Archives For Intellectual Property

Late last month, 25 former judges and government officials, legal academics and economists who are experts in antitrust and intellectual property law submitted a letter to Assistant Attorney General Jonathan Kanter in support of the U.S. Justice Department’s (DOJ) July 2020 Avanci business-review letter (ABRL) dealing with patent pools. The pro-Avanci letter was offered in response to an October 2022 letter to Kanter from ABRL critics that called for reconsideration of the ABRL. A good summary account of the “battle of the scholarly letters” may be found here.

The University of Pennsylvania’s Herbert Hovenkamp defines a patent pool as “an arrangement under which patent holders in a common technology or market commit their patents to a single holder, who then licenses them out to the original patentees and perhaps to outsiders.” Although the U.S. antitrust treatment of patent pools might appear a rather arcane topic, it has major implications for U.S. innovation. As AAG Kanter ponders whether to dive into patent-pool policy, a brief review of this timely topic is in order. That review reveals that Kanter should reject the anti-Avanci letter and reaffirm the ABRL.

Background on Patent Pool Analysis

The 2017 DOJ-FTC IP Licensing Guidelines

Section 5.5 of joint DOJ-Federal Trade Commission (FTC) Antitrust Guidelines for the Licensing of Intellectual Property (2017 Guidelines, which revised a prior 1995 version) provides an overview of the agencies’ competitive assessment of patent pools. The 2017 Guidelines explain that, depending on how pools are designed and operated, they may have procompetitive (and efficiency-enhancing) or anticompetitive features.

On the positive side of the ledger, Section 5.5 states:

Cross-licensing and pooling arrangements are agreements of two or more owners of different items of intellectual property to license one another or third parties. These arrangements may provide procompetitive benefits by integrating complementary technologies, reducing transaction costs, clearing blocking positions, and avoiding costly infringement litigation. By promoting the dissemination of technology, cross-licensing and pooling arrangements are often procompetitive.

On the negative side of the ledger, Section 5.5 states (citations omitted):

Cross-licensing and pooling arrangements can have anticompetitive effects in certain circumstances. For example, collective price or output restraints in pooling arrangements, such as the joint marketing of pooled intellectual property rights with collective price setting or coordinated output restrictions, may be deemed unlawful if they do not contribute to an efficiency-enhancing integration of economic activity among the participants. When cross-licensing or pooling arrangements are mechanisms to accomplish naked price-fixing or market division, they are subject to challenge under the per se rule.

Other aspects of pool behavior may be either procompetitive or anticompetitive, depending upon the circumstances, as Section 5.5 explains. The antitrust rule of reason would apply to pool restraints that may have both procompetitive and anticompetitive features.  

For example, requirements that pool members grant licenses to each other for current and future technology at minimal cost could disincentivize research and development. Such requirements, however, could also promote competition by exploiting economies of scale and integrating complementary capabilities of the pool members. According to the 2017 Guidelines, such requirements are likely to cause competitive problems only when they include a large fraction of the potential research and development in an R&D market.

Section 5.5 also applies rule-of-reason case-specific treatment to exclusion from pools. It notes that, although pooling arrangements generally need not be open to all who wish to join (indeed, exclusion of certain parties may be designed to prevent potential free riding), they may be anticompetitive under certain circumstances (citations omitted):

[E]xclusion from a pooling or cross-licensing arrangement among competing technologies is unlikely to have anticompetitive effects unless (1) excluded firms cannot effectively compete in the relevant market for the good incorporating the licensed technologies and (2) the pool participants collectively possess market power in the relevant market. If these circumstances exist, the [federal antitrust] [a]gencies will evaluate whether the arrangement’s limitations on participation are reasonably related to the efficient development and exploitation of the pooled technologies and will assess the net effect of those limitations in the relevant market.

The 2017 Guidelines are informed by the analysis of prior agency-enforcement actions and prior DOJ business-review letters. Through the business-review-letter procedure, an organization may submit a proposed action to the DOJ Antitrust Division and receive a statement as to whether the Division currently intends to challenge the action under the antitrust laws, based on the information provided. Historically, DOJ has used these letters as a vehicle to discuss current agency thinking about safeguards that may be included in particular forms of business arrangements to alleviate DOJ competitive concerns.

DOJ patent-pool letters, in particular, have prompted DOJ to highlight specific sorts of provisions in pool agreements that forestalled competitive problems. To this point, DOJ has never commented favorably on patent-pool safeguards in a letter and then subsequently reversed course to find the safeguards inadequate.

Subsequent to issuance of the 2017 Guidelines, DOJ issued two business-review letters on patent pools: the July 2020 ABRL letter and the January 2021 University Technology Licensing Program business-review letter (UTLP letter). Those two letters favorably discussed competitive safeguards proffered by the entities requesting favorable DOJ reviews.

ABRL Letter

The ABRL letter explains (citations omitted):

[Avanci] proposed [a] joint patent-licensing pool . . . to . . . license patent claims that have been declared “essential” to implementing 5G cellular wireless standards for use in automobile vehicles and distribute royalty income among the Platform’s licensors. Avanci currently operates a licensing platform related to 4G cellular standards and offers licenses to 2G, 3G, and 4G standards-essential patents used in vehicles and smart meters.

After consulting telecommunications and automobile-industry stakeholders, conducing an independent review, and considering prior guidance to other patent pools, “DOJ conclude[d] that, on balance, Avanci’s proposed 5G Platform is unlikely to harm competition.” As such, DOJ announced it had no present intention to challenge the platform.

The DOJ press release accompanying the ABRL letter provides additional valuable information on Avanci’s potential procompetitive efficiencies; its plan to charge fair, reasonable, and non-discriminatory (FRAND) rates; and its proposed safeguards:

Avanci’s 5G Platform may make licensing standard essential patents related to vehicle connectivity more efficient by providing automakers with a “one stop shop” for licensing 5G technology. The Platform also has the potential to reduce patent infringement and ensure that patent owners who have made significant contributions to the development of 5G “Release 15” specifications are compensated for their innovation. Avanci represents that the Platform will charge FRAND rates for the patented technologies, with input from both licensors and licensees.

In addition, Avanci has incorporated a number of safeguards into its 5G Platform that can help protect competition, including licensing only technically essential patents; providing for independent evaluation of essential patents; permitting licensing outside the Platform, including in other fields of use, bilateral or multi-lateral licensing by pool members, and the formation of other pools at levels of the automotive supply chain; and by including mechanisms to prevent the sharing of competitively sensitive information.  The Department’s review found that the Platform’s essentiality review may help automakers license the patents they actually need to make connected vehicles.  In addition, the Platform license includes “Have Made” rights that creates new access to cellular standard essential patents for licensed automakers’ third-party component suppliers, permitting them to make non-infringing components for 5G connected vehicles.

UTLP Letter

The United Technology Licensing Program business-review letter (issued less than a year after the ABRL letter, at the end of the Trump administration) discussed a proposal by participating universities to offer licenses to their physical-science patents relating to specified emerging technologies. According to DOJ:

[Fifteen universities agreed to cooperate] in licensing certain complementary patents through UTLP, which will be organized into curated portfolios relating to specific technology applications for autonomous vehicles, the “Internet of Things,” and “Big Data.”  The overarching goal of UTLP is to centralize the administrative costs associated with commercializing university research and help participating universities to overcome the budget, institutional relationship, and other constraints that make licensing in these areas particularly challenging for them.

The UTLP letter concluded, based on representations made in UTLP’s letter request, that the pool was on balance unlikely to harm competition. Specifically:

UTLP has incorporated a number of safeguards into its program to help protect competition, including admitting only non-substitutable patents, with a “safety valve” if a patent to accomplish a particular task is inadvertently included in a portfolio with another, substitutable patent. The program also will allow potential sublicensees to choose an individual patent, a group of patents, or UTLP’s entire portfolio, thereby mitigating the risk that a licensee will be required to license more technology than it needs. The department’s letter notes that UTLP is a mechanism that is intended to address licensing inefficiencies and institutional challenges unique to universities in the physical science context, and makes no assessment about whether this mechanism if set up in another context would have similar procompetitive benefits.

