It’s been six weeks since drug maker Allergan announced that it had assigned to the Saint Regis Mohawk Tribe the patents on Restasis, an Allergan drug challenged both in IPR proceedings and in Hatch-Waxman proceedings in federal district court.  The unorthodox agreement was intended to shield the patents from IPR proceedings (and thus restrict the challenge to district court) as the Mohawks would seek to dismiss the IPR proceedings based on the tribe’s sovereign immunity.  Although Allergan  suffered a setback last week when the federal court invalidated the Restasis patents and, in dicta, expressed concern about the Allergan/Mohawk arrangement, several other entities are following Allergan’s lead and assigning patents to sovereigns in hopes of avoiding IPR proceedings.

As an example, in August, SRC Labs assigned about 40 computer technology patents to the Saint Regis Mohawk Tribe.  Last week, the tribe, with SRC as co-plaintiff, filed lawsuits against Microsoft and Amazon for infringement of its data processing patents; the assignment of the SRC patents to the tribe could prevent a counter-challenge from Microsoft and Amazon in IPR proceedings.  Similarly, Prowire LLC, who has sued Apple for infringement, has assigned the patent in question to MEC Resources, a company affiliated with three tribes in North Dakota.  And state universities (whom the PTAB considers to be arms of the sovereign states, and thus immune to IPR challenges) are in discussions with lawyers about offering their sovereign immunity to patent owners as a way to shield patents in IPR proceedings.

These arrangements that attempt to avoid the IPR process and force patent challenges into federal courts are no surprise given the current unbalance in the IPR system.  Critical differences exist between IPR proceedings and Hatch-Waxman litigation that have created a significant deviation in patent invalidation rates under the two pathways; compared to district court challenges, patents are twice as likely to be found invalid in IPR challenges.

The PTAB applies a lower standard of proof for invalidity in IPR proceedings than do federal courts in Hatch-Waxman proceedings. In federal court, patents are presumed valid and challengers must prove each patent claim invalid by “clear and convincing evidence.” In IPR proceedings, no such presumption of validity applies and challengers must only prove patent claims invalid by the “preponderance of the evidence.” In addition to the lower burden, it is also easier for challengers to meet the standard of proof in IPR proceedings.  In federal court, patent claims are construed according to their “ordinary and customary meaning” to a person of ordinary skill in the art.  In contrast, the PTAB uses the more lenient “broadest reasonable interpretation” standard; this more lenient standard can result in the PTAB interpreting patent claims as “claiming too much” (using their broader standard), resulting in the invalidation of more patents.

Moreover, whereas patent challengers in district court must establish sufficient Article III standing, IPR proceedings do not have a standing requirement.  This has given rise to “reverse patent trolling,” in which entities that are not litigation targets, or even participants in the same industry, threaten to file an IPR petition challenging the validity of a patent unless the patent holder agrees to specific pre-filing settlement demands.  The lack of a standing requirement has also led to the  exploitation of the IPR process by entities that would never be granted standing in traditional patent litigation—hedge funds betting against a company by filing an IPR challenge in hopes of crashing the stock and profiting from the bet.

Finally, patent owners are often forced into duplicative litigation in both IPR proceedings and federal court litigation, leading to persistent uncertainty about the validity of their patents.  Many patent challengers that are unsuccessful in invalidating a patent in district court may pursue subsequent IPR proceedings challenging the same patent, essentially giving patent challengers “two bites at the apple.”  And if the challenger prevails in the IPR proceedings (which is easier to do given the lower standard of proof and broader claim construction standard), the PTAB’s decision to invalidate a patent can often “undo” a prior district court decision.  Further, although both district court judgments and PTAB decisions are appealable to the Federal Circuit, the court applies a more deferential standard of review to PTAB decisions, increasing the likelihood that they will be upheld compared to the district court decision.

Courts are increasingly recognizing that certain PTAB practices are biased against patent owners, and, in some cases, violations of underlying law.  The U.S. Supreme Court in Cuozzo Speed Technologies v. Lee concluded that the broadest reasonable interpretation claim construction standard in IPR “increases the possibility that the examiner will find the claim too broad (and deny it)” and that the different claim construction standards in PTAB trials and federal court “may produce inconsistent results and cause added confusion.”  However, the Court concluded that only Congress could mandate a different standard.  Earlier this month, in Aqua Products, Inc. v. Matal, the Federal Circuit held that “[d]espite repeated recognition of the importance of the patent owner’s right to amend [patent claims] during IPR proceedings— by Congress, courts, and the PTO alike—patent owners largely have been prevented from amending claims in the context of IPRs.”   And the Supreme Court has agreed to hear Oil States Energy Services v. Greene’s Energy Group, which questions whether IPR proceedings are even constitutional because they extinguish private property rights through a non-Article III forum without a jury. 

As Courts and lawmakers continue to question the legality and wisdom of IPR to review pharmaceutical patents, they should remember that the relationship between drug companies and patients resembles a social contract. Under this social contract, patients have the right to reasonably-priced, innovative drugs and sufficient access to alternative drug choices, while drug companies have the right to earn profits that compensate for the risk inherent in developing new products and to a stable environment that gives the companies the incentive and ability to innovate.  This social contract requires a balancing of prices (not too high to gouge consumers but not too low to insufficiently compensate drug companies), competition law (not so lenient that it ignores anticompetitive behavior that restricts patients’ access to alternative drugs, but not so strict that it prevents companies from intensely competing for profits), and most importantly in the context of IPR, patent law (not so weak that it fails to incentivize innovation and drug development, but not so strong that it enables drug companies to monopolize the market for an unreasonable amount of time).  The unbalanced IPR process threatens this balance by creating significant uncertainty in pharmaceutical intellectual property rights.  Uncertain patent rights will lead to less innovation in the pharmaceutical industry because drug companies will not spend the billions of dollars it typically costs to bring a new drug to market when they cannot be certain if the patents for that drug can withstand IPR proceedings that are clearly stacked against them.  Indeed, last week former Federal Circuit Chief Judge Paul Redmond Michel acknowledged that IPR has contributed to “hobbling” our nation’s patent system, “discourag[ing] investment, R&D and commercialization.” And if IPR causes drug innovation to decline, a significant body of research predicts that consumers’ health outcomes will suffer as a result.

In her distinguished tenure as a Commissioner and as Acting Chairman of the FTC, Maureen Ohlhausen has done an outstanding job in explaining the tie between robust patent protection and economic growth and innovation (see, for example, her Harvard Journal of Law and Technology article, here).  Her latest public pronouncement on this topic, an October 13 speech entitled “Strong Patent Rights, Strong Economy,” also makes a highly valuable contribution to the patent policy debate.  Ohlhausen’s speech centers on two key points:  “First, strong patent rights are crucial to economic success.  And, second, economically grounded analysis will reveal the right path through thickets of IP [intellectual property] skepticism.”  Ohlhausen concludes with a reaffirmation of the importance of having the United States lead by example on the world stage in defending strong patent rights:

Patents have been at the heart of US innovation since the founding of our country, and respect for patent rights is fundamental to advance innovation.  The United States is more technologically innovative than any other country in the world.  This reality reflects, in part, the property rights that the United States government grants to inventors.  Still, foreign counterparts take or allow the taking of American proprietary technologies without due payment.  For example, emerging competition regimes view “unfairly high royalties” as illegal under antitrust law.  The FTC’s recent policy work offers an important counterweight to this approach, illustrating the important role that patents play in promoting innovation and benefiting consumers.     

In closing, while we may live in an age of patent skepticism, there is hope. Criticism of IP rights frequently does not hold up upon closer examination. Rather, empirical research favors the close tie between strong IP rights and R&D.  This is not to say that changes to the patent system are always unwarranted.  Rather, the key to addressing the U.S. patent system lies in incremental adjustment where necessary based on a firm empirical foundation.  The U.S. economy stands as a shining reminder of everything that American innovation policy has achieved – and intellectual property rights, and patents, are the important cornerstones of those achievements.

Ohlhausen’s remarks are, as always, thoughtful and well worth studying.

Yesterday Learfield and IMG College inked their recently announced merger. Since the negotiations were made public several weeks ago, the deal has garnered some wild speculation and potentially negative attention. Now that the merger has been announced, it’s bound to attract even more attention and conjecture.

On the field of competition, however, the market realities that support the merger’s approval are compelling. And, more importantly, the features of this merger provide critical lessons on market definition, barriers to entry, and other aspects of antitrust law related to two-sided and advertising markets that can be applied to numerous matters vexing competition commentators.

First, some background

Learfield and IMG specialize in managing multimedia rights (MMRs) for intercollegiate sports. They are, in effect, classic advertising intermediaries, facilitating the monetization by colleges of radio broadcast advertising and billboard, program, and scoreboard space during games (among other things), and the purchase by advertisers of access to these valuable outlets.

Although these transactions can certainly be (and very often are) entered into by colleges and advertisers directly, firms like Learfield and IMG allow colleges to outsource the process — as one firm’s tag line puts it, “We Work | You Play.” Most important, by bringing multiple schools’ MMRs under one roof, these firms can reduce the transaction costs borne by advertisers in accessing multiple outlets as part of a broad-based marketing plan.

