Wright on Carrier's Innovation in the 21st Century

Josh Wright —  30 March 2009

First, I want to join the rest of the participants in congratulating Professor Carrier on an excellent and well-written book emerging out of a thoughtful and ambitious project. The project, and the book, are provocative, important contributions to the literature, and usefully synthesize many of the most important debates in both antitrust and intellectual property.

Were this a full book review and not merely a blog post, I would spend more time identifying the many points in the book that I agree with. But it is not. Instead, I will narrow my focus to Professor Carrier’s approach to standard setting activities, and in particular, patent holdup. Chapter 14 is largely devoted to summarizing the state of affairs in antitrust and standard setting. The summary (pages 323-342) is balanced, well-written and recommended reading for anyone interested in getting up to speed on the current policy issues. After summarizing Professor Carrier’s proposal for antitrust analysis of patent holdup (and other business conduct in the standard setting process), I’ll turn to highlighting a few areas where I found myself either disagreeing with his analysis or hoping for a more complete treatment.
In my own view, the two most pressing policy issues with respect to patent holdup are:

1. What is the appropriate role of antitrust in governing patent holdup?

2. If antitrust rules should govern patent holdup, which statute(s) and what type of analysis should apply? In particular, what is the appropriate scope of Section 2 of the Sherman Act and Section 5 of the FTC Act?

While Professor Carrier’s treatment of patent holdup usefully summarizes the debate, and also recommends a policy proposal that I largely agree with, I was left hoping for a bit more in this section of the book in terms of moving the ball forward on these important questions.

Let’s begin with the policy proposal itself. Professor Carrier argues that “given SSOs significant pro-competitive justifications, courts and the antitrust agencies should consider their activity under the Rule of Reason.” Carrier carves out standard setting organization (SSO) members’ joint decisions to fix prices on the final goods sold to consumers as the only conduct deserving of per se treatment. So far I’m on board. It makes economic and legal sense to treat both standard setting activities (with the exception of cartel behavior) and IP rules of SSOs as generally procompetitive and thus falling under the rule of reason. Carrier identifies three potential areas of liability concern under the rule of reason: patent holdup (he cites Dell and Unocal as examples), boycotts, and situations in which SSOs exert buyer power to reduce prices with the effect of reducing the incentive to innovate. Carrier writes that “absent these situations, SSO activity should be upheld under the rule of reason.”

There is much I agree with here. In fact, I find myself in agreement with Professor Carrier about most of what he writes about the limited utility of per se analysis in the standard setting arena. But I will focus on some areas where I suspect that we disagree, though I’m left unsure based solely on what is in the book. Carrier identifies patent holdup involving deception as a cause for concern under a rule of reason analysis. But the treatment is cursory. Carrier writes that “such activity could demonstrate attempted monopolization under Section 2 of the Sherman Act” and notes that a plaintiff making such a claim must demonstrate, amongst other requirements, that “the deception result[ed] in a standard’s adoption or higher royalties.” (page 342).

It is helpful for my purposes to bifurcate the world of patent holdup theories into those involving deception (the stylized facts in Rambus or the allegations in Broadcom v. Qualcomm) from those that do not and merely involve the ex post modification and/or breach of contractual commitments made in good faith in the standard setting process (FTC v. N-Data). Again, with respect to each of these patent holdup theories, there are at least two critically important policy issues:

1. What is the appropriate role of antitrust in governing patent holdup?

2. If antitrust rules should govern patent holdup, which statute(s) and what type of analysis should apply? In particular, what is the appropriate scope of Section 2 of the Sherman Act and Section 5 of the FTC Act?

With respect to the first policy question, Carrier appears to presume that antitrust rules should apply to unilateral conduct in the form of patent holdup involving both deception and breach theories. I may be wrong about the breach theories. While Carrier discusses N-Data briefly, his policy proposal singles out examples such as Dell and Unocal, which involved deception. I was left wanting a more clear exposition of the details of the policy proposal in this section. More fundamentally, the relative merits of state contract law and the patent doctrine of equitable estoppels in the SSO setting as alternatives to antitrust liability are an important topic. Of course, this issue is one of special concern for me since Kobayashi and Wright (Federalism, Substantive Preemption, and Limits on Antitrust) have argued that antitrust rules layered on top of these alternative (and we argue superior) regulatory institutions threaten to chill participation in the SSO process and reduce welfare. But Kobayashi and Wright are not alone in questioning the utility of antitrust liability layered on top of these alternative bodies of state and federal law. For example, Froeb and Ganglomoir present a model in which “the threat of antitrust liability on top of simple contracts shifts bargaining rents from creators to users of intellectual property in an inefficient way.” Other contributors to this literature questioning the role of antitrust liability in “breach” style patent holdup cases such as N-Data include Anne Layne-Farrar. I will not take on the task in this blog post of repeating the various arguments making the case against antitrust liability here. But I believe that Carrier’s standard setting chapter and policy proposals would benefit from addressing them.