Patent-Pool Guidance in Context

DOJ and FTC patent-pool guidance has been bipartisan. It has remained generally consistent in character from the mid-1990s (when the first 1995 IP licensing guidelines were issued) to early 2021 (the end of the Trump administration, when the UTLP letter was issued). The overarching concern expressed in agency guidance has been to prevent a pool from facilitating collusion among competitors, from discouraging innovation, and from inefficiently excluding competitors.

As technology has advanced over the last quarter century, U.S. antitrust enforcers—and, in particular, DOJ, through a series of business-review letters beginning in 1997 (see the pro-Avanci letter at pages 9-10)—consistently have emphasized the procompetitive efficiencies that pools can generate, while also noting the importance of avoiding anticompetitive harms.

Those letters have “given a pass” to pools whose rules contained safeguards against collusion among pool members (e.g., by limiting pool patents to complementary, not substitute, technologies) and against anticompetitive exclusion (e.g., by protecting pool members’ independence of action outside the pool). In assessing safeguards, DOJ has paid attention to the particular market context in which a pool arises.

Notably, economic research generally supports the conclusion that, in recent decades, patent pools have been an important factor in promoting procompetitive welfare-enhancing innovation and technology diffusion.

For example, a 2015 study by Justus Baron and Tim Pohlmann found that a significant number of pools were created following antitrust authorities’ “more permissive stance toward pooling of patents” beginning in the late 1990s. Studying these new pools, they found “a significant increase in patenting rates after pool announcement” that was “primarily attributable to future members of the pool”.

A 2009 analysis by Richard Gilbert of the University of California, Berkeley (who served as chief economist of the DOJ Antitrust Division during the Clinton administration) concluded that (consistent with the approach adopted in DOJ business-review letters) “antitrust authorities and the courts should encourage policies that promote the formation and durability of beneficial pools that combine complementary patents.”

In a 2014 assessment of the role of patent pools in combatting “patent thickets,” Jonathan Barnett of the USC Gould School of Law concluded:

Using network visualization software, I show that information and communication technology markets rely on patent pools and other cross-licensing structures to mitigate or avoid patent thickets and associated inefficiencies. Based on the composition, structure, terms and pricing of selected leading patent pools in the ICT market, I argue that those pools are best understood as mechanisms by which vertically integrated firms mitigate transactional frictions and reduce the cost of accessing technology inputs.

Admittedly, a few studies of some old patents pools (e.g., the 19th century sewing-machine pool and certain early 20th century New Deal pools) found them to be associated with a decline in patenting. Setting aside possible questions of those studies’ methodologies, the old pooling arrangements bear little resemblance to the carefully crafted pool structures today. In particular, unlike the old pools, the more recent pools embody competitive safeguards (the old pools may have combined substitute patents, for example).   

Business-review letters dealing with pools have provided a degree of legal certainty that has helped encourage their formation, to the benefit of innovation in key industries. The anti-Avanci letter ignores that salient fact, focusing instead on allegedly “abusive” SEP-licensing tactics by the Avanci 5G pool—such as refusal to automatically grant a license to all comers—without considering that the pool may have had legitimate reasons not to license particular parties (who may, for instance, have made bad faith unreasonable licensing demands). In sum, this blinkered approach is wrong as a matter of SEP law and policy (as explained in the pro-Avanci letter) and wrong in its implicit undermining of the socially beneficial patent-pool business-review process.   

The pro-Avanci letter ably describes the serious potential harm generated by the anti-Avanci letter:

In evaluating the carefully crafted Avanci pool structure, the 2020 business review letter appropriately concluded that the pool’s design conformed to the well-established, fact-intensive inquiry concerning actual market practices and efficiencies set forth in previous business review letters. Any reconsideration of the 2020 business review letter, as proposed in the October 17 letter, would give rise to significant uncertainty concerning the Antitrust Division’s commitment to the aforementioned sequence of business review letters that have been issued concerning other patent pools in the information technology industry, as well as the larger group of patent pools that did not specifically seek guidance through the business review letter process but relied on the legal template that had been set forth in those previously issued letters.

This is a point of great consequence. Pooling arrangements in the information technology industry have provided an efficient market-driven solution to the transaction costs that are inherent to patent-intensive industries and, when structured appropriately in light of agency guidance and applicable case law, do not raise undue antitrust concerns. Thanks to pooling and related collective licensing arrangements, the innovations embodied in tens of thousands of patents have been made available to hundreds of device producers and other intermediate users, while innovators have been able to earn a commensurate return on the costs and risks that they undertook to develop new technologies that have transformed entire fields and industries to the benefit of consumers.

Conclusion

President Joe Biden’s 2021 Executive Order on Competition commits the Biden administration to “the promotion of competition and innovation by firms small and large, at home and worldwide.” One factor in promoting competition and innovation has been the legal certainty flowing from well-reasoned DOJ business-review letters on patent pools, issued on a bipartisan basis for more than a quarter of a century.

A DOJ decision to reconsider (in other words, to withdraw) the sound guidance embodied in the ABRL would detract from this certainty and thereby threaten to undermine innovation promoted by patent pools. Accordingly, AAG Kanter should reject the advice proffered by the anti-Avanci letter and publicly reaffirm his support for the ABRL—and, more generally, for the DOJ business-review process.

“Just when I thought I was out, they pull me back in!” says Al Pacino’s character, Michael Corleone, in Godfather III. That’s how Facebook and Google must feel about S. 673, the Journalism Competition and Preservation Act (JCPA)

Gus Hurwitz called the bill dead in September. Then it passed the Senate Judiciary Committee. Now, there are some reports that suggest it could be added to the obviously unrelated National Defense Authorization Act (it should be noted that the JCPA was not included in the version of NDAA introduced in the U.S. House).

For an overview of the bill and its flaws, see Dirk Auer and Ben Sperry’s tl;dr. The JCPA would force “covered” online platforms like Facebook and Google to pay for journalism accessed through those platforms. When a user posts a news article on Facebook, which then drives traffic to the news source, Facebook would have to pay. I won’t get paid for links to my banger cat videos, no matter how popular they are, since I’m not a qualifying publication.

I’m going to focus on one aspect of the bill: the use of “final offer arbitration” (FOA) to settle disputes between platforms and news outlets. FOA is sometimes called “baseball arbitration” because it is used for contract disputes in Major League Baseball. This form of arbitration has also been implemented in other jurisdictions to govern similar disputes, notably by the Australian ACCC.

Before getting to the more complicated case, let’s start simple.

Scenario #1: I’m a corn farmer. You’re a granary who buys corn. We’re both invested in this industry, so let’s assume we can’t abandon negotiations in the near term and need to find an agreeable price. In a market, people make offers. Prices vary each year. I decide when to sell my corn based on prevailing market prices and my beliefs about when they will change.

Scenario #2: A government agency comes in (without either of us asking for it) and says the price of corn this year is $6 per bushel. In conventional economics, we call that a price regulation. Unlike a market price, where both sides sign off, regulated prices do not enjoy mutual agreement by the parties to the transaction.

Scenario #3:  Instead of a price imposed independently by regulation, one of the parties (say, the corn farmer) may seek a higher price of $6.50 per bushel and petition the government. The government agrees and the price is set at $6.50. We would still call that price regulation, but the outcome reflects what at least one of the parties wanted and  some may argue that it helps “the little guy.” (Let’s forget that many modern farms are large operations with bargaining power. In our head and in this story, the corn farmer is still a struggling mom-and-pop about to lose their house.)

Scenario #4: Instead of listening only to the corn farmer,  both the farmer and the granary tell the government their “final offer” and the government picks one of those offers, not somewhere in between. The parties don’t give any reasons—just the offer. This is called “final offer arbitration” (FOA). 

As an arbitration mechanism, FOA makes sense, even if it is not always ideal. It avoids some of the issues that can attend “splitting the difference” between the parties. 