Media rights and branding are a notable source of revenue for collegiate athletic departments: on average, they account for about 3% of these revenues. While they tend to pale in comparison to TV rights, ticket sales, and fundraising, for major programs, MMRs may be the next most important revenue source after these.

Many collegiate programs retain some or all of their multimedia rights and use in-house resources to market them. In some cases schools license MMRs through their athletic conference. In other cases, schools ink deals to outsource their MMRs to third parties, such as Learfield, IMG, JMI Sports, Outfront Media, and Fox Sports, among several others. A few schools even use professional sports teams to manage their MMRs (the owner of the Red Sox manages Boston College’s MMRs, for example).

Schools switch among MMR managers with some regularity, and, in most cases apparently, not among the merging parties. Michigan State, for example, was well known for handling its MMRs in-house. But in 2016 the school entered into a 15-year deal with Fox Sports, estimated at minimum guaranteed $150 million. In 2014 Arizona State terminated its MMR deal with IMG and took it MMRs in-house. Then, in 2016, the Sun Devils entered into a first-of-its-kind arrangement with the Pac 12 in which the school manages and sells its own marketing and media rights while the conference handles core business functions for the sales and marketing team (like payroll, accounting, human resources, and employee benefits). The most successful new entrant on the block, JMI Sports, won Kentucky, Clemson, and the University of Pennsylvania from Learfield or IMG. Outfront Media was spun off from CBS in 2014 and has become one of the strongest MMR intermediary competitors, handling some of the biggest names in college sports, including LSU, Maryland, and Virginia. All told, eight recent national Division I champions are served by MMR managers other than IMG and Learfield.

The supposed problem

As noted above, the most obvious pro-competitive benefit of the merger is in the reduction in transaction costs for firms looking to advertise in multiple markets. But, in order to confer that benefit (which, of course, also benefits the schools, whose marketing properties become easier to access), that also means a dreaded increase in size, measured by number of schools’ MMRs managed. So is this cause for concern?

Jason Belzer, a professor at Rutgers University and founder of sports consulting firm, GAME, Inc., has said that the merger will create a juggernaut — yes, “a massive inexorable force… that crushes whatever is in its path” — that is likely to invite antitrust scrutiny. The New York Times opines that the deal will allow Learfield to “tighten its grip — for nearly total control — on this niche but robust market,” “surely” attracting antitrust scrutiny. But these assessments seem dramatically overblown, and insufficiently grounded in the dynamics of the market.

Belzer’s concerns seem to be merely the size of the merging parties — again, measured by the number of schools’ rights they manage — and speculation that the merger would bring to an end “any” opportunity for entry by a “major” competitor. These are misguided concerns.

To begin, the focus on the potential entry of a “major” competitor is an odd standard that ignores the actual and potential entry of many smaller competitors that are able to win some of the most prestigious and biggest schools. In fact, many in the industry argue — rightly — that there are few economies of scale for colleges. Most of these firms’ employees are dedicated to a particular school and those costs must be incurred for each school, no matter the number, and borne by new entrants and incumbents alike. That means a small firm can profitably compete in the same market as larger firms — even “juggernauts.” Indeed, every college that brings MMR management in-house is, in fact, an entrant — and there are some big schools in big conferences that manage their MMRs in-house.

The demonstrated entry of new competitors and the transitions of schools from one provider to another or to in-house MMR management indicate that no competitor has any measurable market power that can disadvantage schools or advertisers.

Indeed, from the perspective of the school, the true relevant market is no broader than each school’s own rights. Even after the merger there will be at least five significant firms competing for those rights, not to mention each school’s conference, new entrants, and the school itself.

The two-sided market that isn’t really two-sided

Standard antitrust analysis, of course, focuses on consumer benefits: Will the merger make consumers better off (or no worse off)? But too often casual antitrust analysis of two-sided markets trips up on identifying just who the consumer is — and what the relevant market is. For a shopping mall, is the consumer the retailer or the shopper? For newspapers and search engines, is the customer the advertiser or the reader? For intercollegiate sports multimedia rights licensing, is the consumer the college or the advertiser?

Media coverage of the anticipated IMG/Learfield merger largely ignores advertisers as consumers and focuses almost exclusively on the the schools’ relationship with intermediaries — as purchasers of marketing services, rather than sellers of advertising space.

Although it’s difficult to identify the source of this odd bias, it seems to be based on the notion that, while corporations like Coca-Cola and General Motors have some sort of countervailing market power against marketing intermediaries, universities don’t. With advertisers out of the picture, media coverage suggests that, somehow, schools may be worse off if the merger were to proceed. But missing from this assessment are two crucial facts that undermine the story: First, schools actually have enormous market power; and, second, schools compete in the business of MMR management.

This second factor suggests, in fact, that sometimes there may be nothing special about two-sided markets sufficient to give rise to a unique style of antitrust analysis.

Much of the antitrust confusion seems to be based on confusion over the behavior of two-sided markets. A two-sided market is one in which two sets of actors interact through an intermediary or platform, which, in turn, facilitates the transactions, often enabling transactions to take place that otherwise would be too expensive absent the platform. A shopping mall is a two-sided market where shoppers can find their preferred stores. Stores would operate without the platform, but perhaps not as many, and not as efficiently. Newspapers, search engines, and other online platforms are two-sided markets that bring together advertisers and eyeballs that might not otherwise find each other absent the platform. And a collegiate multimedia rights management firms is a two-sided market where colleges that want to sell advertising space get together with firms that want to advertise their goods and services.

Yet there is nothing particularly “transformative” about the outsourcing of MMR management. Credit cards, for example are qualitatively different than in-store credit operations. They are two-sided platforms that substitute for in-house operations — but they also create an entirely new product and product market. MMR marketing firms do lower some transaction costs and reduce risk for collegiate sports marketing, but the product is not substantially changed — in fact, schools must have the knowledge and personnel to assess and enter into the initial sale of MMRs to an intermediary and, because of ongoing revenue-sharing and coordination with the intermediary, must devote ongoing resources even after the initial sale.

But will a merged entity have “too much” power? Imagine if a single firm owned the MMRs for nearly all intercollegiate competitors. How would it be able to exercise its supposed market power? Because each deal is negotiated separately, and, other than some mundane, fixed back-office expenses, the costs of rights management must be incurred whether a firm negotiates one deal or 100, there are no substantial economies of scale in the purchasing of MMRs. As a result, the existence of deals with other schools won’t automatically translate into better deals with subsequent schools.

Now, imagine if one school retained its own MMRs, but decided it might want to license them to an intermediary. Does it face anticompetitive market conditions if there is only a single provider of such services? To begin with, there is never only a single provider, as each school can provide the services in-house. This is not even the traditional monopoly constraint of simply “not buying,” which makes up the textbook “deadweight loss” from monopoly: In this case “not buying” does not mean going without; it simply means providing for oneself.

More importantly, because the school has a monopoly on access to its own marketing rights (to say nothing of access to its own physical facilities) unless and until it licenses them, its own bargaining power is largely independent of an intermediary’s access to other schools’ rights. If it were otherwise, each school would face anticompetitive market conditions simply by virtue of other schools’ owning their own rights!

It is possible that a larger, older firm will have more expertise and will be better able to negotiate deals with other schools — i.e., it will reap the benefits of learning by doing. But the returns to learning by doing derive from the ability to offer higher-quality/lower-cost services over time — which are a source of economic benefit, not cost. At the same time, the bulk of the benefits of experience may be gained over time with even a single set of MMRs, given the ever-varying range of circumstances even a single school will create: There may be little additional benefit (and, to be sure, there is additional cost) from managing multiple schools’ MMRs. And whatever benefits specialized firms offer, they also come with agency costs, and an intermediary’s specialized knowledge about marketing MMRs may or may not outweigh a school’s own specialized knowledge about the nuances of its particular circumstances. Moreover, because of knowledge spillovers and employee turnover this marketing expertise is actually widely distributed; not surprisingly, JMI Sports’ MMR unit, one of the most recent and successful entrants into the business was started by a former employee of IMG. Several other firms started out the same way.

The right way to begin thinking about the issue is this: Imagine if MMR intermediaries didn’t exist — what would happen? In this case, the answer is readily apparent because, for a significant number of schools (about 37% of Division I schools, in fact) MMR licensing is handled in-house, without the use of intermediaries. These schools do, in fact, attract advertisers, and there is little indication that they earn less net profit for going it alone. Schools with larger audiences, better targeted to certain advertisers’ products, command higher prices. Each school enjoys an effective monopoly over advertising channels around its own games, and each has bargaining power derived from its particular attractiveness to particular advertisers.

In effect, each school faces a number of possible options for MMR monetization — most notably a) up-front contracting to an intermediary, which then absorbs the risk, expense, and possible up-side of ongoing licensing to advertisers, or b) direct, ongoing licensing to advertisers. The presence of the intermediary doesn’t appreciably change the market, nor the relative bargaining power of sellers (schools) and buyers (advertisers) of advertising space any more than the presence of temp firms transforms the fundamental relationship between employers and potential part-time employees.

