you look really hard, there is a trend line and an equation that will give you the answer in short order):

Finally — well, this one doesn’t really require any explanation:

More to follow.  Now, I’m not arguing that these three pictures are sufficient to conclude with certainty that Intel’s conduct was pr0-competitive and that the FTC settlement will chill competition and harm consumers.  Though I believe both of these to be true (and I make a more detailed case in the paper linked above).   But certainly, the facts on the ground should give one pause on the issue of whether the settlement is going to help or harm consumers at the end of the day.   That analysis will require looking not only at the settlement itself, which I intend to do in posts to come, but also some real world data on how the market was working for participants and consumers during the relevant time frame.   So lets start there for now.

Posted in antitrust, economics, error costs, federal trade commission, markets, monopolization, patent, technology | 2 Comments »

Intel Settlement Watch Part II

Posted by Josh Wright on July 29, 2010

While Intel Corporation nears its settlement deadline with the Federal Trade Commission, it received good news from a federal district court in Delaware evaluating the evidence of alleged consumer harm from the discounts Intel offers to buyers.  It is also very important to note that this pass from a US court applying standards of consumer harm embedded in US Section 2 case law — that is, actual harm to consumers and the competitive process rather than allowing harm to competitors to serve as a sufficient condition for proof of the former — is the first to evaluate the consumer welfare effects of Intel’s conduct from this more rigorous perspective.  One has to wonder whether this ruling will shift settlement negotiations in favor of Intel.   Its true that the FTC can use Section 5 to evade this Section 2 competitive effects analysis.  But not without eventually testing their interpretation of Section 5 in front of a panel at the D.C. Circuit.

From today’s WSJ:

Intel Corp. won a key ruling in a suit against the company on behalf of computer buyers, which found no evidence that consumers have been hurt by the company’s discounting practices in the market for computer chips. …

The case had proceeded in parallel with a private antitrust suit brought in June 2005 by Advanced Micro Devices Inc., which Intel agreed to settle in November along with a $1.25 billion payment to AMD. Both cases alleged that Intel used improper discounts and other tactics to deter computer makers from buying microprocessor chips from AMD, with the proposed class-action case focusing on alleged harm to consumers from Intel’s behavior.

Intel’s tactics have also been challenged by antitrust agencies on three continents, including a suit by the U.S. Federal Trade Commission that is in settlement negotiations. Throughout the process, Intel has denied wrongdoing and argued that its discounting practices represented a lawful form of competition that has helped bring PC prices down.

Special Master Vincent Poppiti appeared to give support to that argument. In a 112-page opinion, he wrote that PC makers had discretion about how to use Intel discounts. In some cases, he wrote, they passed the benefits on to consumers in the form of lower prices—undercutting the idea that all members of the proposed class of consumers suffered a “common impact” from Intel’s action. Mr. Poppiti based his conclusions on what he called the “unreliable analyses” of an expert witness for the plaintiffs, who argued that consumers had been overcharged as a result of Intel’s tactics.

I’ve not read Special Master Poppiti’s analysis.  However, as readers of TOTM will know, I’ve been very critical of the Federal Trade Commission’s Complaint against Intel primarily on two grounds: (1)  the wobbly intellectual underpinnings of the Commission’s attempt to expand its FTC Act Section 5 authority to evade (see also here) the more stringent monopolization standards under Section 2 of the Sherman Act, and (2) that the economic merits of the Commission’s anticompetitive theory are questionable when laid against the available data.  Poppiti’s analysis, as reported, appears to be consistent with the second line of attack.

For more analysis of both, please see, An Antitrust Analysis of the Federal Trade Commission’s Complaint Against Intel, combines these two themes.  The paper will be released as the first installment of the International Center for Law and Economics Antitrust & Competition Policy White Paper Series.  The paper considers the economic merits of the Commission’s anticompetitive theory, evaluates the testable implications of that theory against the available data, and offers a critique of the Commission’s proffered justifications for the Section 5 allegations.

Here is the abstract:

The Federal Trade Commission’s recent complaint targets the Intel Corporation for antitrust scrutiny under Section 5 of the Federal Trade Commission Act and Section 2 of the Sherman Act. The Commission alleges that, through the use of loyalty discounts offered to microprocessor purchasers, Intel unlawfully excluded rivals and harmed consumers in the microprocessor and graphics processor markets. This article analyzes the Commission’s claims. The Commission’s reliance on Section 5 should be viewed with suspicion because it allows the Commission to evade the more stringent standards of proof that have been emerged in the Supreme Court’s Section 2 jurisprudence. Furthermore, the Commission’s actions surrounding its prosecution of Intel reflect an adversarial attitude that undermines the Commission’s stated comparative advantages over private litigants. Moreover, the Commission’s allegations form a weak case when evaluated under the conventional Section 2 standard. Unlike many Section 2 cases alleging speculative future consumer harm, the disputed conduct in this case has been in the marketplace for nearly a decade, and its competitive footprint is readily observable. The available data do not support the Commission’s theory that Intel’s behavior harmed consumers. To the contrary, it is almost certain that Intel’s distribution contracts led to tangible, demonstrable consumer welfare gains in the form of lower prices. Accordingly, the Commission’s complaint against Intel threatens to harm consumers directly in the computer industry as well as indirectly by undermining the stability and certainly which longstanding Section 2 jurisprudence has afforded the business community by requiring the plaintiffs offer rigorous proof of competitive harm.