While it is better than other systems, it is still a price regulation.  In the JCPA’s case, it would not be imposed immediately; the two parties can negotiate on their own (in the shadow of the imposed FOA). And the actual arbitration decision wouldn’t technically be made by the government, but by a third party. Fine. But ultimately, after stripping away the veneer,  this is all just an elaborate mechanism built atop the threat of the government choosing the price in the market. 

I call that price regulation. The losing party does not like the agreement and never agreed to the overall mechanism. Unlike in voluntary markets, at least one of the parties does not agree with the final price. Moreover, neither party explicitly chose the arbitration mechanism. 

The JCPA’s FOA system is not precisely like the baseball situation. In baseball, there is choice on the front-end. Players and owners agree to the system. In baseball, there is also choice after negotiations start. Players can still strike; owners can enact a lockout. Under the JCPA, the platforms must carry the content. They cannot walk away.

I’m an economist, not a philosopher. The problem with force is not that it is unpleasant. Instead, the issue is that force distorts the knowledge conveyed through market transactions. That distortion prevents resources from moving to their highest valued use. 

How do we know the apple is more valuable to Armen than it is to Ben? In a market, “we” don’t need to know. No benevolent outsider needs to pick the “right” price for other people. In most free markets, a seller posts a price. Buyers just need to decide whether they value it more than that price. Armen voluntarily pays Ben for the apple and Ben accepts the transaction. That’s how we know the apple is in the right hands.

Often, transactions are about more than just price. Sometimes there may be haggling and bargaining, especially on bigger purchases. Workers negotiate wages, even when the ad stipulates a specific wage. Home buyers make offers and negotiate. 

But this just kicks up the issue of information to one more level. Negotiating is costly. That is why sometimes, in anticipation of costly disputes down the road, the two sides voluntarily agree to use an arbitration mechanism. MLB players agree to baseball arbitration. That is the two sides revealing that they believe the costs of disputes outweigh the losses from arbitration. 

Again, each side conveys their beliefs and values by agreeing to the arbitration mechanism. Each step in the negotiation process allows the parties to convey the relevant information. No outsider needs to know “the right” answer.For a choice to convey information about relative values, it needs to be freely chosen.

At an abstract level, any trade has two parts. First, people agree to the mechanism, which determines who makes what kinds of offers. At the grocery store, the mechanism is “seller picks the price and buyer picks the quantity.” For buying and selling a house, the mechanism is “seller posts price, buyer can offer above or below and request other conditions.” After both parties agree to the terms, the mechanism plays out and both sides make or accept offers within the mechanism. 

We need choice on both aspects for the price to capture each side’s private information. 

For example, suppose someone comes up to you with a gun and says “give me your wallet or your watch. Your choice.” When you “choose” your watch, we don’t actually call that a choice, since you didn’t pick the mechanism. We have no way of knowing whether the watch means more to you or to the guy with the gun. 

When the JCPA forces Facebook to negotiate with a local news website and Facebook offers to pay a penny per visit, it conveys no information about the relative value that the news website is generating for Facebook. Facebook may just be worried that the website will ask for two pennies and the arbitrator will pick the higher price. It is equally plausible that in a world without transaction costs, the news would pay Facebook, since Facebook sends traffic to them. Is there any chance the arbitrator will pick Facebook’s offer if it asks to be paid? Of course not, so Facebook will never make that offer. 

For sure, things are imposed on us all the time. That is the nature of regulation. Energy prices are regulated. I’m not against regulation. But we should defend that use of force on its own terms and be honest that the system is one of price regulation. We gain nothing by a verbal sleight of hand that turns losing your watch into a “choice” and the JCPA’s FOA into a “negotiation” between platforms and news.

In economics, we often ask about market failures. In this case, is there a sufficient market failure in the market for links to justify regulation? Is that failure resolved by this imposition?

Recently departed Federal Trade Commission (FTC) Commissioner Noah Phillips has been rightly praised as “a powerful voice during his four-year tenure at the FTC, advocating for rational antitrust enforcement and against populist antitrust that derails the fair yet disruptive process of competition.” The FTC will miss his trenchant analysis and collegiality, now that he has departed for the greener pastures of private practice.

A particularly noteworthy example of Phillips’ mastery of his craft is presented by his November 2018 dissent from the FTC’s majority opinion in the 1-800 Contacts case, which presented tricky questions about the proper scope of antitrust intervention in contracts designed to protect intellectual property rights. (For more on the opinion, see Geoffrey A. Manne, Hal Singer, and Joshua D. Wright’s December 2018 piece.)

Phillips’ dissent—vindicated by a June 2021 decision by the 2nd U.S. Circuit Court of Appeals vacating the commission’s order—merits close attention. (The circuit court also denied the FTC’s petition for a rehearing en banc in August 2021.)

The 1-800 Business Model and the FTC’s Proceedings

Before describing the 1-800 proceedings, Phillips’ dissent, and the judicial vindication of his position, we begin with a brief assessment of the welfare-enhancing innovative business model employed by 1-800 Contacts. The firm pioneered the online contact-lens sales business. It is an American entrepreneurial success story, which has bestowed great benefits on consumers through trademark-backed competition focusing on price and quality considerations. Phillips’ dissenting opinion explained:

Jonathan Coon started the business that would become 1-800 Contacts in 1992 from his college dormitory room with just $50 to his name, seeking to reduce prices, improve service, and provide a better customer experience for contact lens consumers. … Over the next 26 years he would succeed, building a company (and a brand) from essentially nothing to one of the largest contact lens retailers in the country, while introducing American consumers to mail-order contact lenses (and later ordering contacts online), driving down prices, and attracting competition from small and large companies alike. That growth required a combination of a massive investment in advertising and a constant quest to improve the customer experience. That is the type of conduct that antitrust and trademark law should, and do, encourage. …

As [the FTC administrative law judge] … found in the Initial Decision, “1-800 Contacts’ business objective from the company’s inception was to make the process of buying contact lenses simple and it tries to distinguish itself from other contact lens retailers by making it faster, easier, and more convenient to get contact lenses.” … This contrasts with other online contact lens retailers, which generally do not seek to distinguish themselves on the basis of customer experience, customer service, or simplicity. … 1-800 Contacts did not limit itself to competing on price because it found that many customers valued speed and convenience just as much as price. …

1-800 Contacts’ relentless investment in its brand and in improving its customer service are recognized. Many third parties—including J.D. Power and Associates, StellaService Elite, and Foresee—have recognized or given awards to 1-800 Contacts for its customer service. … But that has not stopped 1-800 Contacts from continuing to invest in improving its service to enhance the customer experience. …

The service and brand investments made by 1-800 Contacts have resulted in millions of consumers purchasing contact lenses from 1-800 Contacts over the phone and online. They are precisely the types of investments that trademark law exists to protect and encourage.

The 2nd Circuit summarized the actions by 1-800 Contacts (“Petitioner”) that prompted an FTC administrative complaint, then presented a brief history of the internal FTC proceedings:

In 2002, Petitioner began filing complaints and sending cease-and-desist letters to its competitors alleging trademark infringement related to its competitors’ online advertisements. Between 2004 and 2013, Petitioner entered into thirteen settlement agreements to resolve most of these disputes. Each of these agreements includes language that prohibits the parties from using each other’s trademarks, URLs, and variations of trademarks as search advertising keywords. The agreements also require the parties to employ negative keywords so that a search including one party’s trademarks will not trigger a display of the other party’s ads. The agreements do not prohibit parties from bidding on generic keywords such as “contacts” or “contact lenses.” Petitioner enforced the agreements when it perceived them to be breached.   

Apart from the settlement agreements, in 2013 Petitioner entered into a “sourcing and services agreement” with Luxottica, a company that sells and distributes contacts through its affiliates. That agreement also contains reciprocal online search advertising restrictions prohibiting the use of trademark keywords and requiring both parties to employ negative keywords.  

The FTC issued an administrative complaint against Petitioner in August 2016 alleging that the thirteen settlement agreements and the Luxottica agreement, … along with subsequent actions to enforce them, unreasonably restrain truthful, non-misleading advertising as well as price competition in search advertising auctions, all of which constitute a violation of Section 5 of the FTC Act, 15 U.S.C. § 45. The complaint alleges that the Challenged  Agreements prevented Petitioner’s competitors from disseminating ads that would have informed consumers that the same contact lenses were available at a cheaper price from other online retailers, thereby reducing competition and making it more difficult for consumers to compare online retail prices. The case was tried before an ALJ, who concluded that a violation had occurred.   