In making their decisions, schools always have the option of taking their MMR management in-house. In facing competing bids from firms such as IMG or Learfield, from their own conferences, or from professional sports teams, the opening bid, in a sense, comes from the school itself. Even the biggest intermediary in the industry must offer the school a deal that is at least as good as managing the MMRs in-house.

The true relevant market: Advertising

According to economist Andy Schwarz, if the relevant market is “college-based marketing services to Power 5 schools, the antitrust authorities may have more concerns than if it’s marketing services in sports.” But this entirely misses the real market exchange here. Sure, marketing services are purchased by schools, but their value to the schools is independent of the number of other schools an intermediary also markets.

Advertisers always have the option of deploying their ad dollars elsewhere. If Coca-Cola wants to advertise on Auburn’s stadium video board, it’s because Auburn’s video board is a profitable outlet for advertising, not because the Auburn ads are bundled with advertising at dozens of other schools (although that bundling may reduce the total cost of advertising on Auburn’s scoreboard as well as other outlets). Similarly, Auburn is seeking the highest bidder for space on its video board. It does not matter to Auburn that the University of Georgia is using the same intermediary to sell ads on its stadium video board.

The willingness of purchasers — say, Coca-Cola or Toyota — to pay for collegiate multimedia advertising is a function of the school that licenses it (net transaction costs) — and MMR agents like IMG and Learfield commit substantial guaranteed sums and a share of any additional profits for the rights to sell that advertising: For example, IMG recently agreed to pay $150 million over 10 years to renew its MMR contract at UCLA. But this is the value of a particular, niche form of advertising, determined within the context of the broader advertising market. How much pricing power over scoreboard advertising does any university, or even any group of universities under the umbrella of an intermediary have, in a world in which Coke and Toyota can advertise virtually anywhere — including during commercial breaks in televised intercollegiate games, which are licensed separately from the MMRs licensed by companies like IMG and Learfield?

There is, in other words, a hard ceiling on what intermediaries can charge schools for MMR marketing services: The schools’ own cost of operating a comparable program in-house.

To be sure, for advertisers, large MMR marketing firms lower the transaction costs of buying advertising space across a range of schools, presumably increasing demand for intercollegiate sports advertising and sponsorship. But sponsors and advertisers have a wide range of options for spending their marketing dollars. Intercollegiate sports MMRs are a small slice of the sports advertising market, which, in turn, is a small slice of the total advertising market. Even if one were to incorrectly describe the combined entity as a “juggernaut” in intercollegiate sports, the MMR rights it sells would still be a flyspeck in the broader market of multimedia advertising.

According to one calculation (by MoffettNathanson), total ad spending in the U.S. was about $191 billion in 2016 (Pew Research Center estimates total ad revenue at $240 billion) and the global advertising market was estimated to be worth about $493 billion. The intercollegiate MMR segment represents a minuscule fraction of that. According to Jason Belzer, “[a]t the time of its sale to WME in 2013, IMG College’s yearly revenue was nearly $500 million….” Another source puts it at $375 million. Either way, it’s a fraction of one percent of the total market, and even combined with Learfield it will remain a minuscule fraction. Even if one were to define a far narrower sports sponsorship market, which a Price Waterhouse estimate puts at around $16 billion, the combined companies would still have a tiny market share.

As sellers of MMRs, colleges are competing with each other, professional sports such as the NFL and NBA, and with non-sports marketing opportunities. And it’s a huge and competitive market.

Barriers to entry

While capital requirements and the presence of long-term contracts may present challenges to potential entrants into the business of marketing MMRs, these potential entrants face virtually no barriers that are not, or have not been, faced by incumbent providers. In this context, one should keep in mind two factors. First, barriers to entry are properly defined as costs incurred by new entrants that are not incurred by incumbents (no matter what Joe Bain says; Stigler always wins this dispute…). Every firm must bear the cost of negotiating and managing each schools’ MMRs, and, as noted, these costs don’t vary significantly with the number of schools being managed. And every entrant needs approximately the same capital and human resources per similarly sized school as every incumbent. Thus, in this context, neither the need for capital nor dedicated employees is properly construed as a barrier to entry.

Second, as the DOJ and FTC acknowledge in the Horizontal Merger Guidelines, any merger can be lawful under the antitrust laws, no matter its market share, where there are no significant barriers to entry:

The prospect of entry into the relevant market will alleviate concerns about adverse competitive effects… if entry into the market is so easy that the merged firm and its remaining rivals in the market, either unilaterally or collectively, could not profitably raise price or otherwise reduce competition compared to the level that would prevail in the absence of the merger.

As noted, there are low economies of scale in the business, with most of the economies occurring in the relatively small “back office” work of payroll, accounting, human resources, and employee benefits. Since the 2000s, the entry of several significant competitors — many entering with only one or two schools or specializing in smaller or niche markets — strongly suggests that there are no economically important barriers to entry. And these firms have entered and succeeded with a wide range of business models and firm sizes:

  • JMI Sports — a “rising boutique firm” — hired Tom Stultz, the former senior vice president and managing director of IMG’s MMR business, in 2012. JMI won its first (and thus, at the time, only) MMR bid in 2014 at the University of Kentucky, besting IMG to win the deal.
  • Peak Sports MGMT, founded in 2012, is a small-scale MMR firm that focuses on lesser Division I and II schools in Texas and the Midwest. It manages just seven small properties, including Southland Conference schools like the University of Central Arkansas and Southeastern Louisiana University.
  • Fox Sports entered the business in 2008 with a deal with the University of Florida. It now handles MMRs for schools like Georgetown, Auburn, and Villanova. Fox’s entry suggests that other media companies — like ESPN — that may already own TV broadcast rights are also potential entrants.
  • In 2014 the sports advertising firm, Van Wagner, hired three former Nelligan employees to make a play for the college sports space. In 2015 the company won its first MMR bid at Florida International University, reportedly against seven other participants. It now handles more than a dozen schools including Georgia State (which it won from IMG), Loyola Marymount, Pepperdine, Stony Brook, and Santa Clara.
  • In 2001 Fenway Sports Group, parent company of the Boston Red Sox and Liverpool Football Club, entered into an MMR agreement with Boston College. And earlier this year the Tampa Bay Lightning hockey team began handling multimedia marketing for the University of South Florida.

Potential new entrants abound. Most obviously, sports networks like ESPN could readily follow Fox Sports’ lead and advertising firms could follow Van Wagner’s. These companies have existing relationships and expertise that position them for easy entry into the MMR business. Moreover, there are already several companies that handle the trademark licensing for schools, any of which could move into the MMR management business, as well; both IMG and Learfield already handle licensing for a number of schools. Most notably, Fermata Partners, founded in 2012 by former IMG employees and acquired in 2015 by CAA Sports (a division of Creative Artists Agency), has trademark licensing agreements with Georgia, Kentucky, Miami, Notre Dame, Oregon, Virginia, and Wisconsin. It could easily expand into selling MMR rights for these and other schools. Other licensing firms like Exemplar (which handles licensing at Columbia) and 289c (which handles licensing at Texas and Ohio State) could also easily expand into MMR.

Given the relatively trivial economies of scale, the minimum viable scale for a new entrant appears to be approximately one school — a size that each school’s in-house operations, of course, automatically meets. Moreover, the Peak Sports, Fenway, and Tampa Bay Lightning examples suggest that there may be particular benefits to local, regional, or category specialization, suggesting that innovative, new entry is not only possible, but even likely, as the business continues to evolve.

Conclusion

A merger between IMG and Learfield should not raise any antitrust issues. College sports is a small slice of the total advertising market. Even a so-called “juggernaut” in college sports multimedia rights is a small bit in the broader market of multimedia marketing.

The demonstrated entry of new competitors and the transitions of schools from one provider to another or to bringing MMR management in-house, indicates that no competitor has any measurable market power that can disadvantage schools or advertisers.

The term “juggernaut” entered the English language because of misinterpretation and exaggeration of actual events. Fears of the IMG/Learfield merger crushing competition is similarly based on a misinterpretation of two-sided markets and misunderstanding of the reality of the of the market for college multimedia rights management. Importantly, the case is also a cautionary tale for those who would identify narrow, contract-, channel-, or platform-specific relevant markets in circumstances where a range of intermediaries and direct relationships can compete to offer the same service as those being scrutinized. Antitrust advocates have a long and inglorious history of defining markets by channels of distribution or other convenient, yet often economically inappropriate, combinations of firms or products. Yet the presence of marketing or other intermediaries does not automatically transform a basic, commercial relationship into a novel, two-sided market necessitating narrow market definitions and creative economics.

In recent years, the European Union’s (EU) administrative body, the European Commission (EC), increasingly has applied European competition law in a manner that undermines free market dynamics.  In particular, its approach to “dominant” firm conduct disincentivizes highly successful companies from introducing product and service innovations that enhance consumer welfare and benefit the economy – merely because they threaten to harm less efficient competitors.

