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Recently, the en banc Federal Circuit decided in Suprema, Inc. v. ITC that the International Trade Commission could properly prevent the importation of articles that infringe under an indirect liability theory. The core of the dispute in Suprema was whether § 337 of the Tariff Act’s prohibition against “importing articles that . . . infringe a valid and enforceable United States patent” could be used to prevent the importation of articles that at the moment of importation were not (yet) directly infringing. In essence, is the ITC limited to acting only when there is a direct infringement, or can it also prohibit articles involved in an indirect infringement scheme — in this case under an inducement theory?

TOTM’s own Alden Abbott posted his view of the decision, and there are a couple of points we’d like to respond to, both embodied in this quote:

[The ITC’s Suprema decision] would likely be viewed unfavorably by the Supreme Court, which recently has shown reluctance about routinely invoking Chevron deference … Furthermore, the en banc majority’s willingness to find inducement liability at a time when direct patent infringement has not yet occurred (the point of importation) is very hard to square with the teachings of [Limelight v.] Akamai.

In truth, we are of two minds (four minds?) regarding this view. We’re deeply sympathetic with arguments that the Supreme Court has become — and should become — increasingly skeptical of blind Chevron deference. Recently, we filed a brief on the 2015 Open Internet Order that, in large part, argued that the FCC does not deserve Chevron deference under King v. Burwell, UARG v. EPA and Michigan v. EPA (among other important cases) along a very similar line of reasoning. However, much as we’d like to generally scale back Chevron deference, in this case we happen to think that the Federal Circuit got it right.

Put simply, “infringe” as used in § 337 plainly includes indirect infringement. Section 271 of the Patent Act makes it clear that indirect infringers are guilty of “infringement.” The legislative history of the section, as well as Supreme Court case law, makes it very clear that § 271 was a codification of both direct and indirect liability.

In taxonomic terms, § 271 codifies “infringement” as a top-level category, with “direct infringement” and “indirect infringement” as two distinct subcategories of infringement. The law further subdivides “indirect infringement” into sub-subcategories, “inducement” and “contributory infringement.” But all of these are “infringement.”

For instance, § 271(b) says that “[w]hoever actively induces infringement of a patent shall be liable as an infringer” (emphasis added). Thus, in terms of § 271, to induce infringement is to commit infringement within the meaning of the patent laws. And in § 337, assuming it follows § 271 (which seems appropriate given Congress’ stated purpose to “make it a more effective remedy for the protection of United States intellectual property rights” (emphasis added)), it must follow that when one imports “articles… that infringe” she can be liable for either (or both) § 271(a) direct infringement or § 271(b) inducement.

Frankly, we think this should end the analysis: There is no Chevron question here because the Tariff Act isn’t ambiguous.

But although it seems clear on the face of § 337 that “infringe” must include indirect infringement, at the very least § 337 is ambiguous and cannot clearly mean only “direct infringement.” Moreover, the history of patent law as well as the structure of the ITC’s powers both cut in favor of the ITC enforcing the Tariff Act against indirect infringers. The ITC’s interpretation of any ambiguity in the term “articles… that infringe” is surely reasonable.

The Ambiguity and History of § 337 Allows for Inducement Liability

Assuming for argument’s sake that § 337’s lack of specificity leaves room for debate as to what “infringe” means, there is nothing that militates definitively against indirect liability being included in § 337. The majority handles any ambiguity of this sort well:

[T]he shorthand phrase “articles that infringe” does not unambiguously exclude inducement of post-importation infringement… By using the word “infringe,” § 337 refers to 35 U.S.C. § 271, the statutory provision defining patent infringement. The word “infringe” does not narrow § 337’s scope to any particular subsections of § 271. As reflected in § 271 and the case law from before and after 1952, “infringement” is a term that encompasses both direct and indirect infringement, including infringement by importation that induces direct infringement of a method claim… Section 337 refers not just to infringement, but to “articles that infringe.” That phrase does not narrow the provision to exclude inducement of post-importation infringement. Rather, the phrase introduces textual uncertainty.

Further, the court notes that it has consistently held that inducement is a valid theory of liability on which to base § 337 cases.

And lest you think that this interpretation would give some new, expansive powers to the ITC (perhaps meriting something like a Brown & Williamson exception to Chevron deference), the ITC is still bound by all the defenses and limitations on indirect liability under § 271. Saying it has authority to police indirect infringement doesn’t give it carte blanche, nor any more power than US district courts currently have in adjudicating indirect infringement. In this case, the court went nowhere near the limits of Chevron in giving deference to the ITC’s decision that “articles… that infringe” emcompasses the well-established (and statutorily defined) law of indirect infringement.

Inducement Liability Isn’t Precluded by Limelight

Nor does the Supreme Court’s Limelight v. Akamai decision present any problem. Limelight is often quoted for the proposition that there can be no inducement liability without direct infringement. And it does stand for that, as do many other cases; that point is not really in any doubt. But what Alden and others (including the dissenters in Suprema) have cited it for is the proposition that inducement liability cannot attach unless all of the elements of inducement have already been practiced at the time of importation. Limelight does not support that contention, however.

Inducement liability contemplates direct infringement, but the direct infringement need not have been practiced by the same entity liable for inducement, nor at the same time as inducement (see, e.g., Standard Oil. v. Nippon). Instead, the direct infringement may come at a later time — and there is no dispute in Suprema regarding whether there was direct infringement (there was, as Suprema notes: “the Commission found that record evidence demonstrated that Mentalix had already directly infringed claim 19 within the United States prior to the initiation of the investigation.”).

Limelight, on the other hand, is about what constitutes the direct infringement element in an inducement case. The sole issue in Limelight was whether this “direct infringement element” required that all of the steps of a method patent be carried out by a single entity or entities acting in concert. In Limelight’s network there was a division of labor, so to speak, between the company and its customers, such that each carried out some of the steps of the method patent at issue. In effect, plaintiffs argued that Limelight should be liable for inducement because it practised some of the steps of the patented method, with the requisite intent that others would carry out the rest of the steps necessary for direct infringement. But neither Limelight nor its customers separately carried out all of the steps necessary for direct infringement.

The Court held (actually, it simply reiterated established law) that the method patent could never be violated unless a single party (or parties acting in concert) carried out all of the steps of the method necessary for direct infringement. Thus it also held that Limelight could not be liable for inducement because, on the facts of that case, none of its customers could ever be liable for the necessary, underlying direct infringement. Again — what was really at issue in Limelight were the requirements to establish the direct infringement necessary to prove inducement.

On remand, the Federal Circuit reinforced the point that Limelight was really about direct infringement and, by extension, who must be involved in the direct infringement element of an inducement claim. According to the court:

We conclude that the facts Akamai presented at trial constitute substantial evidence from which a jury could find that Limelight directed or controlled its customers’ performance of each remaining method step. As such, substantial evidence supports the jury’s verdict that all steps of the claimed methods were performed by or attributable to Limelight. Therefore, Limelight is liable for direct infringement.