As an initial matter, the ALJ rejected Petitioner’s assertion that trademark settlement agreements are not subject to antitrust scrutiny in light of FTC v. Actavis, 570 U.S. 136 (2013). Applying the “rule of reason” and principles of Section 1 of the Sherman Act, 15 U.S.C. § 1, the ALJ determined that “[o]nline sales of contact lenses constitute a relevant product market.” … He found that the agreements constituted a “contract, combination, or  conspiracy” as required by the Sherman Act and held that the  advertising restrictions in the agreements harmed consumers by reducing the availability of information, in turn making it costlier for consumers to find and compare contact lens prices. …

Having found actual anticompetitive effects, as required under the rule of reason analysis, the ALJ rejected the procompetitive justifications for the agreements offered by Petitioner. He found that while trademark protection is procompetitive, it did not justify the advertising restrictions in the agreements and also that Petitioner failed to show that reduced litigation costs would benefit consumers. The ALJ issued an order that barred Petitioner from entering into an agreement with any marketer or seller of contact lenses to limit participation in search advertising auctions or to prohibit or limit search advertising.

1-800 appealed the ALJ’s order to the Commission. In a split decision, a majority of the Commission agreed with the ALJ that the agreements violated Section 5 of the FTC Act. The majority, however, analyzed the settlement agreements differently from the ALJ. The majority classified the agreements as “inherently suspect” and alternatively found “direct evidence” of anticompetitive effects on consumers and search engines. The majority then analyzed the procompetitive justifications Petitioner offered for the agreements and rejected arguments that the benefits of protecting trademarks and reducing litigation costs outweighed any potential harm to consumers. Finally, the majority identified what it believed to be less anticompetitive alternatives to the advertising restrictions in the agreements. One Commissioner dissented, reasoning both that the majority should not have applied the “inherently suspect” framework and that it failed to give appropriate consideration to Petitioner’s proffered procompetitive justifications. This timely appeal followed.

Commissioner Phillips’ Dissent

Phillips meticulously made the case that 1-800 Contacts’ behavior raised no antitrust concerns.

First, he began by stressing that the settlements in question resolved legitimate trademark-infringement claims. The settlements also were limited in scope. They did not prevent any of the parties from engaging in any form of non-infringing advertising (online or offline), they specifically permitted non-infringing uses like comparative advertising and parodies, and they placed no restrictions on the content that any of the settling parties could include in their ads. In short, the settlements “sought to balance 1-800 Contacts’ legitimate interests in protecting its trademarks with competitors’ (and consumers’) interests in truthful advertising.

Second, he explained in detail why the FTC majority opinion failed to show that the trademark settlements were “inherently suspect.” He noted that the “[s]ettlements do not approximate conduct that the Commission or courts have previously found to be inherently suspect, much less illegal.” FTC complaint counsel had not demonstrated any output effects—the settlements permitted price and quality advertising, and did not affect third-party sellers. The Actavis Supreme Court refused to apply the inherently suspect framework “even though the alleged conduct at issue [reverse payments] was far more harmful to competition than anything at issue here, as well-established economic evidence demonstrated.”

Moreover, the majority opinion’s reliance on the FTC’s Polygram decision was misplaced, because the defendants in that case fixed prices and banned advertising (“[t]here is no price fixing here [n]or is there an advertising ban”). Other cases cited by the majority involving advertising restrictions similarly were inapposite, because they involved far greater restrictions on advertising and did not implicate intellectual property. Furthermore, “[t]he economic studies cited by the majority d[id] not examine paid search advertising, … much less how restraints upon it interact with the trademark policies at issue here.”

Third, he discussed at length why the majority should not have pursued a truncated rule-of-reason analysis. In short:

Applicable precedent makes clear that the Trademark Settlements should be analyzed under the traditional rule of reason. And the cases on which the majority rely fail to provide support for truncating that analysis by applying the “inherently suspect” framework. As noted, those cases do not involve trademarks, or intellectual property of any kind. That is relevant—indeed, decisive—because trademarks often limit advertising in one way or another, and the logic of the majority’s analysis would support a rule that stigmatizes conduct protecting those rights, which is clearly procompetitive, as presumptively unlawful.

Fourth, in addition to the legal infirmities, Phillips skillfully exposed the serious policy shortcomings of the majority’s “inherently suspect” approach:

Treating the Trademark Settlements as “inherently suspect” yields an unclear rule that regardless of interpretation, will, I fear, create uncertainty, dilute trademark rights, and dampen inter-brand competition. The majority couch their holding as a limited one dealing with restraints on the opportunity to make price comparisons, but, by adopting an analytical framework without accounting for the intellectual property at issue, they produce one of the following rules: either all advertising restrictions are inherently suspect, regardless whether they protect intellectual property rights, or the level of scrutiny applied to a particular restraint will depend on the strength of the trademark holder’s underlying infringement claim.

In his policy assessment, Phillips added that the policy favoring litigation settlements (due to the fact that, as a general matter, they promote efficiency) supports application of the traditional rule of reason.

Fifth, turning to the traditional rule of reason, Phillips explicated FTC complaint counsel’s failure to meet its burden of proof (case citations omitted):

If the Trademark Settlements are not “inherently suspect”, which they are not, Complaint Counsel can meet their initial burden of proof under the rule of reason in one of two ways: “an indirect showing based on a demonstration of defendant’s market power” or “direct evidence of ‘actual, sustained adverse effects on competition’” … The majority take only the direct approach; they do not attempt an indirect showing of market power. … To meet the initial burden of direct evidence, a plaintiff must show adverse effects on competition that are actual, sustained, and significant or substantial. … Complaint Counsel have not met that burden with its showing on direct effects.

In dealing with burden-of-proof issues, Phillips demonstrated that, in the context of a trademark-settlement agreement, a restriction on advertising is, by itself, insufficient to show direct effects. Phillips conceded that, “[w]hile restrictions on advertising are not themselves enough, the majority are correct that a showing of actual, sustained, and substantial or significant price effects would suffice.” But Phillips emphasized that the majority failed to show that the trademark settlements were responsible for “the fact that 1-800 Contacts’ prices were higher than some of its competitors’ prices.” Indeed, the record was “clear that that price differential predated the Trademark Settlements.” Furthermore, FTC complaint counsel “put forward no evidence that the price gap increased as a result of the Trademark Settlements.” What’s more, the FTC majority “did not adduce legally sufficient proof” that “1-800 Contacts maintained supracompetitive prices. … [T]he majority d[id] not even attempt to show that 1-800 Contacts’ price cost-margin was abnormally high—either before or after the Trademark Settlements.”

Phillips next focused on the substantial procompetitive justifications for 1-800’s conduct. (This was legally unnecessary, because the initial burden under the inherently suspect framework had not been met, direct effects had not been shown, and there had been no effort to show indirect effects.) These included settlement-related litigation-cost savings and enhanced trademark protections. Phillips stressed “the tremendous amount of investment 1-800 Contacts ha[d] made in building its brand, lowering the price of contact lenses, and offering customers superior service.” 

After skillfully refuting the FTC majority’s novel separate theory that the settlements had anticompetitive effects on firms owning search engines (such as Google or Bing), Phillips skewered the FTC majority’s claim that the trademark settlements could have been narrower:

The searches that the Trademark Settlements prohibit[ed] [we[re] precisely those searches that implicate[d] 1-800 Contacts’ trademarks. They [we]re also the searches through which users [we]re most likely attempting to reach the 1-800 Contacts website (i.e., searches for 1-800 Contacts’ trademark). …

The settling parties included a negative keyword provision in response to Google’s explicit encouragement for 1-800 Contacts to resolve its trademark disputes with competitors by having them implement 1-800 Contacts’ trademarked terms as negative keywords. … They did so because, without negative keywords, a settling party’s advertisements could appear in response to searches for the counterparty’s trademarked terms.