For example, the EC fined Microsoft 561 million euros in 2013 for its failure to adhere to an order that it offer a version of its Window software suite that did not include its popular Windows Media Player (WMP) – despite the lack of consumer demand for a “dumbed down” Windows without WMP.  This EC intrusion into software design has been described as a regulatory “quagmire.”

In June 2017 the EC fined Google 2.42 billion euros for allegedly favoring its own comparison shopping service over others favored in displaying Google search results – ignoring economic research that shows Google’s search policies benefit consumers.  Google also faces potentially higher EC antitrust fines due to alleged abuses involving android software (bundling of popular Google search and Chrome apps), a product that has helped spur dynamic smartphone innovations and foster new markets.

Furthermore, other highly innovative single firms, such as Apple and Amazon (favorable treatment deemed “state aids”), Qualcomm (alleged anticompetitive discounts), and Facebook (in connection with its WhatsApp acquisition), face substantial EC competition law penalties.

Underlying the EC’s current enforcement philosophy is an implicit presumption that innovations by dominant firms violate competition law if they in any way appear to disadvantage competitors.  That presumption forgoes considering the actual effects on the competitive process of dominant firm activities.  This is a recipe for reduced innovation, as successful firms “pull their competitive punches” to avoid onerous penalties.

The European Court of Justice (ECJ) implicitly recognized this problem in its September 6, 2017 decision setting aside the European General Court’s affirmance of the EC’s 2009 1.06 billion euro fine against Intel.  Intel involved allegedly anticompetitive “loyalty rebates” by Intel, which allowed buyers to achieve cost savings in Intel chip purchases.  In remanding the Intel case to the General Court for further legal and factual analysis, the ECJ’s opinion stressed that the EC needed to do more than find a dominant position and categorize the rebates in order to hold Intel liable.  The EC also needed to assess the “capacity of [Intel’s] . . . practice to foreclose competitors which are at least as efficient” and whether any exclusionary effect was outweighed by efficiencies that also benefit consumers.  In short, evidence-based antitrust analysis was required.  Mere reliance on presumptions was not enough.  Why?  Because competition on the merits is centered on the recognition that the departure of less efficient competitors is part and parcel of consumer welfare-based competition on the merits.  As the ECJ cogently put it:

[I]t must be borne in mind that it is in no way the purpose of Article 102 TFEU [which prohibits abuse of a dominant position] to prevent an undertaking from acquiring, on its own merits, the dominant position on a market.  Nor does that provision seek to ensure that competitors less efficient than the undertaking with the dominant position should remain on the market . . . .  [N]ot every exclusionary effect is necessarily detrimental to competition. Competition on the merits may, by definition, lead to the departure from the market or the marginalisation of competitors that are less efficient and so less attractive to consumers from the point of view of, among other things, price, choice, quality or innovation[.]

Although the ECJ’s recent decision is commendable, it does not negate the fact that Intel had to wait eight years to have its straightforward arguments receive attention – and the saga is far from over, since the General Court has to address this matter once again.  These sorts of long-term delays, during which firms face great uncertainty (and the threat of further EC investigations and fines), are antithetical to innovative activity by enterprises deemed dominant.  In short, unless and until the EC changes its competition policy perspective on dominant firm conduct (and there are no indications that such a change is imminent), innovation and economic dynamism will suffer.

Even if the EC dithers, the United Kingdom’s (UK) imminent withdrawal from the EU (Brexit) provides it with a unique opportunity to blaze a new competition policy trail – and perhaps in so doing influence other jurisdictions.

In particular, Brexit will enable the UK’s antitrust enforcer, the Competition and Markets Authority (CMA), to adopt an outlook on competition policy in general – and on single firm conduct in particular – that is more sensitive to innovation and economic dynamism.  What might such a CMA enforcement policy look like?  It should reject the EC’s current approach.  It should focus instead on the actual effects of competitive activity.  In particular, it should incorporate the insights of decision theory (see here, for example) and place great weight on efficiencies (see here, for example).

Let us hope that the CMA acts boldly – carpe diem.  Such action, combined with other regulatory reforms, could contribute substantially to the economic success of Brexit (see here).

U.S. international trade law has various statutory mechanisms to deal with unfair competition.  Regrettably, American trade law (and, for that matter, the trade laws of other nations) has a history of being deployed in a mercantilist fashion to further the interests of American producer interests, rather than consumer interests and aggregate economic welfare.  That need not, however, necessarily be the case.

For example, instead of penalizing more efficient imports, American antidumping law could be reoriented to deal only with true predatory pricing, thereby promoting free market interests (see my proposal here).  And section 337 of the Tariff Act, directed at “unfair methods of competition” in import trade, could be employed in a non-protectionist manner that enhances market efficiency by focusing exclusively on foreign harm to U.S. intellectual property (IP) rights (see my proposal here).

Countervailing duty (CVD) law, which applies tariffs to counteract foreign government subsidies, could be a force for eliminating government-imposed competitive distortions – and for discouraging governments from conferring subsidies to favored industries or firms in the first place.  In practice, however, significant distortive government subsidies to key industries have persisted in the face of CVD statutes.  The application of countervailing duties and the raising of CVD disputes to the World Trade Organization have proven to be inadequate in curbing governments’ persistent efforts to subsidize corporate favorites, while preventing trading partners from bestowing similar largesse on their national champions.

Among the beneficiaries of major subsidies that lead to international trade disputes, the commercial aircraft sector, dominated by the longstanding Boeing and Airbus duopoly, stands out.  A recent article by trade law expert Shanker Singham, Director of Economic Policy and Prosperity Studies at the United Kingdom’s Legatum Institute, highlights the economic deficiencies revealed by the most recent battle in the ongoing commercial aircraft “subsidies war” saga.

Specifically, Singham suggests reforming countervailable subsidies with a “trade remedy law based on evaluating distortions and their effects”.  Singham’s article, “America’s Protectionism Is Damaging British Interests,” is worth a careful read:

Theresa May was recently in Canada meeting the Canadian PM, Justin Trudeau, to discuss how theyshould react to a trade case that Boeing has brought against Bombardier, Canada’s aerospace manufacturer. The case could affect 4,000 jobs in Bombardier’s Belfast facility. From Belfast, this might look like the vagaries of international trade, but the real story runs deeper.

Competition among producers of aircraft has been fierce, and has also been often accompanied by complaints about state subsidies and other trade distortions. Civil aviation is a sector that has been plagued by government interventions all over the world, and to say that the playing field is not level is an understatement.

While Airbus subsidies are its usual target, Boeing has recently turned its fire onto Bombardier, claiming that the Canadian jet manufacturer has dumped product into the US market. Boeing is citing US trade remedy laws, the price-based focus of which makes them prone to this sort of protectionist abuse.

The UK has been dragged in to the row because jobs in Belfast depend on the production of key inputs into the Bombardier plane. So just as the people of Northern Ireland are struggling with Brexit, they face a fresh concern not of their own making.

Our recently released [Legatum Institute] paper on Northern Ireland discusses the need to find ways of promoting economic activity in Northern Ireland using Special Economic Zones, among other ways of minimising the costs of Brexit. And one idea is that the people of Northern Ireland should benefit from UK-US trade agreements as we set out in our Transatlantic partnership paper.

But allowing the abuse of notoriously protectionist trade remedy laws in the US to have a completely unjustifiable and knock-on effect in Northern Ireland would not indicate the good UK-US trade relations that the Trump administration has promised.

The Prime Minister has recognised the danger, and raised the issue in a call with President Trump, as well with Trudeau this week. Voices within her own party, and the media, are calling for her to take a tougher line against Boeing to protect those jobs in Northern Ireland, and others in the supply chain across the UK.

But what could the Prime Minister do?

The case highlights the trade barrier that the trade remedies themselves pose and shows why reform is necessary. Given that new UK trade remedy laws must be developed as a result of Brexit, and the US-UK agreement, here is an excellent opportunity to deal with those government interventions that distort trade by focusing on the source of the problem – and not on pricing (as current trade remedy laws do).

For trade to be fair, we need to make sure that distortions are reduced in all our markets, and that any trade remedies we use are designed to deal with these distortions.

In the case of the production of aircraft (large-body), Boeing and Airbus have been at each other’s throats, each maintaining that the other is subsidised or supported by governments. Recently, Airbus lost a case in the WTO where it was arguing that Boeing’s Washington state incentives violated WTO rules on subsidies. That case was in response to a series of cases which Boeing had brought against Airbus. It highlights the problem of the WTO’s approach to subsidies and government support in general.

Whether the government privilege or grant is given federally or through a state, what matters is whether the cost of production has been reduced by ordinary business processes and efficiency, or whether in fact it has been reduced through government action. Viewed through this lens, very few aircraft manufacturers have clean hands.

However, while these distortions abound, bringing trade remedy cases that ignore the complainants’ own network of distortions and subsidies is patently unfair. The Boeing case has effects in Canada, but because we are in a world of competing global supply chains, these effects reverberate around the world.