Readers might also be interested in TOTM guest-blogger Dan Crane and Herbert Hovenkamp on the FTC’s case against Intel.

Posted in antitrust, economics, federal trade commission, international center for law & economics, legal scholarship, patent, technology | Comments Off

IP Colloquium: The First Sale Doctrine

Posted by Josh Wright on April 3, 2010

For TOTM readers who might not know already, Professor Doug Lichtman (UCLA) has put together a great series of programs over at IP Colloquium. The IP Colloquium is an online audio program focused on patent and copyright issues where Professor Lichtman interviews guests from academia, business, and the judiciary to discuss current topics (archives available here). On top of all that, CLE credit is available in many states. I had the pleasure of being included in the current show focusing on the First Sale Doctrine, along with guests Michael Salinger (Boston University) and Tony Reese (UC Irvine). Most of my discussion with Professor Lichtman focused on antitrust aspects of post-sale vertical restraints which were then compared with intellectual property-based constraints on similar contracts.  Check it out.

Posted in antitrust, copyright, economics, intellectual property, patent, technology | 1 Comment »

On seed industry concentration and its claimed effects [#dojusda #agworkshop]

Posted by Geoffrey Manne on March 12, 2010

A common theme throughout the day has been the declining number of seed companies–increasing concentration–and its effect. Except no one has talked about the effect.  Other than pointing to the structural change itself, no one seems to have any evidence relating to the effect of the change.  One farmer at the open mic session (coincidentally one who had been sued by Monsanto) asserted that the move from 70 seed companies to 4 represented a relevant decline in competition.  But he didn’t talk about any relevant effect; he had nothing to offer on declining return on investment–no evidence that the change actually affected his bottom line.

Unfortunately, Diana Moss is the lone antitrust expert on the seed industry concentration panel (also known as the “is Monsanto an antitrust problem?” panel), and it falls to her to put meat on these bones.  But she fails in the effort, and really just repeats the same mantra as the farmer, with exactly the same amount of evidence (zero, in case I wasn’t clear on this point).  (Moss’s AAI paper on biotech seeds is available here; our ICLE paper partially addressing Moss’s is here).

Read the rest of this entry »

Posted in ag/antitrust workshop, antitrust, business, contracts, economics, intellectual property, markets, patent, politics, technology | 2 Comments »

An Interesting Patent Holdup Decision out of the Central District of CA: Vizio v. Funai

Posted by Josh Wright on February 11, 2010

Readers may recall we highlighted the Vizio v. Funai complaint about a year ago, in large part because it involved antitrust and standard setting issues.  The case involves allegations that Funai breached a FRAND commitment, and thus, is an important decision in the debate over the appropriate scope of Section 2 in cases involving alleged breach of obligations made in the standard setting context (a subject I’ve written on with Bruce Kobayashi here and here, with former student Aubrey Stuempfle here, and on my own in partial defense of the D.C. Circuit’s Rambus decision here ).

Thanks to a TOTM reader, we’ve got some new information on the latest developments in Judge Matz’s opinion granting Funai’s motion to dismiss the Sherman Act Section 2 claims.  I think the opinion is an interesting addition to the growing body of case law on Section 2 and standard setting.  The entire opinion is available here.

For a brief primer for those interested, I’ll lay out some of the basic facts as they appear in the Complaint.  Thomson held a number of patents related to the transmission, receipt and use of specific program information in a digital broadcast signal.  In 1997, the Advanced TV Systems Committee (ATSC), an SSO, adopted a standard for digital TV broadcast signals and Thomson designated several patents as essential to the standard.  Thomson made FRAND commitments to ATSC, and subsequently, the FCC adopted major elements of the ATSC standard.   In September 2007, Thomson assigned the rights to two of the relevant patents to Funai, and retained the rights to another.  Vizio alleges that before selling some of its patents to Funai, Thomson licensed the bundle of relevant patents to licensees who needed only to deal Thomson, whose monopoly power was restrained by the FRAND commitment it made to the ATSC.  Vizio now alleges that its Funai charges prices much higher than those charged by Thomson, and that Funai and Thomson conspired to evade the FRAND commitment and split profits.

Right off the top, readers will recognize hints of both N-Data and Ovation, two FTC cases I’ve criticized for expanding the notion that exclusionary conduct might be defined as any business decision that “evades a pricing constraint.”   As I’ve written:

The implicit answer [adopted by the Commission] is that the antitrust laws condemn evasion of pricing constraints.  This answer is getting more and more familiar at the current Commission.  Let’s follow the pattern.  First, Rambus is based on the concept that evasion of patent disclosure rules in the standard setting context violation Section 2 and Section 5.  Second, N-Data is based on the concept that evasion of a contractual pricing constraint in the form of a RAND commitment is a violation of at least section 5 even when the monopoly power is lawfully acquired.  Third, Ovation now adds to the list the evasion of reputational constraints on pricing as the genesis of actionable antitrust conduct.