The holding of Limelight is simply inapposite to the facts of Suprema. The crux of Suprema is whether the appropriate mens rea existed to support a claim of inducement — not whether the requisite direct infringement occurred or not.

The Structure of § 337 Supports The ITC’s Ability to Block Inducement

Further, as the majority in Suprema notes, the very idea of inducement liability necessarily contemplates that there will be a temporal separation between the event that gives rise to indirect liability and the future direct infringement (required to prove inducement). As the Suprema court briefly noted “Section 337(a)(1)(B)’s ‘sale . . . after importation’ language confirms that the Commission is permitted to focus on post-importation activity to identify the completion of infringement.”

In particular, each of the enforcement powers in § 337(a) contains a clause that, in addition to a prohibition against, e.g., infringing articles at the time of importation, also prohibits “the sale within the United States after importation by the owner, importer, or consignee, of articles[.]” Thus, Congress explicitly contemplated that the ITC would have the power to act upon articles at various points in time, not limiting it to a power effective only at the moment of importation.

Although the particular power to reach into the domestic market has to do with preventing the importer or its agent from making sales, this doesn’t undermine the larger point here: the ITC’s power to prevent infringing articles extends over a range of time. Given that “articles that … infringe” is at the very least ambiguous, and, as per the Federal Circuit (and our own position), this ambiguity allows for indirect infringement, it isn’t a stretch to infer that that Congress intended the ITC to have authority under § 337 to ban the import of articles that induce infringement that occurs only after the time of importation..

To interpret § 337 otherwise would be to render it absurd and to create a giant loophole that would enable infringers to easily circumvent the ITC’s enforcement powers.

A Dissent from the Dissent

The dissent also takes a curious approach to § 271 by mixing inducement and contributory infringement, and generally making a confusing mess of the two. For instance, Judge Dyk says

At the time of importation, the scanners neither directly infringe nor induce infringement… Instead, these staple articles may or may not ultimately be used to infringe… depending upon whether and how they are combined with domestically developed software after importation into the United States (emphasis added).

Whether or not the goods were “staples articles” (and thus potentially capable of substantial noninfringing uses) has nothing to do with whether or not there was inducement. Section 271 makes a very clear delineation between inducement in § 271(b) and contributory infringement in § 271(c). While a staple article of commerce capable of substantial noninfringing uses will not serve as the basis for a contributory infringement claim, it is irrelevant whether or not goods are such “staples” for purposes of establishing inducement.

The boundaries of inducement liability, by contrast, are focused on the intent of the actors: If there is an intent to induce, whether or not there is a substantial noninfringing use, there can be a violation of § 271. Contributory infringement and inducement receive treatment in separate paragraphs of § 271 and are separate doctrines comprising separate elements. This separation is so evident on the face of the law as well as in its history that the Supreme Court read the doctrine into copyright in Grokster — where, despite a potentially large number of non-infringing uses, the intent to induce infringement was sufficient to find liability.

Parting Thoughts on Chevron

We have some final thoughts on the Chevron question, because this is rightly a sore point in administrative law. In this case we think that the analysis should have ended at step one. Although the Federal Circuit began with an assumption of ambiguity, it was being generous to the appellants. Did Congress speak with clear intent? We think so. Section 271 very clearly includes direct infringement as well as indirect infringement within its definition of what constitutes infringement of a patent. When § 337 references “articles … that infringe” it seems fairly obvious that Congress intended the ITC to be able to enforce the prohibitions in § 271 in the context of imported goods.

But even if we advance to step two of the Chevron analysis, the ITC’s construction of § 337 is plainly permissible — and far from expansive. By asserting its authority here the ITC is simply policing the importation of infringing goods (which it clearly has the power to do), and doing so in the case of goods that indirectly infringe (a concept that has been part of US law for a very long time). If “infringe” as used in the Tariff Act is ambiguous, the ITC’s interpretation of it to include both indirect as well as direct infringement seems self-evidently reasonable.

Under the dissent’s (and Alden’s) interpretation of § 337, all that would be required to evade the ITC would be to import only the basic components of an article such that at the moment of importation there was no infringement. Once reassembled within the United States, the ITC’s power to prevent the sale of infringing goods would be nullified. Section 337 would thus be read to simply write out the entire “indirect infringement” subdivision of § 271 — an inference that seems like a much bigger stretch than that “infringement” under § 337 means all infringement under § 271. Congress was more than capable of referring only to “direct infringement” in § 337 if that’s what it intended.

Much as we would like to see Chevron limited, not every agency case is the place to fight this battle. If we are to have agencies, and we are to have a Chevron doctrine, there will be instances of valid deference to agency interpretations — regardless of how broadly or narrowly Chevron is interpreted. The ITC wasn’t making a power grab in Suprema, nor was its reading of the statute unexpected, inconsistent with its past practice, or expansive.

In short, Suprema doesn’t break any new statutory interpretation ground, nor present a novel question of “deep economic or political significance” akin to the question at issue in King v. Burwell. Like it or not, there will be no roots of an anti-Chevron-deference revolution growing out of Suprema.

As the organizer of this retrospective on Josh Wright’s tenure as FTC Commissioner, I have the (self-conferred) honor of closing out the symposium.

When Josh was confirmed I wrote that:

The FTC will benefit enormously from Josh’s expertise and his error cost approach to antitrust and consumer protection law will be a tremendous asset to the Commission — particularly as it delves further into the regulation of data and privacy. His work is rigorous, empirically grounded, and ever-mindful of the complexities of both business and regulation…. The Commissioners and staff at the FTC will surely… profit from his time there.

Whether others at the Commission have really learned from Josh is an open question, but there’s no doubt that Josh offered an enormous amount from which they could learn. As Tim Muris said, Josh “did not disappoint, having one of the most important and memorable tenures of any non-Chair” at the agency.

Within a month of his arrival at the Commission, in fact, Josh “laid down the cost-benefit-analysis gauntlet” in a little-noticed concurring statement regarding a proposed amendment to the Hart-Scott-Rodino Rules. The technical details of the proposed rule don’t matter for these purposes, but, as Josh noted in his statement, the situation intended to be avoided by the rule had never arisen:

The proposed rulemaking appears to be a solution in search of a problem. The Federal Register notice states that the proposed rules are necessary to prevent the FTC and DOJ from “expend[ing] scarce resources on hypothetical transactions.” Yet, I have not to date been presented with evidence that any of the over 68,000 transactions notified under the HSR rules have required Commission resources to be allocated to a truly hypothetical transaction.

What Josh asked for in his statement was not that the rule be scrapped, but simply that, before adopting the rule, the FTC weigh its costs and benefits.

As I noted at the time:

[I]t is the Commission’s responsibility to ensure that the rules it enacts will actually be beneficial (it is a consumer protection agency, after all). The staff, presumably, did a perfectly fine job writing the rule they were asked to write. Josh’s point is simply that it isn’t clear the rule should be adopted because it isn’t clear that the benefits of doing so would outweigh the costs.