All the suppliers to Bombardier, including those based in Northern Ireland, are adversely affected when US firms use the US trade remedy laws to damage trade between nations. These laws were written at a time when we did not live in a world of global supply chains, but rather a world where firms produced products in country A and sold them in country B.  They do not fit within our new world of complex supply chains.

It is high time that countries around the world ensured that their domestic policies and their external trade policies lined up. Countries such as the US cannot argue that they intend to do trade deals with the UK, if their domestic measures damage the interests of that trading partner.

In fact, the UK and the US have an opportunity here to use trade remedy measures to attack products from companies whose costs are artificially lowered as a result of government distortion, as opposed to being more competitive. Boeing’s case, however, does not differentiate between the two – which is why it is flawed.

In the UK, there is talk of using a public interest test in the application of trade remedy laws. Such a test could look at the impact of the use of these remedies on international trade and on consumers.

Theresa May has argued for industrial strategy in ways that give those of us who believe in the power of free trade and free markets pause. But in this case, the most basic industrial strategy has to be to defend UK production, such as the plant in Belfast, from the effects of distortions in other markets, and the abuse of trade remedy laws.

A trade remedy law based on evaluating distortions and their effects would prevent this. It is something the UK and US may be able to agree, and it is certainly something that the UK could lead on by example.

If the UK government seeks to protect its workers in this case, this should not be seen as a protectionist gesture.  It would be a necessary response to US protectionism. As long as countries maintain laws on their books that allow consumers to be damaged, and supply chains to be adversely affected, countries may seek to use other means to retaliate against the offender.

World trade is under sufficient threat, at the moment not to freight it down with additional and quite unnecessary challenges, such as over-vigorous use of anti-dumping laws. The UK has a great opportunity to lead this debate as it formulates its own independent trade policy.

As Singham’s article suggests, U.S.-UK free trade negotiations made possible by Brexit create the possibility for the reformulation of American CVD law to focus on actual distortions of competition.  CVD assessments calibrated precisely to the amount of the foreign government’s distortionary subsidy, applied first in the context of US-UK trade, could serve as a model for the more general reform of American (and UK) CVD law.  This in turn might serve as a template for more general CVD reform, through bilateral or plurilateral deals – and perhaps eventually a global deal under the auspices of the World Trade Organization.  Think big.

 

In a recent post at the (appallingly misnamed) ProMarket blog (the blog of the Stigler Center at the University of Chicago Booth School of Business — George Stigler is rolling in his grave…), Marshall Steinbaum keeps alive the hipster-antitrust assertion that lax antitrust enforcement — this time in the labor market — is to blame for… well, most? all? of what’s wrong with “the labor market and the broader macroeconomic conditions” in the country.

In this entry, Steinbaum takes particular aim at the US enforcement agencies, which he claims do not consider monopsony power in merger review (and other antitrust enforcement actions) because their current consumer welfare framework somehow doesn’t recognize monopsony as a possible harm.

This will probably come as news to the agencies themselves, whose Horizontal Merger Guidelines devote an entire (albeit brief) section (section 12) to monopsony, noting that:

Mergers of competing buyers can enhance market power on the buying side of the market, just as mergers of competing sellers can enhance market power on the selling side of the market. Buyer market power is sometimes called “monopsony power.”

* * *

Market power on the buying side of the market is not a significant concern if suppliers have numerous attractive outlets for their goods or services. However, when that is not the case, the Agencies may conclude that the merger of competing buyers is likely to lessen competition in a manner harmful to sellers.

Steinbaum fails to mention the HMGs, but he does point to a US submission to the OECD to make his point. In that document, the agencies state that

The U.S. Federal Trade Commission (“FTC”) and the Antitrust Division of the Department of Justice (“DOJ”) [] do not consider employment or other non-competition factors in their antitrust analysis. The antitrust agencies have learned that, while such considerations “may be appropriate policy objectives and worthy goals overall… integrating their consideration into a competition analysis… can lead to poor outcomes to the detriment of both businesses and consumers.” Instead, the antitrust agencies focus on ensuring robust competition that benefits consumers and leave other policies such as employment to other parts of government that may be specifically charged with or better placed to consider such objectives.

Steinbaum, of course, cites only the first sentence. And he uses it as a launching-off point to attack the notion that antitrust is an improper tool for labor market regulation. But if he had just read a little bit further in the (very short) document he cites, Steinbaum might have discovered that the US antitrust agencies have, in fact, challenged the exercise of collusive monopsony power in labor markets. As footnote 19 of the OECD submission notes:

Although employment is not a relevant policy goal in antitrust analysis, anticompetitive conduct affecting terms of employment can violate the Sherman Act. See, e.g., DOJ settlement with eBay Inc. that prevents the company from entering into or maintaining agreements with other companies that restrain employee recruiting or hiring; FTC settlement with ski equipment manufacturers settling charges that companies illegally agreed not to compete for one another’s ski endorsers or employees. (Emphasis added).

And, ironically, while asserting that labor market collusion doesn’t matter to the agencies, Steinbaum himself points to “the Justice Department’s 2010 lawsuit against Silicon Valley employers for colluding not to hire one another’s programmers.”

Steinbaum instead opts for a willful misreading of the first sentence of the OECD submission. But what the OECD document refers to, of course, are situations where two firms merge, no market power is created (either in input or output markets), but people are laid off because the merged firm does not need all of, say, the IT and human resources employees previously employed in the pre-merger world.

Does Steinbaum really think this is grounds for challenging the merger on antitrust grounds?

Actually, his post suggests that he does indeed think so, although he doesn’t come right out and say it. What he does say — as he must in order to bring antitrust enforcement to bear on the low- and unskilled labor markets (e.g., burger flippers; retail cashiers; Uber drivers) he purports to care most about — is that:

Employers can have that control [over employees, as opposed to independent contractors] without first establishing themselves as a monopoly—in fact, reclassification [of workers as independent contractors] is increasingly standard operating procedure in many industries, which means that treating it as a violation of Section 2 of the Sherman Act should not require that outright monopolization must first be shown. (Emphasis added).

Honestly, I don’t have any idea what he means. Somehow, because firms hire independent contractors where at one time long ago they might have hired employees… they engage in Sherman Act violations, even if they don’t have market power? Huh?

I get why he needs to try to make this move: As I intimated above, there is probably not a single firm in the world that hires low- or unskilled workers that has anything approaching monopsony power in those labor markets. Even Uber, the example he uses, has nothing like monopsony power, unless perhaps you define the market (completely improperly) as “drivers already working for Uber.” Even then Uber doesn’t have monopsony power: There can be no (or, at best, virtually no) markets in the world where an Uber driver has no other potential employment opportunities but working for Uber.

Moreover, how on earth is hiring independent contractors evidence of anticompetitive behavior? ”Reclassification” is not, in fact, “standard operating procedure.” It is the case that in many industries firms (unilaterally) often decide to contract out the hiring of low- and unskilled workers over whom they do not need to exercise direct oversight to specialized firms, thus not employing those workers directly. That isn’t “reclassification” of existing workers who have no choice but to accept their employer’s terms; it’s a long-term evolution of the economy toward specialization, enabled in part by technology.

And if we’re really concerned about what “employee” and “independent contractor” mean for workers and employment regulation, we should reconsider those outdated categories. Firms are faced with a binary choice: hire workers or independent contractors. Neither really fits many of today’s employment arrangements very well, but that’s the choice firms are given. That they sometimes choose “independent worker” over “employee” is hardly evidence of anticompetitive conduct meriting antitrust enforcement.

The point is: The notion that any of this is evidence of monopsony power, or that the antitrust enforcement agencies don’t care about monopsony power — because, Bork! — is absurd.

Even more absurd is the notion that the antitrust laws should be used to effect Steinbaum’s preferred market regulations — independent of proof of actual anticompetitive effect. I get that it’s hard to convince Congress to pass the precise laws you want all the time. But simply routing around Congress and using the antitrust statutes as a sort of meta-legislation to enact whatever happens to be Marshall Steinbaum’s preferred regulation du jour is ridiculous.

Which is a point the OECD submission made (again, if only Steinbaum had read beyond the first sentence…):

[T]wo difficulties with expanding the scope of antitrust analysis to include employment concerns warrant discussion. First, a full accounting of employment effects would require consideration of short-term effects, such as likely layoffs by the merged firm, but also long-term effects, which could include employment gains elsewhere in the industry or in the economy arising from efficiencies generated by the merger. Measuring these effects would [be extremely difficult.]. Second, unless a clear policy spelling out how the antitrust agency would assess the appropriate weight to give employment effects in relation to the proposed conduct or transaction’s procompetitive and anticompetitive effects could be developed, [such enforcement would be deeply problematic, and essentially arbitrary].

To be sure, the agencies don’t recognize enough that they already face the problem of reconciling multidimensional effects — e.g., short-, medium-, and long-term price effects, innovation effects, product quality effects, etc. But there is no reason to exacerbate the problem by asking them to also consider employment effects. Especially not in Steinbaum’s world in which certain employment effects are problematic even without evidence of market power or even actual anticompetitive harm, just because he says so.