Almost all of the Trademark Settlements balanced these restrictions with a provision explicitly permitting a settling party to use the counterparty’s trademarks in the non-internet context, including comparative advertising. …

As a result, …  the Trademark Settlements were appropriately tailored to achieve their goal of preventing trademark infringement while balancing the need to permit non-infringing advertising.

Turning to the Luxottica servicing agreement, Phillips explained that the majority opinion mistakenly characterized it as just another inherently suspect settlement. Instead, it was an efficient sourcing and servicing agreement. Under the agreement, 1-800 Contacts shipped contacts for sale to Luxottica brick-and-mortar chain stores, and Luxottica also provided other services. Luxottica benefited by outsourcing its entire contact-lens business—including negotiating with contact-lens suppliers—to 1-800 Contacts. The majority failed to analyze the various procompetitive benefits stemming from this arrangement, which fit squarely within the FTC-U.S. Justice Department (DOJ) Competitor Collaboration Guidelines. In particular, for example, “[a]s a direct result of its decision to outsource much of its contact business to 1-800 Contacts, Luxottica customers could receive lower prices and better services (e.g., faster delivery).”

Phillips closed his dissent by highlighting the ineffectiveness of the FTC majority’s order, which “state[d] that the only agreements that 1-800 Contacts c[ould] enter [we]re those that, in effect, that t[old] the counterparty that they c[ould] [not] violate the trademark laws.” This unhelpful language “w[ould] only lead to more litigation to determine what conduct actually violated the trademark laws in the context of paid search advertising based on trademarked keywords. Because the Order only allow[ed] agreements that d[id] not actually resolve the dispute in trademark infringement litigation, it w[ould] reduce the incentive to settle, which, in turn, w[ould] lead to either less trademark enforcement or more costly litigation”.

Phillips concluding paragraph offered sound general advice about the limits of antitrust and the need to avoid a harmful lack of clarity in enforcement:

The Commission’s mandate is to enforce the antitrust laws, but we cannot do so in a vacuum. We need to consider competing policies, including federal trademark policy, when analyzing allegedly anticompetitive conduct. And we should recognize that unclear rules may do more harm both to that policy and to competition than the alleged conduct here. In the case of the Trademark Settlements, precedent offers a better way: the Commission should analyze such agreements under the full rule of reason, giving appropriate weight to the trademarks at issue and the value they protect. Such a rule will decrease uncertainty in the market, encourage brand investment, and increase competition.

The 2nd Circuit Rejects the FTC Majority’s Position

The 2nd Circuit rejected the FTC majority opinion and vacated commission’s order. First, it rejected the FTC’s reliance on a “quick look” analysis, stating:

Courts do not have sufficient experience with this type of conduct to permit the abbreviated analysis of the Challenged [trademark settlement] Agreements undertaken by the Commission. … When, as here, not only are there cognizable procompetitive justifications but also the type of restraint has not been widely condemned in our “judicial experience,” … more is required. … The Challenged Agreements, therefore, are not so obviously anticompetitive to consumers that someone with only a basic understanding of economics would immediately recognize them to be so. … We are bound, then, to apply the rule of reason.

Turning to full rule-of-reason analysis, the court began by assessing anticompetitive effects. It rejected the FTC’s argument that it had established direct evidence of such effects in the form of increased prices. It emphasized that the government could not show an actual anticompetitive change in prices after the restraint was implemented, “because it did not conduct an empirical analysis of the Challenged Agreements effect on the price of contact lenses in the online market for contacts.” Specifically, because the FTC’s evidence was merely “theoretical and anecdotal,” the evidence was not “direct.” The court also concluded that it need not decide whether an FTC theory of anticompetitive harm due to “disrupted information flow” (due to a reduction in the quantity of advertisements) was viable, because 1-800 Contacts had shown a procompetitive justification.

The court rejected the FTC’s finding that 1-800 Contact’s citation of two procompetitive effects—reduced litigation costs and the protection of trademark rights—had no basis in fact. Citing the 2nd Circuit’s Clorox decision, the court emphasized that “[t]rademarks are by their nature non-exclusionary, and agreements to protect trademark interests are ‘common and favored, under the law.’” The FTC’s doubts about the merits of the trademark-infringement claims were irrelevant, because, consistent with Clorox, “trademark agreements that ‘only marginally advance[] trademark policies’ can be procompetitive.” And while trademark agreements that were “auxiliary to an underlying illegal agreement between competitors” would not pass legal muster, there was “a lack of evidence here that the Challenged Agreements [we]re the ‘product of anything other than hard-nosed trademark negotiations.’”

Because 1-800 Contacts had “carried its burden of identifying a procompetitive justification, the government [had to] … show that a less-restrictive alternative exist[ed] that achieve[d] the same legitimate competitive benefits.” In that regard, the FTC claimed “that the parties to the Challenged Agreements could have agreed to require clear disclosure in each search advertisement of the identity of the rival seller rather than prohibit all advertising on trademarked issues.”

But, citing Clorox, the court opined that “it is usually unwise for courts to second-guess” trademark agreements between competitors, because “the parties’ determination of the proper scope of needed trademark protection is entitled to substantial weight.” In this matter, the FTC “failed to consider the practical reasons for the parties entering into the Challenged Agreements. … The Commission did not consider, for example, how the parties might enforce such a requirement moving forward or give any weight to how onerous such enforcement efforts would be for private parties.” In short, “[w]hile trademark agreements limit competitors from competing as effectively as they otherwise might, … forcing companies to be less aggressive in enforcing their trademarks is antithetical to the procompetitive goals of trademark policy.”

In sum, the court concluded:

In this case, where the restrictions that arise are born of typical trademark settlement agreements, we cannot overlook the Procompetitive Agreements’ procompetitive goal of promoting trademark policy. In light of the strong procompetitive justification of protecting Petitioner’s trademarks, we conclude the Challenged Agreements “merely regulate[] and perhaps thereby promote[] competition.”

Conclusion

While strong intellectual-property protection is key to robust competition, the different types of IP advance competitive interests in different manners. Patents, for example, provide a right to exclude access to well-defined inventions, thereby creating incentives to invent and facilitating contracts that spread patent-based innovations throughout the economy. Trademarks protect brand names and logos, thereby serving as specific indicators of origin and creating incentives to invest in improving the quality of the product or service covered by a trademark. As such, strong trademarks spur competition over quality and reduce uncertainty about the particular attributes of competing goods and services. In short, trademarks tend to promote dynamic competition and benefit consumers.

Properly applied, antitrust law seeks to advance consumer welfare and strengthen the competitive process. In that regard, the policy goals of antitrust and intellectual property are in harmony, and antitrust should be enforced in a manner that complements, and does not undermine, IP policy. Thus, when faced with a competitive restraint covering IP rights, antitrust enforcers should evaluate it carefully. They should be mindful of the procompetitive goals it may serve and avoid focusing solely on theories of competitive harm that ignore IP interests.

The FTC majority in 1-800 Contacts missed this fundamental point. They gave relatively short shrift to the procompetitive aspects of trademark protection and, at the same time, mischaracterized minor restrictions on advertising as akin to significant restraints that chill the provision of price information and product comparisons.

There was no showing that the 1-800 restrictions had stifled price competition or undermined in any manner consumers’ ability to compare contact-lens brands and prices online. In reality, the settlement agreements under scrutiny were rather carefully crafted to protect 1-800 Contacts’ goodwill, reflected in its substantial investments in quality enhancement and the promotion of relatively low-cost online sales. In the absence of the settlements, its online rivals would have been able to free ride on 1-800’s brand investments, diminishing that innovative firm’s incentive to continue to invest in trademark-related product enhancements. The long-term effect would have been to diminish, not enhance, dynamic competition.

More generally, had it prevailed, the FTC majority’s blinkered analytical approach in 1-800 Contacts could have chilled vigorous, welfare-enhancing competition in many other markets where trademarks play an important role. Fortunately, the majority’s holding did not stand for long.