As essentially everyone who has contributed to this symposium has noted, Josh was singularly focused on the rigorous application of the deceptively simple concept that the FTC should ensure that the benefits of any rule or enforcement action it adopts outweigh the costs. The rest, as they say, is commentary.

For Josh, this basic principle should permeate every aspect of the agency, and permeate the way it thinks about everything it does. Only an entirely new mindset can ensure that outcomes, from the most significant enforcement actions to the most trivial rule amendments, actually serve consumers.

While the FTC has a strong tradition of incorporating economic analysis in its antitrust decision-making, its record in using economics in other areas is decidedly mixed, as Berin points out. But even in competition policy, the Commission frequently uses economics — but it’s not clear it entirely understands economics. The approach that others have lauded Josh for is powerful, but it’s also subtle.

Inherent limitations on anyone’s knowledge about the future of technology, business and social norms caution skepticism, as regulators attempt to predict whether any given business conduct will, on net, improve or harm consumer welfare. In fact, a host of factors suggests that even the best-intentioned regulators tend toward overconfidence and the erroneous condemnation of novel conduct that benefits consumers in ways that are difficult for regulators to understand. Coase’s famous admonition in a 1972 paper has been quoted here before (frequently), but bears quoting again:

If an economist finds something – a business practice of one sort or another – 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 very large, and the reliance on a monopoly explanation, frequent.

Simply “knowing” economics, and knowing that it is important to antitrust enforcement, aren’t enough. Reliance on economic formulae and theoretical models alone — to say nothing of “evidence-based” analysis that doesn’t or can’t differentiate between probative and prejudicial facts — doesn’t resolve the key limitations on regulatory decisionmaking that threaten consumer welfare, particularly when it comes to the modern, innovative economy.

As Josh and I have written:

[O]ur theoretical knowledge cannot yet confidently predict the direction of the impact of additional product market competition on innovation, much less the magnitude. Additionally, the multi-dimensional nature of competition implies that the magnitude of these impacts will be important as innovation and other forms of competition will frequently be inversely correlated as they relate to consumer welfare. Thus, weighing the magnitudes of opposing effects will be essential to most policy decisions relating to innovation. Again, at this stage, economic theory does not provide a reliable basis for predicting the conditions under which welfare gains associated with greater product market competition resulting from some regulatory intervention will outweigh losses associated with reduced innovation.

* * *

In sum, the theoretical and empirical literature reveals an undeniably complex interaction between product market competition, patent rules, innovation, and consumer welfare. While these complexities are well understood, in our view, their implications for the debate about the appropriate scale and form of regulation of innovation are not.

Along the most important dimensions, while our knowledge has expanded since 1972, the problem has not disappeared — and it may only have magnified. As Tim Muris noted in 2005,

[A] visitor from Mars who reads only the mathematical IO literature could mistakenly conclude that the U.S. economy is rife with monopoly power…. [Meanwhile, Section 2’s] history has mostly been one of mistaken enforcement.

It may not sound like much, but what is needed, what Josh brought to the agency, and what turns out to be absolutely essential to getting it right, is unflagging awareness of and attention to the institutional, political and microeconomic relationships that shape regulatory institutions and regulatory outcomes.

Regulators must do their best to constantly grapple with uncertainty, problems of operationalizing useful theory, and, perhaps most important, the social losses associated with error costs. It is not (just) technicians that the FTC needs; it’s regulators imbued with the “Economic Way of Thinking.” In short, what is needed, and what Josh brought to the Commission, is humility — the belief that, as Coase also wrote, sometimes the best answer is to “do nothing at all.”

The technocratic model of regulation is inconsistent with the regulatory humility required in the face of fast-changing, unexpected — and immeasurably valuable — technological advance. As Virginia Postrel warns in The Future and Its Enemies:

Technocrats are “for the future,” but only if someone is in charge of making it turn out according to plan. They greet every new idea with a “yes, but,” followed by legislation, regulation, and litigation…. By design, technocrats pick winners, establish standards, and impose a single set of values on the future.

For Josh, the first JD/Econ PhD appointed to the FTC,

economics provides a framework to organize the way I think about issues beyond analyzing the competitive effects in a particular case, including, for example, rulemaking, the various policy issues facing the Commission, and how I weigh evidence relative to the burdens of proof and production. Almost all the decisions I make as a Commissioner are made through the lens of economics and marginal analysis because that is the way I have been taught to think.

A representative example will serve to illuminate the distinction between merely using economics and evidence and understanding them — and their limitations.

In his Nielson/Arbitron dissent Josh wrote:

The Commission thus challenges the proposed transaction based upon what must be acknowledged as a novel theory—that is, that the merger will substantially lessen competition in a market that does not today exist.

[W]e… do not know how the market will evolve, what other potential competitors might exist, and whether and to what extent these competitors might impose competitive constraints upon the parties.

Josh’s straightforward statement of the basis for restraint stands in marked contrast to the majority’s decision to impose antitrust-based limits on economic activity that hasn’t even yet been contemplated. Such conduct is directly at odds with a sensible, evidence-based approach to enforcement, and the economic problems with it are considerable, as Josh also notes:

[I]t is an exceedingly difficult task to predict the competitive effects of a transaction where there is insufficient evidence to reliably answer the[] basic questions upon which proper merger analysis is based.

When the Commission’s antitrust analysis comes unmoored from such fact-based inquiry, tethered tightly to robust economic theory, there is a more significant risk that non-economic considerations, intuition, and policy preferences influence the outcome of cases.

Compare in this regard Josh’s words about Nielsen with Deborah Feinstein’s defense of the majority from such charges:

The Commission based its decision not on crystal-ball gazing about what might happen, but on evidence from the merging firms about what they were doing and from customers about their expectations of those development plans. From this fact-based analysis, the Commission concluded that each company could be considered a likely future entrant, and that the elimination of the future offering of one would likely result in a lessening of competition.

Instead of requiring rigorous economic analysis of the facts, couched in an acute awareness of our necessary ignorance about the future, for Feinstein the FTC fulfilled its obligation in Nielsen by considering the “facts” alone (not economic evidence, mind you, but customer statements and expressions of intent by the parties) and then, at best, casually applying to them the simplistic, outdated structural presumption – the conclusion that increased concentration would lead inexorably to anticompetitive harm. Her implicit claim is that all the Commission needed to know about the future was what the parties thought about what they were doing and what (hardy disinterested) customers thought they were doing. This shouldn’t be nearly enough.

Worst of all, Nielsen was “decided” with a consent order. As Josh wrote, strongly reflecting the essential awareness of the broader institutional environment that he brought to the Commission:

[w]here the Commission has endorsed by way of consent a willingness to challenge transactions where it might not be able to meet its burden of proving harm to competition, and which therefore at best are competitively innocuous, the Commission’s actions may alter private parties’ behavior in a manner that does not enhance consumer welfare.