This case invokes some of the some basic ideas.  At least one of the underlying theories is that Thomson evaded the pricing constraint by transferring its patents to Funai, i.e. does transferring the patent from Thomson to Funai, who is unconstrained by the FRAND commitment, constitute exclusionary conduct under Section 2?

Here’s an excerpt of Judge Matz’s analysis of the Section 2 allegations:

Nor does the allegation that Funai repudiated Thomson’s FRAND commitments constitute a harm to competition. Vizio cites to the Broadcom and Research in Motion cases for the proposition that deceiving a standard setting organization and then evading FRAND commitments can qualify as anticompetitive conduct and can constitute harm to competition. See Broadcom Corp. v. Qualcomm, Inc., 501 F.3d 297, 313-14 (3d Cir. 2007) (holding that a patent holder’s intentionally false promise to license essential proprietary technology on FRAND terms, coupled with a standard setting organization’s reliance on that promise, and the patent holder’s subsequent breach of that promise, constitutes actionable anticompetitive conduct); Research in Motion Ltd. v. Motorola, Inc., 2008 WL 5191922 at *4-7 (N.D. Tex. Dec. 11, 2008) (holding that a refusal to license on agreed-to FRAND terms constitutes a harm to competition). However, other courts have reached the opposite conclusion. See Rambus v. Federal Trade Commission, 522 F.3d 456, 467 (D.C. Cir. 2008) (holding that deceiving a standard-setting organization, thereby avoiding FRAND (there called “RAND”) limits on licensing fees, did not constitute a harm to competition under the Sherman Act). The court in Rambus explained that, even in the context of FRAND licensing agreements, “an otherwise lawful monopolist’s end-run around price constraints, even when deceptive or fraudulent, does not alone present a harm to competition in the monopolized marked.” Rambus, 522 F.3d at 466. The Rambus court cited NYNEX v. Discon, supra, for that proposition, after observing previously that “to the extent [the Broadcom ruling] may have rested on a supposition that there is a cognizable violation of the Sherman Act when a lawful monopolist’s deceit has the effect of raising prices (without an effect on competitive structure), it conflicts with NYNEX.” Id. (citing NYNEX, 525 U.S. 128). As discussed above, Vizio has not explained how the mere transfer of a valid patent from Thomson to Funai created an unlawful monopoly, and so its alleged conduct does not constitute a harm to competition.

Moreover, in both Broadcom and Research in Motion the antitrust defendant itself had entered into a FRAND obligation with the standard setting organization. Here, Vizio’s only allegation that suggests that Funai has any obligations to the ATSC is its conclusory statement that “[w]hen Funai acquired Thomson’s rights to the ’074 patent, specific encumbrances attached to that patent, including Thomson’s obligation to license the ’074 patent to implementers of the ATSC standards, such as Vizio, on a FRAND basis.” FAC ¶ 30. However, Thomson—not Funai—participated in the standard-setting process and entered into the FRAND agreement with the ATSC. FAC ¶¶ 14, 16, 18-19, Ex. C. And, as the FAC alleges, the ATSC Patent Policy requires only that participants provide a written agreement to license on FRAND terms. FAC ¶ 16. Although the allegations might suffice to state an antitrust claim against Thomson under the holding in Broadcom, they do not against Funai. Based on this analysis, Vizio’s claims of unlawful monopolization under Section 2 of the Sherman Act—claims three through five—and unlawful acquisition under Section 7 of the Clayton Act—claim one—must fail.

The next to last sentence is pretty interesting when read along with the first paragraph.  On the one hand, the court notes that the allegations might state a valid Section 2 claim against Thomson under the holding in Broadcom, suggesting that the evasion of constraint theory in Broadcom lives so long as the plaintiff has also alleged that Thomson’s promise as intentionally false at the time it was made to the ATSC, that there was reliance on that promise, and it was subsequently breached.  On the other hand, the first paragraph seems to at least weakly suggest that the court is aligning itself with the D.C. Circuit’s Rambus holding under which even an intentionally false promise or deceptive cannot constitute a Section 2 problem unless the plaintiff also can survive muster under NYNEX, i.e. prove that the defendant is not simply exercising its lawfully acquired ex ante monopoly power.  I don’t mean to suggest these two excerpts are contradictory.  The court is correctly pointing out that even under less restrictive standard in Broadcom, the Section 2 claim against Funai must fail.

As I point out here, I do not believe that Broadcom and Rambus create a circuit split because they turn on the court’s assessment of the defendant’s possession of ex ante monopoly power.  In Broadcom, at the pleading stage, the Third Circuit accepted the allegation as true that the defendant acquired monopoly power as the result of its deceptive conduct; in Rambus, the D.C. Circuit correctly held under NYNEX that the plaintiff faced the burden of proving that the price-increasing deception was also exclusionary, i.e. allowed the defendant to acquire or maintain monopoly power, and ruled that the FTC failed to carry that burden on the facts.

Posted in antitrust, intellectual property, patent, technology | 3 Comments »

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