Consider how this might play out:

Suppose that Pepsi, Coca-Cola, Dr. Pepper… and every other soft drink company in the world attempted to merge, creating a monopoly soft drink manufacturer. In what possible employment market would even this merger create a monopsony in which anticompetitive harm could be tied to the merger? In the market for “people who know soft drink secret formulas?” Yet Steinbaum would have the Sherman Act enforced against such a merger not because it might create a product market monopoly, but because the existence of a product market monopoly means the firm must be able to bad things in other markets, as well. For Steinbaum and all the other scolds who see concentration as the source of all evil, the dearth of evidence to support such a claim is no barrier (on which, see, e.g., this recent, content-less NYT article (that, naturally, quotes Steinbaum) on how “big business may be to blame” for the slowing rate of startups).

The point is, monopoly power in a product market does not necessarily have any relationship to monopsony power in the labor market. Simply asserting that it does — and lambasting the enforcement agencies for not just accepting that assertion — is farcical.

The real question, however, is what has happened to the University of Chicago that it continues to provide a platform for such nonsense?

Last Friday, drug maker Allergan and the Saint Regis Mohawk Tribe announced that they had reached an agreement under which Allergan assigned the patents on its top-selling drug Restasis to the tribe and, in return, Allergan was given the exclusive license on the Restasis patents so that it can continue producing and distributing the drug.  Allergan agreed to pay $13.75 million to the tribe for the deal, and up to $15 million annually in royalties as long as the patents remain valid.

Why would a large drug maker assign the patents on a leading drug to a sovereign Indian nation?  This unorthodox agreement may actually be a brilliant strategy that enables patent owners to avoid the unbalanced inter partes review (IPR) process.  The validity of the Restasis patents is currently being challenged both in IPR proceedings before the Patent Trial and Appeal Board (PTAB) and in federal district court in Texas.  However, the Allergan-Mohawk deal may lead to the dismissal of the IPR proceedings as, under the terms of the deal, the Mohawks will file a motion to dismiss the IPR proceedings based on the tribe’s sovereign immunity.  Earlier this year, in Covidien v. University of Florida Research Foundation, the PTAB determined that sovereign immunity shields state universities holding patents from IPR proceedings, and the same reasoning should certainly apply to sovereign Indian nations.

I’ve published a previous article explaining why pharmaceutical companies have legitimate reasons to avoid IPR proceedings–critical differences between district court litigation and IPR proceedings jeopardize the delicate balance Hatch-Waxman sought to achieve between patent owners and patent challengers. In addition to forcing patent owners into duplicative litigation in district courts and the PTAB, depriving them of the ability to achieve finality in one proceeding, the PTAB also applies a lower standard of proof for invalidity than do district courts in Hatch-Waxman litigation.  It is also easier to meet the standard of proof in a PTAB trial because of a more lenient claim construction standard.  Moreover, on appeal, PTAB decisions in IPR proceedings are given more deference than lower district court decisions.  Finally, while patent challengers in district court must establish sufficient Article III standing, IPR proceedings do not have a standing requirement.  This has led to the exploitation of the IPR process by entities that would never be granted standing in traditional patent litigation—hedge funds betting against a company by filing an IPR challenge in hopes of crashing the stock and profiting from the bet.

The differences between district court litigation and IPR proceedings have created a significant deviation in patent invalidation rates under the two pathways; compared to district court challenges, patents are twice as likely to be found invalid in IPR challenges.  Although the U.S. Supreme Court in Cuozzo Speed Technologies v. Lee concluded that the anti-patentee claim construction standard in IPR “increases the possibility that the examiner will find the claim too broad (and deny it)”, the Court concluded that only Congress could mandate a different standard.  So far, Congress has done nothing to reduce the disparities between IPR proceedings and Hatch-Waxman litigation. But, while we wait, the high patent invalidation rate in IPR proceedings creates significant uncertainty for patent owners’ intellectual property rights.   Uncertain patent rights, in turn, lead to less innovation in the pharmaceutical industry.  Put simply, drug companies will not spend the billions of dollars it typically costs to bring a new drug to market when they can’t be certain if the patents for that drug can withstand IPR proceedings that are clearly stacked against them (for an excellent discussion of how the PTAB threatens innovation, see Alden Abbot’s recent TOTM post).  Thus, deals between brand companies and sovereigns, such as Indian nations, that insulate patents from IPR proceedings should improve the certainty around intellectual property rights and protect drug innovation.

Yet, the response to the Allergan-Mohawk deal among some scholars and generic drug companies has been one of panic and speculative doom.  Critics have questioned the deal largely on the grounds that, in addition to insulating Restasis from IPR proceedings, tribal sovereignty might also shield the patents in standard Hatch-Waxman district court litigation.  If this were true and brand companies began to routinely house their patents with sovereign Indian nations, then the venues in which generic companies could challenge patents would be restricted and generic companies would have less incentive to produce and market cheaper drugs.

However, it is far from clear that these deals could shield patents in standard Hatch-Waxman district court litigation.  Hatch-Waxman litigation typically follows a familiar pattern: a generic company files a Paragraph IV ANDA alleging patent owner’s patents are invalid or will not be infringed, the patent owner then sues the generic for infringement, and then the generic company files a counterclaim for invalidity.  Critics of the Allergan-Mohawk deal allege that tribal sovereignty could insulate patent owners from the counterclaim.  However, courts have held that state universities waive sovereign immunity for counterclaims when they file the initial patent infringement suit.  Although, in non-infringement contexts, tribes have been found to not waive sovereign immunity for counterclaims merely by filing an action as a plaintiff, this has never been tested in patent litigation.  Moreover, even if sovereign immunity could be used to prevent the counterclaim, invalidity can still be raised as an affirmative defense in the patent owner’s infringement suit (although it has been asserted that requiring generics to assert invalidity as an affirmative defense instead of a counterclaim may still tilt the playing field toward patent owners).  Finally, many patent owners that are sovereigns may choose to voluntarily waive sovereign immunity to head off any criticism or congressional meddling. Given the uncertainty of the effects of tribal sovereignty in Hatch-Waxman litigation, Allergan has concluded that their deal with the Mohawks won’t affect the pending district court litigation involving the validity of the Restasis patents.  However, if tribes in future cases were to cloud the viability of Hatch-Waxman by asserting sovereign immunity in district court litigation, Congress could always respond by altering the Hatch-Waxman rules to preclude this.

For now, we should all take a deep breath and put the fearmongering on hold.  Whether deals like the Allergan-Mohawk arrangement could affect Hatch-Waxman litigation is simply a matter of speculation, and there are many reasons to believe that they won’t. In the meantime, the deal between Allergan and the Saint Regis Mohawk Tribe is an ingenious strategy to avoid the unbalanced IPR process.   This move is the natural extension of the PTAB’s ruling on state university sovereign immunity, and state universities are likely incorporating the advantage into their own licensing and litigation strategies.  The Supreme Court will soon hear a case questioning the constitutionality of the IPR process.  Until the courts or Congress act to reduce the disparities between IPR proceedings and Hatch-Waxman litigation, we can hardly blame patent owners from taking clever legal steps to avoid the unbalanced IPR process.

On August 14, the Federalist Society’s Regulatory Transparency Project released a report detailing the harm imposed on innovation and property rights by the Patent Trial and Appeals Board, a Patent and Trademark Office patent review agency created by the infelicitously-named “America Invents Act” of 2011.  As the report’s abstract explains:

Patents are property rights secured to inventors of new products or services, such as the software and other high-tech innovations in our laptops and smart phones, the life-saving medicines prescribed by our doctors, and the new mechanical designs that make batteries more efficient and airplane engines more powerful. Many Americans first learn in school about the great inventors who revolutionized our lives with their patented innovations, such as Thomas Edison (the light bulb and record player), Alexander Graham Bell (the telephone), Nikola Tesla (electrical systems), the Wright brothers (airplanes), Charles Goodyear (cured rubber), Enrico Fermi (nuclear power), and Samuel Morse (the telegraph). These inventors and tens of thousands of others had the fruits of their inventive labors secured to them by patents, and these vital property rights have driven America’s innovation economy for over 225 years. For this reason, the United States has long been viewed as having the “gold standard” patent system throughout the world.

In 2011, Congress passed a new law, called the America Invents Act (AIA), that made significant changes to the U.S. patent system. Among its many changes, the AIA created a new administrative tribunal for invalidating “bad patents” (patents mistakenly issued because the claimed inventions were not actually new or because they suffer from other defects that create problems for companies in the innovation economy). This administrative tribunal is called the Patent Trial & Appeal Board (PTAB). The PTAB is composed of “administrative patent judges” appointed by the Director of the United States Patent & Trademark Office (USPTO). The PTAB administrative judges are supposed to be experts in both technology and patent law. They hold administrative hearings in response to petitions that challenge patents as defective. If they agree with the challenger, they cancel the patent by declaring it “invalid.” Anyone in the world willing to pay a filing fee can file a petition to invalidate any patent.