Obviously in this regard his successful effort to get the Commission to adopt a UMC enforcement policy statement is a most welcome development.

In short, Josh is to be applauded not because he brought economics to the Commission, but because he brought the economic way of thinking. Such a thing is entirely too rare in the modern administrative state. Josh’s tenure at the FTC was relatively short, but he used every moment of it to assiduously advance his singular, and essential, mission. And, to paraphrase the last line of the movie The Right Stuff (it helps to have the rousing film score playing in the background as you read this): “for a brief moment, [Josh Wright] became the greatest [regulator] anyone had ever seen.”

I would like to extend my thanks to everyone who participated in this symposium. The contributions here will stand as a fitting and lasting tribute to Josh and his legacy at the Commission. And, of course, I’d also like to thank Josh for a tenure at the FTC very much worth honoring.

by Richard A. Epstein, Laurence A. Tisch Professor of Law, NYU School of Law

A recent story in the Wall Street Journal described Josh Wright as the “FTC’s most conservative commissioner.” It is a sign of today’s politicized environment that this label is used as a substitute for serious substantive analysis of the particular positions that Wright has taken relative to the other commissioners. The article also noted that he was the Republican commissioner who brokered a deal with the three democratic members to publish a short set of guidelines to deal with the Delphic question of what counts as unlawful methods of competition. Before I had received knowledge that Josh was about to resign, I had posted a piece on Defining Ideas that carried with it the near-oxymoronic title, “When Bureaucrats Do Good.”

I must confess that my initial impression on hearing of the publication of the statement was that it would be more bad news. But I happily I changed course after reading the statement, which is mercifully short, and after having the benefit of the thoughtful dissent of the other Republican Commissioner Maureen Ohlhausen, and of the speech that FTC Chairwoman Edith Ramirez gave in defense of those guidelines at the George Washington Law School.

There are clearly times when short should be regarded as sweet, and this is one of them.  It may well be that there is an iron law that says the longer the document that any government prepares, the worse its content. This short policy statement sets matters in the right direction when it treats unfair methods of competition as a variation on the basic theme of monopoly, and notes that where the antitrust laws do apply, the FTC should be reluctant to exercise its standalone jurisdiction. It is a tribute to Ramirez and Wright that they could come to agree on the statement, so that a set of sound principles has bipartisan support.

It is also welcome that the dissent of Commissioner Ohlhausen does not differ on fundamental orientation but on two questions that I regard as having subordinate importance: do we give public hearings before publishing the statement; and do we provide more illustrations as to how the principle out to be applied. The pressure therefore came from the pro-market side of the political spectrum such that there is now no Commissioner on the FTC who regards Section 5 of the Federal Trade Commission Act as a general warrant to pursue any and all forms of professional mischief.

The contrast of this document with the FCC’s net neutrality principles is too clear to require much comment.

At this point, Josh will return to his position at George Mason University Law School, where he shall resume his distinguished academic career. He regards the publication of this one page statement as the capstone of his career. On that point, I am confident that history will prove him right. Welcome back to the Academy, and thanks for a job well done on the Commission.

Recently, I discussed at this site the Supreme Court’s imposition of takings liability on the U.S. Department of Agriculture (“USDA”), because USDA fined a small raisin grower for refusing to cooperate with the California Raisins Marketing Order – which, stripped of the fancy verbiage, is little more than a government-supervised output limitation cartel.  The California raisin cartel is far from unique.  There are many other USDA cartels (and analogous regulatory schemes) out there, the bitter fruits of anti-consumer and corporatist New Deal economic policy.  On August 14, in Humane Society of the United States v. Thomas J. Vilsack, the U.S. Court of Appeals for the D.C. Circuit, applying standing doctrine, took the knives to a less obviously anticompetitive, but no less pernicious, USDA agricultural order, the “Pork Order,” promulgated pursuant to the infelicitously named Pork Act (7 U.S.C. §§ 4801-19).

The case was filed in federal court by Harvey Dillenburg (a pork producer) and two organizations whose members include pork producers against the National Pork Board, claiming that it misappropriated millions of dollars from a fund for pork promotion into which all pork producers are required by law to contribute for the benefit of a trade association that is funded and controlled by large pork producers.  The district court dismissed the case for lack of standing, but that decision has now been reversed by the D.C. Circuit.  It is to be hoped that upon remand, the district court will take the next step and slaughter the Pork Order, thereby “bringing home the economic liberties bacon.”  Such an outcome would strike at the abuse of governmental processes by well-organized, powerful businesses, one of the worst aspects of crony capitalism.

The D.C. Circuit’s summary description of the case is instructive:

“The National Pork Board [Board] is a quasi-governmental entity responsible for administering a federal regulatory scheme known as the ‘Pork Order[,]’ [which implements] . . . the Pork Act, . . . the purpose of which is to promote pork in the marketplace. . . .  The Board strengthens, maintains, develops, and expands markets for pork and pork products through research and consumer information campaigns. In exchange for the Board’s efforts on behalf of their industry, pork producers pay the Board a special assessment on each hog they import or sell. . . . 

In 2006, the Board, with the approval of the Secretary of the Department of Agriculture, bought four trademarks associated with the slogan Pork:  The Other White Meat . . . from the National Pork Producers Council [Council], an industry trade group, for $60 million.  [Footnote deleted which explains that the USDA Secretary is charged by statute with reviewing the Pork Board’s actions, but that the reviewing court attributes those actions to the Board.]  The payment terms provide that the Board will pay the Council $3 million annually for twenty years. The Board can terminate the payments at any time with one year’s notice, in which case ownership of the phrase reverts back to the Council. Five years after buying the mark, the Board replaced it with a new motto, Pork:  Be Inspired. Now the Board keeps the initial slogan around as a “heritage brand” that it does not feature in its advertising.

The plaintiffs claim that the Board did not buy the slogan for its value as a marketing tool. They allege that the Board used the purchase of the slogan as a means to cut a sweetheart deal with the Council to keep the Council in business and support its lobbying efforts. They maintain that the Board overpaid for the slogan and that the Board’s shift to the Pork: Be Inspired campaign makes the initial slogan all but worthless.  According to the plaintiffs, the purchase of the mark and continued payment for it was and is arbitrary and capricious.  The plaintiffs also argue that the Board’s purchase of the slogan with the purpose of supporting the Council’s lobbying efforts violates the Pork Act and Order’s prohibitions against the Board spending funds to influence legislation.

The plaintiffs sued the Secretary of the Department of Agriculture under the Administrative Procedure Act seeking an order enjoining the Board’s further payments to the Council and directing the Secretary to claw back what payments he can from the deal.  The district court dismissed the plaintiffs’ suit for lack of Article III standing. . . .  The court held that Dillenburg failed to establish an injury in fact fairly traceable to the Board’s actions that is likely to be redressed by a favorable decision. . . .  It also held that the two plaintiff organizations could not establish standing to sue in their own right or on behalf of their pork-producing members. . . .