Second, assuming that antitrust rules should apply to patent holdup (both deception and breach variants), what should the analysis look like? With respect to the Section 2 analysis in claims involving deception, Professor Carrier appears to endorse the proposition that a demonstration of either actual exclusion (e.g., the deception is the but-for cause of the adoption of the technology) or higher royalties would be sufficient to support such a claim. I’m not sure why the latter is or should be sufficient? As I’ve argued elsewhere, the Supreme Court’s decision in NYNEX applies in the patent holdup setting when (1) the patent holder has market power prior to the deception and (2) the deceptive conduct results in higher royalties but not exclusion of rival technologies. When those conditions are satisfied, NYNEX’s holding (which is consistent with much of the Supreme Court’s general jurisprudence about the monopolist’s freedom to optimal pricing, e.g., Trinko, Linkline) that deceptive or fraudulent conduct that merely results in higher prices but not exclusion cannot be the basis of a Section 2 claim. Along those lines, I’ve argued that the D.C. Circuit’s Rambus decision is best interpreted as calling the Commission to task for failure to meet its burden of demonstrating that the first of these conditions did not apply. In any event, in reading Carrier’s treatment of patent holdup issues I’m left with several questions. For instance, I’m left wondering whether he believes that Section 2 should apply to both the deception and breach variants of patent holdup? If it applies to both, what is the appropriate scope of NYNEX? For example, do plaintiffs in patent holdup claims under Section 2 have the burden of demonstrating that the patent holder did not have monopoly power prior to the deceptive conduct? If not, on what grounds is NYNEX distinguishable? Is it because it was not an SSO case? What is the appropriate rule of reason analysis in a case involving deception in the standard setting process? What about cases like N-Data where the plaintiff does not allege any “bad conduct” at the time the technology is selected by the standard but rather some renegotiation of contract terms at a later time?

Third, no discussion of patent holdup would be complete without a discussion of whether and how Section 5 of the FTC Act should apply to patent holdup theories. Here again, while Carrier discusses N-Data briefly, this question does not receive attention. So the blog symposium seems like a great place to ask questions like the following: Should Section 5 of the FTC Act apply to both the deception-based and the “pure breach” variants of patent holdup? These are some of the most pressing issues relating to antitrust analysis of standard setting. Recently, Chairman Leibowitz singled out N-Data as a paradigmatic example of the appropriate application of Section 5:

One category of potential cases [to which to apply Section 5] involves standard-setting. N-Data, our consent from last spring, is a useful example. Reasonable people can disagree over whether N-Data violated the Sherman Act because it was never clear whether N-Data’s alleged bad conduct actually caused its monopoly power. However, it was clear to the majority of the Commission that reneging on a commitment was not acceptable business behavior and that—at least in this context—it would harm American consumers. It does not require a complex analysis to see that such behavior could seriously undermine standard-setting, which is generally procompetitive, and dangerously limit the benefits that consumers now get from the wide adoption of industry standards for new technologies.

Tales from the Crypt” Episode ’08 and ’09: The Return of Section 5 (“Unfair Methods of Competition in Commerce are Hereby Declared Unlawful”).
Similarly, Commissioners Leibowitz, Rosch, and Harbour noted in the N-Data majority statement that “there is little doubt that N-Data’s conduct constitutes an unfair method of competition,” describing the renegotiation of the ex ante contractual commitment to license at $1,000 to a RAND commitment as “oppressive” and an act that threatens to “stall [the standard setting process] to the detriment of all consumers.”

I wonder whether Professor Carrier thinks the majority in N-Data was correct? And if so, on what basis?  Or are breach variant holdup claims more appropriately governed under Section 2? If the answer to either of those questions is yes, I’d like to know whether and on what basis the application of these mandatory antitrust rules is superior to contract law, which contains doctrine designed to identify and distinguish good faith modifications and renegotiations from attempts at ex post opportunism.

I should note that I do not consider it a criticism of the book that these details are largely left out of the book. The task of organizing a coherent and intellectually provocative book that moves between copyright, patent, and antitrust is monumental and comes with its own special set of breadth and depth tradeoffs. However, I ultimately found the attention to legal, economic, and policy details in the SSO section less satisfying than the treatment of other equally complex issues throughout the book. While I was left disappointed that these details were not there, I admit to being very curious after reading Professor Carrier’s views on innovation and antitrust more generally as to how he will manage the thorny details in the patent holdup context.