As many people are aware, administrative agencies can become a source of costs and harms that far outweigh the harms they were created to address. This is exactly what has happened with the PTAB. This administrative tribunal has become a prime example of regulatory overreach

Congress created the PTAB in 2011 in response to concerns about the quality of patents being granted to inventors by the USPTO. Legitimate patents promote both inventive activity and the commercial development of inventions into real-world innovation used by regular people the world over. But “bad patents” clog the intricate gears of the innovation economy, deterring real innovators and creating unnecessary costs for companies by enabling needless and wasteful litigation. The creation of the PTAB was well intended: it was supposed to remove bad patents from the innovation economy. But the PTAB has ended up imposing tremendous and unnecessary costs and creating destructive uncertainty for the innovation economy.

In its procedures and its decisions, the PTAB has become an example of an administrative tribunal run amok. It does not provide basic legal procedures to patent owners that all other property owners receive in court. When called upon to redress these concerns, the courts have instead granted the PTAB the same broad deference they have given to other administrative agencies. Thus, these problems have gone uncorrected and unchecked. Without providing basic procedural protections to all patent owners, the PTAB has gone too far with its charge of eliminating bad patents. It is now invalidating patents in a willy-nilly fashion. One example among many is that, in early 2017, the PTAB invalidated a patent on a new MRI machine because it believed this new medical device was an “abstract idea” (and thus unpatentable).

The problems in the PTAB’s operations have become so serious that a former federal appellate chief judge has referred to PTAB administrative judges as “patent death squads.” This metaphor has proven apt, even if rhetorically exaggerated. Created to remove only bad patents clogging the innovation economy, the PTAB has itself begun to clog innovation — killing large numbers of patents and casting a pall of uncertainty over every patent that might become valuable and thus a target of a PTAB petition to invalidate it.

The U.S. innovation economy has thrived because inventors know they can devote years of productive labor and resources into developing their inventions for the marketplace, secure in the knowledge that their patents provide a solid foundation for commercialization. Pharmaceutical companies depend on their patents to recoup billions of dollars in research and development of new drugs. Venture capitalists invest in startups on the basis of these vital property rights in new products and services, as viewers of Shark Tank see every week.

The PTAB now looms over all of these inventive and commercial activities, threatening to cancel a valuable patent at any moment and without rhyme or reason. In addition to the lost investments in the invalidated patents themselves, this creates uncertainty for inventors and investors, undermining the foundations of the U.S. innovation economy.

This paper explains how the PTAB has become a prime example of regulatory overreach. The PTAB administrative tribunal is creating unnecessary costs for inventors and companies, and thus it is harming the innovation economy far beyond the harm of the bad patents it was created to remedy. First, we describe the U.S. patent system and how it secures property rights in technological innovation. Second, we describe Congress’s creation of the PTAB in 2011 and the six different administrative proceedings the PTAB uses for reviewing and canceling patents. Third, we detail the various ways that the PTAB is now causing real harm, through both its procedures and its substantive decisions, and thus threatening innovation.

The PTAB has created fundamental uncertainty about the status of all patent rights in inventions. The result is that the PTAB undermines the market value of patents and frustrates the role that these property rights serve in the investment in and commercial development of the new technological products and services that make many aspects of our modern lives seem like miracles.

In June 2017, the U.S. Supreme Court agreed to review the Oil States Energy case, raising the question of whether PTAB patent review “violates the Constitution by extinguishing private property rights through a non-Article III forum without a jury.”  A Supreme Court finding of unconstitutionality would be ideal.  But in the event the Court leaves PTAB patent review intact, legislation to curb the worst excesses of PTAB – such as the bipartisan “STRONGER Patent Act of 2017” – merits serious consideration.  Stay tuned – I will have more to say in detail about potential patent law reforms, including the reining in of PTAB, in the near future.

On July 24, as part of their newly-announced “Better Deal” campaign, congressional Democrats released an antitrust proposal (“Better Deal Antitrust Proposal” or BDAP) entitled “Cracking Down on Corporate Monopolies and the Abuse of Economic and Political Power.”  Unfortunately, this antitrust tract is really an “Old Deal” screed that rehashes long-discredited ideas about “bigness is badness” and “corporate abuses,” untethered from serious economic analysis.  (In spirit it echoes the proposal for a renewed emphasis on “fairness” in antitrust made by then Acting Assistant Attorney General Renata Hesse in 2016 – a recommendation that ran counter to sound economics, as I explained in a September 2016 Truth on the Market commentary.)  Implementation of the BDAP’s recommendations would be a “worse deal” for American consumers and for American economic vitality and growth.

The BDAP’s Portrayal of the State of Antitrust Enforcement is Factually Inaccurate, and it Ignores the Real Problems of Crony Capitalism and Regulatory Overreach

The Better Deal Antitrust Proposal begins with the assertion that antitrust has failed in recent decades:

Over the past thirty years, growing corporate influence and consolidation has led to reductions in competition, choice for consumers, and bargaining power for workers.  The extensive concentration of power in the hands of a few corporations hurts wages, undermines job growth, and threatens to squeeze out small businesses, suppliers, and new, innovative competitors.  It means higher prices and less choice for the things the American people buy every day. . .  [This is because] [o]ver the last thirty years, courts and permissive regulators have allowed large companies to get larger, resulting in higher prices and limited consumer choice in daily expenses such as travel, cable, and food and beverages.  And because concentrated market power leads to concentrated political power, these companies deploy armies of lobbyists to increase their stranglehold on Washington.  A Better Deal on competition means that we will revisit our antitrust laws to ensure that the economic freedom of all Americans—consumers, workers, and small businesses—come before big corporations that are getting even bigger.

This statement’s assertions are curious (not to mention problematic) in multiple respects.

First, since Democratic administrations have held the White House for sixteen of the past thirty years, the BDAP appears to acknowledge that Democratic presidents have overseen a failed antitrust policy.

Second, the broad claim that consumers have faced higher prices and limited consumer choice with regard to their daily expenses is baseless.  Indeed, internet commerce and new business models have sharply reduced travel and entertainment costs for the bulk of American consumers, and new “high technology” products such as smartphones and electronic games have been characterized by dramatic improvements in innovation, enhanced variety, and relatively lower costs.  Cable suppliers face vibrant competition from competitive satellite providers, fiberoptic cable suppliers (the major telcos such as Verizon), and new online methods for distributing content.  Consumer price inflation has been extremely low in recent decades, compared to the high inflationary, less innovative environment of the 1960s and 1970s – decades when federal antitrust law was applied much more vigorously.  Thus, the claim that weaker antitrust has denied consumers “economic freedom” is at war with the truth.

Third, the claim that recent decades have seen the creation of “concentrated market power,” safe from antitrust challenge, ignores the fact that, over the last three decades, apolitical government antitrust officials under both Democratic and Republican administrations have applied well-accepted economic tools (wielded by the scores of Ph.D. economists in the Justice Department and Federal Trade Commission) in enforcing the antitrust laws.  Antitrust analysis has used economics to focus on inefficient business conduct that would maintain or increase market power, and large numbers of cartels have been prosecuted and questionable mergers (including a variety of major health care and communications industry mergers) have been successfully challenged.  The alleged growth of “concentrated market power,” untouched by incompetent antitrust enforcers, is a myth.  Furthermore, claims that mere corporate size and “aggregate concentration” are grounds for antitrust concern (“big is bad”) were decisively rejected by empirical economic research published in the 1970s, and are no more convincing today.  (As I pointed out in a January 2017 blog posting at this site, recent research by highly respected economists debunks a few claims that federal antitrust enforcers have been “excessively tolerant” of late in analyzing proposed mergers.)

More interesting is the BDAP’s claim that “armies of [corporate] lobbyists” manage to “increase their stranglehold on Washington.”  This is not an antitrust concern, however, but, rather, a complaint against crony capitalism and overregulation, which became an ever more serious problem under the Obama Administration.  As I explained in my October 2016 critique of the American Antitrust Institute’s September 2008 National Competition Policy Report (a Report which is very similar in tone to the BDAP), the rapid growth of excessive regulation during the Obama years has diminished competition by creating new regulatory schemes that benefit entrenched and powerful firms (such as Dodd-Frank Act banking rules that impose excessive burdens on smaller banks).  My critique emphasized that, “as Dodd-Frank and other regulatory programs illustrate, large government rulemaking schemes often are designed to favor large and wealthy well-connected rent-seekers at the expense of smaller and more dynamic competitors.”  And, more generally, excessive regulatory burdens undermine the competitive process, by distorting business decisions in a manner that detracts from competition on the merits.

It follows that, if the BDAP really wanted to challenge “unfair” corporate advantages, it would seek to roll back excessive regulation (see my November 2012 article on Trump Administration competition policy).  Indeed, the Trump Administration’s regulatory reform program (which features agency-specific regulatory reform task forces) seeks to do just that.  Perhaps then the BDAP could be rewritten to focus on endorsing President Trump’s regulatory reform initiative, rather than emphasizing a meritless “big is bad” populist antitrust policy that was consigned to the enforcement dustbin decades ago.