[W]e reverse and remand [to the district court].  This case involves a concrete and particularized harm caused by an agency’s failure to confer a direct economic benefit on a statutory beneficiary. We also reject the government’s argument that the plaintiffs have failed to exhaust their administrative remedies.  The statute’s provision for administrative review would not offer the plaintiffs adequate relief, and therefore they were not required to pursue it.”

This case is an example of rent-seeking in action, and, in particular, the abuse of regulatory processes to impose disproportionate costs on less-connected rivals (a phenomenon well-documented in public choice analysis of regulation), as further revealed in the D.C. Circuit’s opinion.  The Council, as a private trade organization, could not require all pork producers to join it and pay dues to support institutional advertising and other pork-related promotional activities.  The Council, however, achieved its goal indirectly by establishing and manipulating government regulation.  It successfully lobbied for passage of the Pork Act, proposed the text that ultimately served as foundation for the Pork Order, and used the Board to exercise regulatory authority over all pork producers.  Part of that exercise of regulatory authority involved the Board’s agreement to pay the Council $60 million for “The Other White Meat” mark.  This fee inevitably would be passed on to all pork industry members (including those that were not members of the Council), which are required by force of law to render payments to the Board.

The Board’s regulatory capture by the Council (the “big industry members’” lobby) is apparent, as further revealed in the Court’s opinion:

“Even though the Board paid for the mark’s development, the Council registered the mark in its own name and as its sole owner. . .  The Board and the Council were so enmeshed that, in 1986 when the Board voted to adopt the campaign [to promote the Other White Meat mark] and so committed itself to spend tens of millions of dollars in assessment funds over two decades on the promotion, it did not execute any licensing agreement or fee contract to formalize that arrangement. . . . [USDA’s] Office of Inspector General concluded in a 1999 audit that the Board ‘had relinquished too much authority to its primary contractor, the [Council], and ha[d] placed the [Council] in a position to exert undue influence over Board budgets and grant proposals.’  That history . . . raises a plausible inference that the Board’s purchase was not the product of arm’s length negotiation.

[Moreover], [b]efore the Board entered the . . . [subsequent formal] licensing agreement [for the Other White Meat mark], the Board’s own economist recommended that the Board pay no more than $375,000 annually to license the mark. . . .  [Furthermore], facts plausibly show[] that, whatever its value when the Board purchased it, the [Other White Meat] mark is no longer worth $3 million per year.”

A more compelling judicial account of the manipulation of government authority to achieve the aims of an organized private lobbying group (namely, using government to foist its promotional and licensing costs on the less-well-connected rivals of the lobbying organization’s members) is hard to imagine.

In conclusion, while the Pork Order in and of itself may have only limited economic impact, it is symptomatic of the more general problem of rent-seeking-induced special interest regulation (both federal and state) that, collectively, imposes enormous costs on the American economy.  It is also emblematic of the existence of countless federal government programs for which there is no principled justification in our republic, based on a federal Constitution that establishes limited enumerated powers and focuses on restricting government incursions into individual liberties.  It is to be hoped that the federal courts will keep this in mind and use their full panoply of constitutional tools in empowering private parties to fight cronyist governmental programs.

Yesterday, the International Center for Law & Economics, together with Professor Gus Hurwitz, Nebraska College of Law, and nine other scholars of law and economics, filed an amicus brief in the DC Circuit explaining why the court should vacate the FCC’s 2015 Open Internet Order.

A few key points from ICLE’s brief follow, but you can read a longer summary of the brief here.

If the 2010 Order was a limited incursion into neighboring territory, the 2015 Order represents the outright colonization of a foreign land, extending FCC control over the Internet far beyond what the Telecommunications Act authorizes.

The Commission asserts vast powers — powers that Congress never gave it — not just over broadband but also over the very ‘edge’ providers it claims to be protecting. The court should be very skeptical of the FCC’s claims to pervasive powers over the Internet.

In the 2015 Order, the FCC Invoked Title II, admitted that it was unworkable for the Internet, and then tried to ‘tailor’ the statute to avoid its worst excesses.

That the FCC felt the need for such sweeping forbearance should have indicated to it that it had ‘taken an interpretive wrong turn’ in understanding the statute Congress gave it. Last year, the Supreme Court blocked a similar attempt by the EPA to ‘modernize’ old legislation in a way that gave it expansive new powers. In its landmark UARG decision, the Court made clear that it won’t allow regulatory agencies to rewrite legislation in an effort to retrofit their statutes to their preferred regulatory regimes.

Internet regulation is a question of ‘vast economic and political significance,’ yet the FCC  didn’t even bother to weigh the costs and benefits of its rule. 

FCC Chairman Tom Wheeler never misses an opportunity to talk about the the Internet as ‘the most important network known to Man.’ So why did he and the previous FCC Chairman ignore requests from other commissioners for serious, independent economic analysis of the supposed problem and the best way to address it? Why did the FCC rush to adopt a plan that had the effect of blocking the Federal Trade Commission from applying its consumer protection laws to the Internet? For all the FCC’s talk about protecting consumers, it appears that its real agenda may be simply expanding its own power.

Joining ICLE on the brief are:

  • Richard Epstein (NYU Law)
  • James Huffman (Lewis & Clark Law)
  • Gus Hurwitz (Nebraska Law)
  • Thom Lambert (Missouri Law)
  • Daniel Lyons (Boston College Law)
  • Geoffrey Manne (ICLE)
  • Randy May (Free State Foundation)
  • Jeremy Rabkin (GMU Law)
  • Ronald Rotunda (Chapman Law)
  • Ilya Somin (GMU Law)

Read the brief here, and the summary here.

Read more of ICLE’s work on net neutrality and Title II, including:

  • Highlights from policy and legal comments filed by ICLE and TechFreedom on net neutrality
  • “Regulating the Most Powerful Network Ever,” a scholarly essay by Gus Hurwitz for the Free State Foundation
  • “How to Break the Internet,” an essay by Geoffrey Manne and Ben Sperry, in Reason Magazine
  • “The FCC’s Net Neutrality Victory is Anything But,” an op-ed by Geoffrey Manne, in Wired
  • “The Feds Lost on Net Neutrality, But Won Control of the Internet,” an op-ed by Geoffrey Manne and Berin Szoka in Wired
  • “Net Neutrality’s Hollow Promise to Startups,” an op-ed by Geoffrey Manne and Berin Szoka in Computerworld
  • Letter signed by 32 scholars urging the FTC to caution the FCC against adopting per se net neutrality rules by reclassifying ISPs under Title II
  • The FCC’s Open Internet Roundtables, Policy Approaches, Panel 3, Enhancing Transparency, with Geoffrey Manne​

The Heritage Foundation continues to do path-breaking work on the burden overregulation imposes on the American economy, and to promote comprehensive reform measures to reduce regulatory costs.  Overregulation, unfortunately, is a global problem, and one that is related to the problem of anticompetitive market distortions (ACMDs) – government-supported cronyist restrictions that weaken the competitive process, undermine free trade, slow economic growth, and harm consumers.  Shanker Singham and I have written about the importance of estimating the effects of and tackling ACMDs if international trade liberalization measures are to be successful in promoting economic growth and efficiency.