Phillips’ brilliant dissent, which carefully integrated trademark-policy concerns into the application of antitrust principles—in tandem with the subsequent 2nd Circuit decision that properly acknowledged the need to weigh such concerns in antitrust analysis—provide a template for trademark-antitrust assessments that may be looked to by future courts and enforcers. Let us hope that current Biden administration FTC and DOJ Antitrust Division enforcers also take heed. 

A highly competitive economy is characterized by strong, legally respected property rights. A failure to afford legal protection to certain types of property will reduce individual incentives to participate in market transactions, thereby reducing the effectiveness of market competition. As the great economist Armen Alchian put it, “[w]ell-defined and well-protected property rights replace competition by violence with competition by peaceful means.”

In particular, strong and well-defined intellectual-property rights complement and enhance market competition, thereby promoting innovation. As the U.S. Justice Department’s (DOJ) Antitrust Division put it in 2012: “[t]he successful promotion of innovation and creativity requires a [sic] both competitive markets and strong intellectual property rights.”

In the realm of intellectual property, patent rights are particularly effective in driving innovation by supporting a market for invention in several critical ways, as Northwestern University’s Daniel F. Spulber has explained:

Patents support the establishment of the market [for invention] in several key ways. First, patents provide a system of intellectual property (IP) rights that increases transaction efficiencies and stimulates competition by offering exclusion, transferability, disclosure, certification, standardization, and divisibility. Second, patents provide efficient incentives for invention, innovation, and investment in complementary assets so that the market for inventions is a market for innovative control. Third, patents as intangible real assets promote the financing of invention and innovation.

It thus follows that weak, ill-defined patent rights create confusion, thereby undermining effective competition and innovation.

The Supreme Court’s Undermining of Patentability

Regrettably, the U.S. Supreme Court has, of late, been oblivious to this reality. Over roughly the past decade, several Court decisions have weakened incentives to patent by engendering confusion regarding the core question of what subject matter is patentable. Those decisions represent an abrupt retreat from decades of textually based case law that recognized the broad scope of patentable subject matter.

As I explained in a 2019 Speech to the IP Watchdog Institute Patent Masters Symposium (footnotes omitted):

Confusion about what is patentable lies at the heart of recent discussions of reform to Section 101 of the Patent Act [35 U.S. Code § 101] – the statutory provision that describes patentable subject matter. Section 101 plainly states that “[w]hoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor, subject to the [other] conditions and requirements of this title.” This language basically says that patentable subject matter covers everything new and useful that is invented or discovered. For many years, however, the Supreme Court has recognized three judicially created exceptions to patent eligibility, providing that you cannot patent: (1) laws of nature, (2) natural phenomena, or (3) abstract ideas. Even with these exceptions, the scope for patentability was quite broad from 1952 (when the modern version of the Patent Act was codified) until roughly 2010.

But over the past decade, the Supreme Court has cut back significantly on what it deems patent eligible, particularly in such areas as biotechnology, computer-implemented inventions, and software. As a result, today “there are many other parts of the world that have more expansive views of what can be patented, including Europe, Australia, and even China.” A key feature of the changes has been the engrafting of case law requirements that patentable eligible subject matter meet before a patent is granted, found in other sections of the Patent Act, onto the previously very broad language of Section 101.

As IPWatchdog President and CEO Gene Quinn explained in a 2019 article, “the real mischief” of recent Supreme Court case law (and, in particular, the 2012 Mayo Collaborative Services v. Prometheus decision) is that it reads requirements of other Patent Act provisions (dealing with novelty, obviousness, and description) into Section 101. That approach defies the plain expansive language of Section 101 and is at odds with earlier Supreme Court case law, which had deemed such an approach totally inappropriate. As such, according to Quinn:

Today, thanks to Mayo, decision makers consider whether claims are new, nonobvious and even properly described all under a Section 101 patent eligibility analysis, which makes the remainder of the patentability sections of the statute superfluous. Indeed, with Mayo, the Supreme Court has usurped Congressional authority over patentability; an authority that is explicitly granted to Congress in the Constitution itself. This usurpation of power is not only wreaking havoc on American innovation, but it has wrought havoc on the delicate balance of power between the Supreme Court and Congress.

Another Supreme Court decision on Section 101 deserves mention. In Alice Corp. v. CLS Bank (2014), the Court construed Mayo as establishing a two-part Section 101 test for patentable subject matter, which involved:

  1. Determining whether the patent claims are directed to a patent-ineligible concept; and
  2. Determining whether the claim’s elements, considered both individually and as an ordered combination, transform the nature of the claims into a patent-eligible application.

This “test,” which was pulled out of thin air, went far beyond the text of Section 101, and involved considerations properly assigned to other provisions of the Patent Act.

Flash forward to last week. The  Supreme Court on June 30 denied certiorari in American Axle & Mfg. Inc. v. Neapco Holdings, a case raising the question whether  a patent that claims a process for manufacturing an automobile driveshaft that simultaneously reduces two types of driveshaft vibration is patent-eligible under Section 101. Underlying the uncertainty (one might say vacuity) of the Mayo-Alice “principle,” a divided U.S. Court of Appeals for the Federal Circuit (with six judges unsuccessfully voting in favor of rehearing en banc) had found the patent claim ineligible, given the Supreme Court’s Mayo and Alice decisions. Amazingly, a classic type of mechanical invention, at the very heart of traditional notions of patenting, somehow had failed the patent-eligibility test, a result no patent-law observer would have dreamed of prior to the Mayo-Alice duet.

Commendably, Solicitor General Elizabeth Prelogar in May 2022 filed a brief in support of the grant of certiorari in American Axle. In short:

The SG’s brief sa[id] that inventions like the one at issue in American Axle have “[h]istorically…long been viewed as paradigmatic examples of the ‘arts’ or ‘processes’ that may receive patent protection if other statutory criteria are satisfied” and that the U.S. Court of Appeals for the Federal Circuit “erred in reading this Court’s precedents to dictate a contrary conclusion.”

The brief explain[ed] in no uncertain terms that claim 22 of the patent at issue in the case does not “simply describe or recite” a natural law and ultimately should have been held patent eligible.

In light of Solicitor General Prelogar’s filing, the Supreme Court’s denial of certiorari in American Axle can only be read as a clear signal to the bar that it does not intend to back down from or clarify the application of Mayo and Alice. This has serious negative ramifications for the health of the U.S. patent system. As Michael Borella—a computer scientist and chair of the Software and Business Methods Practice Group at McDonnell Boehnen Hulbert & Berghoff LLP—explains:

In denying certiorari in American Axle & Mfg. Inc. v. Neapco Holdings LLC, the Supreme Court has in essence told the patent community to “deal with it.” That operative ‘it’ is the obtuse and uncertain state of patent-eligibility, where even tangible inventions like garage door openers, electric vehicle charging stations, and mobile phones are too abstract for patenting. The Court has created a system that favors large companies over startups and individual inventors by making the fundamental decision of whether even to seek patent protection akin to shaking a Magic 8 Ball for guidance.

The solution, according to former Federal Circuit Chief Judge Paul Michel, is prompt congressional action:

The Supreme Court’s decisions in the last decade have confused and distorted the law of eligibility. … From 1981 to 2012 … the law was stable and yielded good outcomes in specific cases. Then came Mayo and later, Alice. Now, it is a mess: illogical, unpredictable, chaotic. Bad policy for important innovation including for promoting human health. Congress needs to rescue the innovation economy from the courts which have left it a disaster. Let’s hope Congress rises to the need and acts before China and other nations surpass US technology.

Conclusion

It is most unfortunate that the Supreme Court continues to miss the mark on patent rights. Its failure to heed the clearly expressed statutory language on patent eligibility is badly out of synch with the respect for textualism that it has shown in handing down recent landmark decisions on the free exercise of religion, the right to bear arms, and limitations on the administrative state. Given the sad reality that the Court is unlikely to change its tune, Congress should act promptly to amend Section 101 and thereby reaffirm the clear and broad patent-eligibility standard that had stood our country in good stead from the mid-20th century to a decade ago. Such an outcome would strengthen the U.S. patent system, thereby promoting innovation and competition.  