The BDAP’s Specific Proposals Would Harm the Economy and Reduce Consumer Welfare

Unfortunately, the BDAP does more than wax nostalgic about old-time “big is bad” antitrust policy.  It affirmatively recommends policy changes that would harm the economy.

First, the BDAP would require “a broader, longer-term view and strong presumptions that market concentration can result in anticompetitive conduct.”  Specifically, it would create “new standards to limit large mergers that unfairly consolidate corporate power,” including “mergers [that] reduce wages, cut jobs, lower product quality, limit access to services, stifle innovation, or hinder the ability of small businesses and entrepreneurs to compete.”  New standards would also “explicitly consider the ways in which control of consumer data can be used to stifle competition or jeopardize consumer privacy.”

Unlike current merger policy, which evaluates likely competitive effects, centered on price and quality, estimated in economically relevant markets, these new standards are open-ended.  They could justify challenges based on such a wide variety of factors that they would incentivize direct competitors not to merge, even in cases where the proposed merged entity would prove more efficient and able to enhance quality or innovation.  Certain less efficient competitors – say small businesses – could argue that they would be driven out of business, or that some jobs in the industry would disappear, in order to prompt government challenges.  But such challenges would tend to undermine innovation and business improvements, and the inevitable redistribution of assets to higher-valued uses that is a key benefit of corporate reorganizations and acquisitions.  (Mergers might focus instead, for example, on inefficient conglomerate acquisitions among companies in unrelated industries, which were incentivized by the overly strict 1960s rules that prohibited mergers among direct competitors.)  Such a change would represent a retreat from economic common sense, and be at odds with consensus economically-sound merger enforcement guidance that U.S. enforcers have long recommended other countries adopt.  Furthermore, questions of consumer data and privacy are more appropriately dealt with as consumer protection questions, which the Federal Trade Commission has handled successfully for years.

Second, the BDAP would require “frequent, independent [after-the-fact] reviews of mergers” and require regulators “to take corrective measures if they find abusive monopolistic conditions where previously approved [consent decree] measures fail to make good on their intended outcomes.”

While high profile mergers subject to significant divestiture or other remedial requirements have in appropriate circumstances included monitoring requirements, the tone of this recommendation is to require that far more mergers be subjected to detailed and ongoing post-acquisition reviews.  The cost of such monitoring is substantial, however, and routine reliance on it (backed by the threat of additional enforcement actions based merely on changing economic conditions) could create excessive caution in the post-merger management of newly-consolidated enterprises.  Indeed, potential merged parties might decide in close cases that this sort of oversight is not worth accepting, and therefore call off potentially efficient transactions that would have enhanced economic welfare.  (The reality of enforcement error cost, and the possibility of misdiagnosis of post-merger competitive conditions, is not acknowledged by the BDAP.)

Third, a newly created “competition advocate” independent of the existing federal antitrust enforcers would be empowered to publicly recommend investigations, with the enforcers required to justify publicly why they chose not to pursue a particular recommended investigation.  The advocate would ensure that antitrust enforcers are held “accountable,” assure that complaints about “market exploitation and anticompetitive conduct” are heard, and publish data on “concentration and abuses of economic power” with demographic breakdowns.

This third proposal is particularly egregious.  It is at odds with the long tradition of prosecutorial discretion that has been enjoyed by the federal antitrust enforcers (and law enforcers in general).  It would also empower a special interest intervenor to promote the complaints of interest groups that object to efficiency-seeking business conduct, thereby undermining the careful economic and legal analysis that is consistently employed by the expert antitrust agencies.  The references to “concentration” and “economic power” clarify that the “advocate” would have an untrammeled ability to highlight non-economic objections to transactions raised by inefficient competitors, jealous rivals, or self-styled populists who object to excessive “bigness.”  This would strike at the heart of our competitive process, which presumes that private parties will be allowed to fulfill their own goals, free from government micromanagement, absent indications of a clear and well-defined violation of law.  In sum, the “competition advocate” is better viewed as a “special interest” advocate empowered to ignore normal legal constraints and unjustifiably interfere in business transactions.  If empowered to operate freely, such an advocate (better viewed as an albatross) would undoubtedly chill a wide variety of business arrangements, to the detriment of consumers and economic innovation.

Finally, the BDAP refers to a variety of ills that are said to affect specific named industries, in particular airlines, cable/telecom, beer, food prices, and eyeglasses.  Airlines are subject to a variety of capacity limitations (limitations on landing slots and the size/number of airports) and regulatory constraints (prohibitions on foreign entry or investment) that may affect competitive conditions, but airlines mergers are closely reviewed by the Justice Department.  Cable and telecom companies face a variety of federal, state, and local regulations, and their mergers also are closely scrutinized.  The BDAP’s reference to the proposed AT&T/Time Warner merger ignores the potential efficiencies of this “vertical” arrangement involving complementary assets (see my coauthored commentary here), and resorts to unsupported claims about wrongful “discrimination” by “behemoths” – issues that in any event are examined in antitrust merger reviews.  Unsupported references to harm to competition and consumer choice are thrown out in the references to beer and agrochemical mergers, which also receive close economically-focused merger scrutiny under existing law.  Concerns raised about the price of eyeglasses ignore the role of potentially anticompetitive regulation – that is, bad government – in harming consumer welfare in this sector.  In short, the alleged competitive “problems” the BDAP raises with respect to particular industries are no more compelling than the rest of its analysis.  The Justice Department and Federal Trade Commission are hard at work applying sound economics to these sectors.  They should be left to do their jobs, and the BDAP’s industry-specific commentary (sadly, like the rest of its commentary) should be accorded no weight.

Conclusion

Congressional Democrats would be well-advised to ditch their efforts to resurrect the counterproductive antitrust policy from days of yore, and instead focus on real economic problems, such as excessive and inappropriate government regulation, as well as weak protection for U.S. intellectual property rights, here and abroad (see here, for example).  Such a change in emphasis would redound to the benefit of American consumers and producers.

 

 

My new book, How to Regulate: A Guide for Policymakers, will be published in a few weeks.  A while back, I promised a series of posts on the book’s key chapters.  I posted an overview of the book and a description of the book’s chapter on externalities.  I then got busy on another writing project (on horizontal shareholdings—more on that later) and dropped the ball.  Today, I resume my book summary with some thoughts from the book’s chapter on public goods.

With most goods, the owner can keep others from enjoying what she owns, and, if one person enjoys the good, no one else can do so.  Consider your coat or your morning cup of Starbucks.  You can prevent me from wearing your coat or drinking your coffee, and if you choose to let me wear the coat or drink the coffee, it’s not available to anyone else.

There are some amenities, though, that are “non-excludable,” meaning that the owner can’t prevent others from enjoying them, and “non-rivalrous,” meaning that one person’s consumption of them doesn’t prevent others from enjoying them as well.  National defense and local flood control systems (levees, etc.) are like this.  So are more mundane things like public art projects and fireworks displays.  Amenities that are both non-excludable and non-rivalrous are “public goods.”

[NOTE:  Amenities that are either non-excludable or non-rivalrous, but not both, are “quasi-public goods.”  Such goods include excludable but non-rivalrous “club goods” (e.g., satellite radio programming) and non-excludable but rivalrous “commons goods” (e.g., public fisheries).  The public goods chapter of How to Regulate addresses both types of quasi-public goods, but I won’t discuss them here.]

The primary concern with public goods is that they will be underproduced.  That’s because the producer, who must bear all the cost of producing the good, cannot exclude benefit recipients who do not contribute to the good’s production and thus cannot capture many of the benefits of his productive efforts.

Suppose, for example, that a levee would cost $5 million to construct and would create $10 million of benefit by protecting 500 homeowners from expected losses of $20,000 each (i.e., the levee would eliminate a 10% chance of a big flood that would cause each homeowner a $200,000 loss).  To maximize social welfare, the levee should be built.  But no single homeowner has an incentive to build the levee.  At least 250 homeowners would need to combine their resources to make the levee project worthwhile for participants (250 * $20,000 in individual benefit = $5 million), but most homeowners would prefer to hold out and see if their neighbors will finance the levee project without their help.  The upshot is that the levee never gets built, even though its construction is value-enhancing.

Economists have often jumped from the observation that public goods are susceptible to underproduction to the conclusion that the government should tax people and use the revenues to provide public goods.  Consider, for example, this passage from a law school textbook by several renowned economists:

It is apparent that public goods will not be adequately supplied by the private sector. The reason is plain: because people can’t be excluded from using public goods, they can’t be charged money for using them, so a private supplier can’t make money from providing them. … Because public goods are generally not adequately supplied by the private sector, they have to be supplied by the public sector.

[Howell E. Jackson, Louis Kaplow, Steven Shavell, W. Kip Viscusi, & David Cope, Analytical Methods for Lawyers 362-63 (2003) (emphasis added).]

That last claim seems demonstrably false.   Continue Reading…