The key role of tackling ACMDs in spurring economic growth is highlighted by the highly publicized Greek economic crisis.  The Heritage Foundation recently assessed the issues of fiscal profligacy and over-taxation that need to be addressed by Greece.  While those issues are of central importance, Greece will not be able to fulfill its economic potential without also undertaking substantial regulatory reforms and eliminating ACMDs.  In that regard, a 2014 OECD report on competition-distorting rules and provisions in Greece, concluded that the elimination of barriers to competition would lead to increased productivity, stronger economic growth, and job creation.  That report, which focused on regulatory restrictions in just four sectors of the Greek economy (food processing, retail trade, building materials, and tourism), made 329 specific recommendations to mitigate harm to competition.  It estimated that the benefit to the Greek economy of implementing those reforms would be around EUR 5.2 billion – the equivalent of 2.5% of GDP –  due to increased purchasing power for consumers and efficiency gains for companies.  It also stressed that implementing those recommendations would have an even wider impact over time. Extended to all other sectors of the Greek economy (which are also plagued by overregulation and competitive distortions), the welfare gains from Greek regulatory reforms would be far larger.  The OECD’s Competition Assessment Toolkit provides a useful framework that Greece and other reform-minded nations could use to identify harmful regulatory restrictions.

Unfortunately, in Greece and elsewhere, merely identifying the sources of bad regulation is not enough – political will is needed to actually dismantle harmful regulatory barriers and cronyist rules.  As Shanker Singham pointed out yesterday in commenting on the prospects for Greek regulatory reform, “[t]here is enormous wealth locked away in the Greek economy, just as there is in every country, but distortions destroy it.  The Greek competition agency has done excellent work in promoting a more competitive market, but its political masters merely pay lip service to the concept. . . .  The Greeks have offered promises of reform, but very little acceptance of the major structural changes that are needed.”  The United States is not immune to this problem – consider the case of the Export-Import Bank, whose inefficient credit distortionary policies proved impervious to reform, as the Heritage Foundation explained.

What, then, can be done to reduce the burden of overregulation and ACMDs, in Greece, the United States, and other countries?  Consistent with Justice Louis Brandeis’s observation that “sunshine is the best disinfectant,” shining a public spotlight on the problem can, over time, help build public support for dismantling or reforming welfare-inimical restrictions.  In that regard, the Heritage Foundation’s Index of Economic Freedom takes into account “regulatory efficiency,” and, in particular, “the overall burden of regulation as well as the efficiency of government in the regulatory process”, in producing annual ordinal rankings of every nations’ degree of economic freedom.  Public concern has to translate into action to be effective, of course, and thus the Heritage Foundation has promulgated a list of legislative reforms that could help rein in federal regulatory excesses.  Although there is no “silver bullet,” the Heritage Foundation will continue to publicize regulatory overreach and ACMDs, and propose practical solutions to dismantle these harmful distortions.  This is a long-term fight (incentives for government to overregulate and engage in cronyism are not easily curbed), but well worth the candle.

The most welfare-inimical restrictions on competition stem from governmental action, and the Organization for Economic Cooperation and Development’s newly promulgated “Competition Assessment Toolkit, Volume 3: Operational Manual” (“Toolkit 3,” approved by the OECD in late June 2015) provides useful additional guidance on how to evaluate and tackle such harmful market distortions. Toolkit 3 is a very helpful supplement to the second and third volumes of the Competition Assessment Toolkit. Commendably, Toolkit 3 promotes itself generally as a tool that can be employed by well-intentioned governments, rather than merely marketing itself as a manual for advocacy by national competition agencies (which may lack the political clout to sell reforms to other government bureaucracies or to legislators). It is a succinct non-highly-technical document that can be used by a wide range of governments, and applied flexibly, in light of their resource constraints and institutional capacities. Let’s briefly survey Toolkit 3’s key provisions.

Toolkit 3 begins with a “competition checklist” that states that a competition assessment should be undertaken if a regulatory or legislative proposal has any one of four effects: (1) it limits the number or range of suppliers; (2) it limits the ability of suppliers to compete; (3) it reduces the incentive of suppliers to compete; or (4) it limits the choices and information available to consumers. The Toolkit then sets forth basic guidance on competition assessments in seven relatively short, clearly written chapters.

Chapter one begins by explaining that Toolkit 3 “shows how to assess laws, regulations, and policies for their competition effects, and how to revise regulations or policies to make them more procompetitive.” To that end, the chapter introduces the concept of market studies and sectoral reviews, and outlines a six-part process for carrying out competition assessments: (1) identify policies to assess; (2) apply the competition checklist (see above); (3) identify alternative options for achieving a policy objective; (4) select the best option; (5) implement the best option; and (6) review the impacts of an option once it has been implemented.

Chapter two provides general guidance on the selection of public policies for examination, with particular attention to the identification of sectors of the economy, that have the greatest restraints on competition and a major impact on economic output and efficiency.

Chapter three focuses on competition screening through use of threshold questions embodied in the four-part competition checklist. It also provides examples of the sorts of regulations that fall into each category covered by the checklist.

Chapter four sets forth guidance for the examination of potential restrictions that have been flagged for evaluation by the checklist. It provides indicators for deciding whether or not “in-depth analysis” is required, delineates specific considerations that should be brought to bear in conducting an analysis, and provides a detailed example of the steps to be followed in assessing a hypothetical drug patent law (beginning with a preliminary assessment, followed by a detailed analysis, and ending with key findings).

Chapter five centers on identifying the policy options that allow a policymaker to achieve a desired objective with a minimum distortion of competition. It discusses: (1) identifying the purpose of a policy; (2) identifying the competition problems caused by the policy under examination and whether it is necessary to achieve the desired objective; (3) evaluating the technical features of the subject matter being regulated; (4) accounting for features of the broader regulatory environment that have an effect on the market in question, in order to develop alternatives; (5) understanding changes in the business or market environment that have occurred since the last policy implementation; and (6) identifying specific techniques that allow an objective to be achieved with a minimum distortion of competition. The chapter closes by briefly describing various policy approaches for achieving a hypothetical desired reform objective (promotion of generic drug competition).

Chapter six provides guidance on comparing the policy options that have been identified. After summarizing background concepts, it discusses qualitative analysis, quantitative analysis, and the measurement of costs and benefits. The cost-benefits section is particularly thorough, delving into data gathering, techniques of measurement, estimates of values, adjustments to values, and accounting for risk and uncertainty. These tools are then applied to a specific hypothetical involving pharmaceutical regulation, featuring an assessment of the advantages and disadvantages of alternative options.