Federal Trade Commission (FTC) Chair Lina Khan recently joined with FTC Commissioner Rebecca Slaughter to file a “written submission on the public interest” in the U.S. International Trade Commission (ITC) Section 337 proceeding concerning imports of certain cellular-telecommunications equipment covered by standard essential patents (SEPs). SEPs are patents that “read on” technology adopted for inclusion in a standard. Regrettably, the commissioners’ filing embodies advice that, if followed, would effectively preclude Section 337 relief to SEP holders. Such a result would substantially reduce the value of U.S. SEPs and thereby discourage investments in standards that help drive American innovation.

Section 337 of the Tariff Act authorizes the ITC to issue “exclusion orders” blocking the importation of products that infringe U.S. patents, subject to certain “public interest” exceptions. Specifically, before issuing an exclusion order, the ITC must consider:

  1. the public health and welfare;
  2. competitive conditions in the U.S. economy;
  3. production of like or directly competitive articles in the United States; and
  4. U.S. consumers.

The Khan-Slaughter filing urges the ITC to consider the impact that issuing an exclusion order against a willing licensee implementing a standard would have on competition and consumers in the United States. The filing concludes that “where a complainant seeks to license and can be made whole through remedies in a different U.S. forum [a federal district court], an exclusion order barring standardized products from the United States will harm consumers and other market participants without providing commensurate benefits.”

Khan and Slaughter’s filing takes a one-dimensional view of the competitive effects of SEP rights. In short, it emphasizes that:

  1. standardization empowers SEP owners to “hold up” licensees by demanding more for a technology than it would have been worth, absent the standard;
  2. “hold ups” lead to higher prices and may discourage standard-setting activities and collaboration, which can delay innovation;
  3. many standard-setting organizations require FRAND (fair, reasonable, and non-discriminatory) licensing commitments from SEP holders to preclude hold-up and encourage standards adoption;
  4. FRAND commitments ensure that SEP licenses will be available at rates limited to the SEP’s “true” value;
  5. the threat of ITC exclusion orders would empower SEP holders to coerce licensees into paying “anticompetitively high” supra-FRAND licensing rates, discouraging investments in standard-compliant products;
  6. inappropriate exclusion orders harm consumers in the short term by depriving them of desired products and, in the longer run, through reduced innovation, competition, quality, and choice;
  7. thus, where the standard implementer is a “willing licensee,” an exclusion order would be contrary to the public interest; and
  8. as a general matter, exclusionary relief is incongruent and against the public interest where a court has been asked to resolve FRAND terms and can make the SEP holder whole.

In essence, Khan and Slaughter recite a parade of theoretical horribles, centered on anticompetitive hold-ups, to call-for denying exclusion orders to SEP owners on public-interest grounds. Their filing’s analysis, however, fails as a matter of empirics, law, and sound economics. 

First, the filing fails to note that there is a lack of empirical support for anticompetitive hold-up being a problem at all (see, for example, here, here, and here). Indeed, a far more serious threat is “hold-out,” whereby the ability of implementers to infringe SEPs without facing serious consequences leads to an inefficient undervaluation of SEP rights (see, for example, here). (At worst, implementers will have to pay at some future time a “reasonable” licensing fee if held to be infringers in court, since U.S. case law (unlike foreign case law) has essentially eliminated SEP holders’ ability to obtain an injunction.)  

Second, as a legal matter, the filing’s logic would undercut the central statutory purpose of Section 337, which is to provide all U.S. patent holders a right to exclude infringing imports. Section 337 does not distinguish between SEPs and other patents—all are entitled to full statutory protection. Former ITC Chair Deanna Tanner Okun, in critiquing a draft administration policy statement that would severely curtail the rights of SEP holders, assessed the denigration of Section 337 statutory protections in a manner that is equally applicable to the Khan-Slaughter filing:

The Draft Policy Statement also circumvents Congress by upending the statutory framework and purpose of Section 337, which includes the ITC’s practice of evaluating all unfair acts equally. Although the draft disclaims any “unique set of legal rules for SEPs,” it does, in fact, create a special and unequal analysis for SEPs. The draft also implies that the ITC should focus on whether the patents asserted are SEPs when judging whether an exclusion order would adversely affect the public interest. The draft fundamentally misunderstands the ITC’s purpose, statutory mandates, and overriding consideration of safeguarding the U.S. public interest and would — again, without statutory approval — elevate SEP status of a single patent over other weighty public interest considerations. The draft also overlooks Presidential review requirements, agency consultation opportunities and the ITC’s ability to issue no remedies at all.

[Notable,] Section 337’s statutory language does not distinguish the types of relief available to patentees when SEPs are asserted.

Third, Khan and Slaughter not only assert theoretical competitive harms from hold-ups that have not been shown to exist (while ignoring the far more real threat of hold-out), they also ignore the foregone dynamic economic gains that would stem from limitations on SEP rights (see, generally, here). Denying SEP holders the right to obtain a Section 337 exclusion order, as advocated by the filing, deprives them of a key property right. It thereby establishes an SEP “liability rule” (SEP holder relegated to seeking damages), as opposed to a “property rule” (SEP holder may seek injunctive relief) as the SEP holder’s sole means to obtain recompense for patent infringement. As my colleague Andrew Mercado and I have explained, a liability-rule approach denies society the substantial economic benefits achievable through an SEP property rule:

[U]nder a property rule, as contrasted to a liability rule, innovation will rise and drive an increase in social surplus, to the benefit of innovators, implementers, and consumers. 

Innovators’ welfare will rise. … First, innovators already in the market will be able to receive higher licensing fees due to their improved negotiating position. Second, new innovators enticed into the market by the “demonstration effect” of incumbent innovators’ success will in turn engage in profitable R&D (to them) that brings forth new cycles of innovation.

Implementers will experience welfare gains as the flood of new innovations enhances their commercial opportunities. New technologies will enable implementers to expand their product offerings and decrease their marginal cost of production. Additionally, new implementers will enter the market as innovation accelerates. Seeing the opportunity to earn high returns, new implementers will be willing to pay innovators a high licensing fee in order to produce novel and improved products.

Finally, consumers will benefit from expanded product offerings and lower quality-adjusted prices. Initial high prices for new goods and services entering the market will fall as companies compete for customers and scale economies are realized. As such, more consumers will have access to new and better products, raising consumers’ surplus.

In conclusion, the ITC should accord zero weight to Khan and Slaughter’s fundamentally flawed filing in determining whether ITC exclusion orders should be available to SEP holders. Denying SEP holders a statutorily provided right to exclude would tend to undermine the value of their property, diminish investment in improved standards, reduce innovation, and ultimately harm consumers—all to the detriment, not the benefit, of the public interest.  

[The 15th entry in our FTC UMC Rulemaking symposium is a guest post from DePaul University College of Law‘s Josh Sarnoff, a former Thomas A. Edison Distinguished Scholar at the U.S. Patent and Trademark Office. You can find other posts at the symposium page here. Truth on the Market also invites academics, practitioners, and other antitrust/regulation commentators to send us 1,500-4,000 word responses for potential inclusion in the symposium.]

We used to have a robust aftermarket for non-original equipment manufacturer (OEM) automobile repair parts and “independent” repair services, but car companies have increasingly resorted to design-patent protection to prevent competition in the supply of cosmetic repair parts such as bumpers, hoods, panels, and mirrors. The predictable and intended consequence has been to raise prices and reduce options for consumers, effectively monopolizing the separate repair parts and services markets through federal intellectual-property control over needed repair products or inputs to service markets.

Because this is a federal legal right, moreover, it preempts state “right to repair” laws that would authorize such products and services, either as a matter of consumer rights or as a remedy for anti-competitive conduct or “unfair or deceptive” acts and practices resulting from tying a monopoly over the original sales market for specific automobiles (protected by those intellectual-property rights) into a monopoly in the repair markets for those automobiles. Existing law under Section 102(c) of the 1975 Magnuson-Moss Warranty Act does not explicitly prohibit such supply-restriction anti-competitive conduct when protecting against warranty requirements that would void warranties based on “tie-in sales” requirements that would void warranties if third-party repair parts or independent repair services are used by consumers. 