Chapter seven outlines the steps that should be taken in submitting a recommendation for government action. Those involve: (1) selecting the best policy option; (2) presenting the recommendation to a decision-maker; (3) drafting a regulation that is needed to effectuate the desired policy option; (4) obtaining final approval; and (5) implementing the regulation. The chapter closes by applying this framework to hypothetical regulations.

Chapter 8 discusses the performance of ex post evaluations of competition assessments, in order to determine whether the option chosen following the review process had the anticipated effects and was most appropriate. Four examples of ex post evaluations are summarized.

Toolkit 3 closes with a brief annex that describes mathematically and graphically the consumer benefits that arise when moving from a restrictive market equilibrium to a competitive equilibrium.

In sum, the release of Toolkit 3 is best seen as one more small step forward in the long-term fight against state-managed regulatory capitalism and cronyism, on a par with increased attention to advocacy initiatives within the International Competition Network and growing World Bank efforts to highlight the welfare harm due to governmental regulatory impediments. Although anticompetitive government market distortions will remain a huge problem for the foreseeable future, at least international organizations are starting to acknowledge their severity and to provide conceptual tools for combatting them. Now it is up to free market proponents to work in the trenches to secure the political changes needed to bring such distortions – and their rent-seeking advocates – to heel. This is a long-term fight, but well worth the candle.

Today, in Michigan v. EPA, a five-Justice Supreme Court majority (Antonin Scalia, joined by Chief Justice John Roberts, and Justices Anthony Kennedy, Clarence Thomas, and Samuel Alito, with Thomas issuing a separate concurrence) held that the Clean Air Act requires the Environmental Protection Agency (EPA) to consider costs, including the cost of compliance, when deciding whether to regulate hazardous air pollutants emitted by power plants.  The Clean Air Act, 42 U. S. C. §7412, authorizes the EPA to regulate emissions of hazardous air pollutants from certain stationary sources, such as refineries and factories.  The EPA may, however, regulate power plants under this program only if it concludes that such regulation is “appropriate and necessary” after studying hazards to public health posed by power-plant emissions, 42 U.S.C. §7412(n)(1)(A).  EPA determined that it was “appropriate and necessary” to regulate oil- and coal-fired power plants, because the plants’ emissions pose risks to public health and the environment and because controls capable of reducing these emissions were available.  (The EPA contended that its regulations would have ancillary benefits (including cutting power plants’ emissions of  particulate matter and sulfur dioxide) not covered by the hazardous air pollutants program, but conceded that its estimate of benefits “played no role” in its finding that regulation was “appropriate and necessary.”)  The EPA refused to consider costs when deciding to regulate, even though it estimated that the cost of its regulations to power plants would be $9.6 billion a year, but the quantifiable benefits from the resulting reduction in hazardous-air-pollutant emissions would be $4 to $6 million a year.  Twenty-three states challenged the EPA’s refusal to consider cost, but the U.S. Court of Appeals for the D.C. Circuit upheld the agency’s decision not to consider costs at the outset.  In reversing the D.C. Circuit, the Court stressed that EPA strayed well beyond the bounds of reasonable interpretation in concluding that cost is not a factor relevant to the appropriateness of regulating power plants.  Read naturally against the backdrop of established administrative law, the phrase “appropriate and necessary” plainly encompasses cost, according to the Court.

In a concurring opinion, Justice Thomas opined that this case “raises serious questions about the constitutionality of our broader practice of deferring to agency interpretations of federal statutes.”  Justice Elena Kagan, joined by Justices Ruth Bader Ginsburg, Stephen Breyer, and Sonya Sotomayor, dissented, reasoning that EPA “acted well within its authority in declining to consider costs at the [beginning] . . . of the regulatory process given that it would do so in every round thereafter.”

Although the Supreme Court’s holding merits praise, it is inherently limited in scope, and should not be expected to significantly constrain regulatory overreach, whether by the EPA or by other agencies.  First, in remanding the case, the Court did not opine on the precise manner in which costs and benefits should be evaluated, potentially leaving EPA broad latitude to try to reach its desired regulatory result with a bit of “cost-benefit” wordsmithing.  Such a result would not be surprising, given that “[t]he U.S. Government has a strong tendency to overregulate.  More specifically, administrative agencies such as EPA, whose staffs are dominated by regulatorily-minded permanent bureaucrats, will have every incentive to skew judicially-required “cost assessments” to justify their actions – based on, for example, “false assumptions and linkages, black-box computer models, secretive collusion with activist groups, outright deception, and supposedly ‘scientific’ reports whose shady data and methodologies the agency refuses to share with industries, citizens or even Congress.”  Since, as a practical matter, appellate courts have neither the resources nor the capacity to sort out legitimate from illegitimate agency claims that regulatory programs truly meet cost-benefit standards, it would be naïve to believe that the Court’s majority opinion will be able to do much to rein in the federal regulatory behemoth.

What, then, is the solution?  The concern that federal administrative agencies are being allowed to arrogate to themselves inherently executive and judicial functions, a theme previously stressed by Justice Thomas, has not led other justices to call for wide-scale judicial nullification or limitation of expansive agency regulatory findings.  Absent an unexpected Executive Branch epiphany, then, the best bet for reform lies primarily in congressional action.

What sort of congressional action?  The Heritage Foundation has described actions needed to help stem the tide of overregulation:  (1) require congressional approval of new major regulations promulgated by agencies; (2) establish a sunset date for federal regulations; (3) subject “independent” agencies to executive branch regulatory review; and (4) develop a congressional regulatory analysis capability.  Legislative proposals such as the REINS Act (Regulations from the Executive in Need of Scrutiny Act of 2015), would meet the first objective, while other discrete measures could advance the other three goals.  Public choice considerations suggest that these reforms will not be easily achieved (beneficiaries of the intrusive regulatory status quo may be expected to vigorously oppose reform), but they nevertheless should be pursued posthaste.

Today, in Horne v. Department of Agriculture, the U.S. Supreme Court held that the Fifth Amendment requires that the Government pay just compensation when it takes personal property, just as when it takes real property, and that the Government cannot make raisin growers relinquish their property without just compensation as a condition of selling their raisins in interstate commerce. This decision represents a major victory for economic liberty, but it is at best the first step in the reining in of anticompetitive cartel-like government regulation by government. (See my previous discussion of this matter at Truth on the Market here and a more detailed discussion of today’s decision here.) A capsule summary of the Court’s holding follows.

Most American raisins are grown in California. Under a United States Department of Agriculture Raisin Marketing Order, California raisin growers must give a percentage of their crop to a Raisin Administrative Committee (a government entity largely comprised of raisin producers appointed by the Secretary of Agriculture) to sell, allocate, or dispose of, and the government sets the compensation price that growers are paid for these “reserved” raisins. After selling the reserved raisins and deducting expenses, the Committee returns any net proceeds to the growers. The Hornes were assessed a fine of $480,000 plus a $200,000 civil penalty for refusing to set aside raisins for the government in 2002. The Hornes sued in court, arguing that the reserve requirement violated the Fifth Amendment Takings Clause. The Ninth Circuit rejected the Hornes’ claim that this was a per se taking, because personal property is entitled to less protection than private property, and concluded rather that this should be treated as a regulatory taking, such as a government condition on the grant of a land use permit. The Supreme Court reversed, holding that neither the text nor the history of the Takings Clause suggests that appropriation of personal property is different from appropriation of real property. The Court also held that the government may not avoid its categorical duty to pay just compensation by reserving to the property owner a contingent interest in the property. The Court further held that in this case, the government mandate to surrender property as a condition to engage in commerce effects a per se taking, noting that selling raisins in interstate commerce is “not a special governmental benefit that the Government may hold hostage, to be ransomed by the waiver of constitutional protection.” The Court majority determined that the case should not be remanded to the Ninth Circuit to calculate the amount of just compensation, because the government already did so when it fined the Hornes $480,000, the fair market value of the raisins.

The Horne decision is a victory for economic freedom and the right of individuals not to participate in government cartel schemes that harm the public interest. Unfortunately, however, it is a limited one. As the dissent by Justice Sotomayor indicates, “the Government . . . can permissibly achieve its market control goals by imposing a quota without offering raisin producers a way of reaping any return whatsoever on the raisins they cannot sell.” In short, today’s holding turns entirely on the conclusion that the raisin marketing order involves a “physical taking” of raisins. A more straightforward regulatory scheme under which the federal government directly limited production by raisin growers (much as the government did to a small wheat farmer in Wickard v. Filburn) likely would pass constitutional muster under modern Commerce Clause jurisprudence.

Thus, if it is truly interested in benefiting the American public and ferreting out special interest favoritism in agriculture, Congress should give serious consideration to prohibiting far more than production limitations in agricultural marketing orders. More generally, it should consider legislation to bar any regulatory restrictions that have the effect of limiting the freedom of individual farmers to grow and sell as much of their crop as they please. Such a rule would promote general free market competition, to the benefit of American consumers and the American economy.

Today, in Kimble v. Marvel Entertainment, a case involving the technology underlying the Spider-Man Web-Blaster, the Supreme Court invoked stare decisis to uphold an old precedent based on bad economics. In so doing, the Court spun a tangled web of formalism that trapped economic common sense within it, forgetting that, as Spider-Man was warned in 1962, “with great power there must also come – great responsibility.”

In 1990, Stephen Kimble obtained a patent on a toy that allows children (and young-at-heart adults) to role-play as “a spider person” by shooting webs—really, pressurized foam string—“from the palm of [the] hand.” Marvel Entertainment made and sold a “Web-Blaster” toy based on Kimble’s invention, without remunerating him. Kimble sued Marvel for patent infringement in 1997, and the parties settled, with Marvel agreeing to buy Kimble’s patent for a lump sum (roughly a half-million dollars) plus a 3% royalty on future sales, with no end date set for the payment of royalties.

Marvel subsequently sought a declaratory judgment in federal district court confirming that it could stop paying Kimble royalties after the patent’s expiration date. The district court granted relief, the Ninth Circuit Court of Appeals affirmed, and the Supreme Court affirmed the Ninth Circuit. In an opinion by Justice Kagan, joined by Justices Scalia, Kennedy, Ginsburg, Breyer, and Sotomayor, the Court held that a patentee cannot continue to receive royalties for sales made after his patent expires. Invoking stare decisis, the Court reaffirmed Brulotte v. Thys (1964), which held that a patent licensing agreement that provided for the payment of royalties accruing after the patent’s expiration was illegal per se, because it extended the patent monopoly beyond its statutory time period. The Kimble Court stressed that stare decisis is “the preferred course,” and noted that though the Brulotte rule may prevent some parties from entering into deals they desire, parties can often find ways to achieve similar outcomes.

Justice Alito, joined by Chief Justice Roberts and Justice Thomas, dissented, arguing that Brulotte is a “baseless and damaging precedent” that interferes with the ability of parties to negotiate licensing agreements that reflect the true value of a patent. More specifically:

“There are . . . good reasons why parties sometimes prefer post-expiration royalties over upfront fees, and why such arrangements have pro-competitive effects. Patent holders and licensees are often unsure whether a patented idea will yield significant economic value, and it often takes years to monetize an innovation. In those circumstances, deferred royalty agreements are economically efficient. They encourage innovators, like universities, hospitals, and other institutions, to invest in research that might not yield marketable products until decades down the line. . . . And they allow producers to hedge their bets and develop more products by spreading licensing fees over longer periods. . . . By prohibiting these arrangements, Brulotte erects an obstacle to efficient patent use. In patent law and other areas, we have abandoned per se rules with similarly disruptive effects. . . . [T]he need to avoid Brulotte is an economic inefficiency in itself. . . . And the suggested alternatives do not provide the same benefits as post-expiration royalty agreements. . . . The sort of agreements that Brulotte prohibits would allow licensees to spread their costs, while also allowing patent holders to capitalize on slow-developing inventions.”

Furthermore, the Supreme Court was willing to overturn a nearly century-old antitrust precedent that absolutely barred resale price maintenance in the Leegin case, despite the fact that the precedent was extremely well know (much better known than the Brulotte rule) and had prompted a vast array of contractual workarounds. Given the seemingly greater weight of the Leegin precedent, why was stare decisis set aside in Leegin, but not in Kimble? The Kimble majority’s argument that stare decisis should weigh more heavily in patent than in antitrust because, unlike the antitrust laws, “the patent laws do not turn over exceptional law-shaping authority to the courts”, is unconvincing. As the dissent explains:

“[T]his distinction is unwarranted. We have been more willing to reexamine antitrust precedents because they have attributes of common-law decisions. I see no reason why the same approach should not apply where the precedent at issue, while purporting to apply a statute, is actually based on policy concerns. Indeed, we should be even more willing to reconsider such a precedent because the role implicitly assigned to the federal courts under the Sherman [Antitrust] Act has no parallel in Patent Act cases.”

Stare decisis undoubtedly promotes predictability and the rule of law and, relatedly, institutional stability and efficiency – considerations that go to the costs of administering the legal system and of formulating private conduct in light of prior judicial precedents. The cost-based efficiency considerations underlying applying stare decisis to any particular rule, must, however, be weighed against the net economic benefits associated with abandonment of that rule. The dissent in Kimble did this, but the majority opinion regrettably did not.

In sum, let us hope that in the future the Court keeps in mind its prior advice, cited in Justice Alito’s dissent, that “stare decisis is not an ‘inexorable command’,” and that “[r]evisiting precedent is particularly appropriate where . . . a departure would not upset expectations, the precedent consists of a judge-made rule . . . , and experience has pointed up the precedent’s shortcomings.”