Unlike for functional parts of “machines,” which have always been subject to utility-patent rights, non-functional parts of machines were not (and still are not) statutorily authorized as the subject of design-patent rights. However, in 1980, the U.S. Court of Appeals for the Federal Circuit—in an opinion by Judge Giles Rich—held that design patents can protect parts or fragments of “articles of manufacture,” the class of statutory subject matter for which ornamental design-patent rights can be provided.

By reducing the “size” of the thing to which the design-patent right applies—here, a part rather than an entire automobile (leaving aside the question of how machines get protection in the first place, when Congress hasn’t authorized it for design patents)—the historic right to repair a purchased machine without reconstructing it can be effectively overridden. This is because the third-party parts supplier is now constructing an entire part (e.g., a headlight) subject to design-patent rights, whereas they would have been authorized to make a part for use in repairing the entire car (and note that designs are supposed to be understood as a whole, not by assessing only parts of the objects to be protected—the article of manufacture).

In 2019, the Federal Circuit held that consumer desires to purchase and use replacement cosmetic auto parts to repair cars to their original appearance is not a “functional” requirement for which ornamental design-patent rights cannot be provided, and thus design patents protect against competition to supply such ornamental repair parts. As the court stated:

Our precedent gives weight to this language, holding that a de-sign patent must claim an “ornamental” design, not one ‘dictated by function.’…  We hold that, even in this context of a consumer preference for a particular design to match other parts of a whole, the aesthetic appeal of a design to consumers is inadequate to render that design functional.

This decision assures that design patents override both consumers’ “right” to restore the appearance of their products to the original condition and state or insurance-policy requirements that require the use of “must-match” aftermarket parts to do so. If the manufacture or import of aftermarket parts is prohibited by design-patent law, then obviously consumers and independent repair shops cannot use them to repair their vehicles, and insurers cannot control costs by paying for the use such aftermarket parts. This is true even when those aftermarket parts are superior in quality to the OEM parts, at lower prices.

The Federal Trade Commission (FTC) in theory could address the over-extension by the judiciary of design-patent protection for cosmetic auto parts, by finding such repair-restricting practices relying on design-patent protection to be either anticompetitive or unfair to consumers. The FTC has already recognized the need to protect the right to repair products. In 2013, the Supreme Court held in FTC v. Actavis that conduct within the scope of granted patent rights may still constitute an antitrust violation. Using patent rights to tie repair parts and services to the original purchase market may violate either Section 1 or Section 2 of the Sherman Act. 

The FTC might also, in theory, extend antitrust principles beyond what is prohibited under the Sherman Act, using its adjudicatory “unfair methods of competition” (UMC) authority under Section 5(a)(2) & (b) or its rulemaking authority under Section 6(g). Some have argued that the FTC cannot or should not adopt prohibitions on anticompetitive conduct that does not violate other statutory antitrust laws, and that Section 6(g) rulemaking authority is limited to procedural rules and does not authorize substantive antitrust rulemaking, even though the U.S. Court of Appeals for the D.C. Circuit upheld such substantive rulemaking in 1973 (which would now be overruled if the issue reached the Supreme Court). I’ll leave that issue aside for now, even though it is often difficult to distinguish UMC from unfair commercial practices.

Instead, I’ll focus on the clearer and undisputed authority of the FTC to issue (admittedly procedurally burdensome) rules to prohibit “unfair or deceptive commercial practices” (UDCP) using rulemaking authority under Section 18 of the FTC Act. Under that section, subsection (a)(1)(B), the FTC can “prescribe … rules which define with specificity acts or practices which are unfair or deceptive acts or practices in or affecting commerce.” But the rulemaking authority does not define what “practices are unfair, except to refer to Section 5(a)(1)’s legislative declaration that “unfair … commercial practices” are “unlawful.”

In turn, Section 5(n) of the FTC Act defines an “unfair” act or practice as one that must “cause[] or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition.”

For the reasons described above, use of design-patent rights (even if they may result in lower upfront sales prices of cars, because manufacturers may obtain additional profits through leveraging those rights to prevent an aftermarket in repair parts) should clearly qualify as “unfair” under this definition, even if Congress (at least according to the Federal Circuit, even if the statutory text doesn’t support that and only activist judicial interpretation is the proximate cause of the authority) is the source of the patent right that is being used “unfairly.”

“Common wisdom,” however, suggests that the FTC will not choose to exercise its “unfairness” authority beyond recognized categories of specifically and legislatively prohibited acts, just like with its antitrust UMC authority, without further legislative enactment. This common wisdom may be belied by the fact that the FTC updated its Section 18 rulemaking procedures in July 2021, and recently requested that the public bring complaints over illegal repair restriction practices to its attention and indicated that it would “prioritize investigations into unlawful repair restrictions under … Section 5….”

More importantly, “common wisdom” suggests that Congress restricted the FTC’s authority to impose broad new rules defining unfair commercial practices when it adopted the Section 18 rules in response to purported overreach by the FTC in the late 1970s under the Carter administration, as well as temporarily defunded the agency. But Section 18 does not substantively modify the FTC’s Section 5(a) authority (to which Section 18 rulemaking applies), and the common wisdom is likely incorrect that the FTC lacks the power to issue such rules (even if it lacks the willpower).

Since the 1980 legislative change to FTC’s UDCP rulemaking requirements, the FTC has been reluctant to engage in broad rulemaking to define unfairness in commercial contexts, although it has continued to enforce more vigorously prohibitions against deception against consumers, including through deceptive advertisements. The FTC has not issued any similar, generally applicable principles as to what constitutes “unfairness” in commercial practices.

Nevertheless, it should be clear that the FTC has the power to do so. But in the current judicial-review context, the FTC may be even more reluctant than during the past four decades to exercise such authority, as it may lead to judicial invalidation of its Section 5(a)&(b) authority to declare what practices are “unfair.”

As many administrative law scholars have noted, the Supreme Court has recently adopted a much more aggressive “major questions” doctrine for refusing deference to agency interpretations of the scope of their regulatory authority. Instead of lack of deference, the Court has imposed a new and restrictive “clear statement” rule, requiring greater legislative specificity before finding that an agency possesses regulatory authority to take challenged actions. Accordingly, should the FTC issue a new, broad unfair commercial practices rule under Section 18 prohibiting the use of design patents to prevent aftermarket parts from being manufactured—on grounds that it is “unfair” to consumers and adversely affects their “right” of repair—then absent significant change to the Court’s composition, that rule will likely be invalidated because Congress did not define “unfairness” with sufficient specificity.

Even more importantly, such a rule would provide a very “good” test case for a Supreme Court itching to revive the non-delegation doctrine and to hamstring the administrative regulatory apparatus. Thus, the FTC might rightly fear outright repeal of its Section 5(a) as well as its Section 18 (and Section 6g substantive rulemaking) authority should it adopt an aggressive consumer-protection approach.

In conclusion, given the likely lack of political will on the FTC—in light of the likely response of the Supreme Court should the FTC exercise its legislatively conferred power in a consumer-friendly fashion—the use of design patents to restrict the right to repair is a problem that Congress should and must fix. Congress should do so both by adopting a right-to-repair law (such as the Fair Repair Act) and by amending the design-patent act to ensure that the consumer right to repair can be effectuated.

Since broad legislation to accomplish this in a general right-to-repair law or in a modification of the design-patent law that overturns partial and fragment protection for machines directly is likely to face significant opposition, Congress should at least act swiftly to pass the pending SMART Act, which provides that manufacture, import, and offer for sale of design-patented cosmetic automobile repair parts is not an act of infringement, and permits sale and use of those parts after a limited period of exclusivity (30 months) that assures more than sufficient returns on investment in such parts-design development. That way, consumers will be protected in regard to the second most valuable purchase they can make (the first being their home) and the one that is most likely to need repair given the continuing, widespread problem of traffic accidents (the subject of different consumer protection measures that are needed).

[Continuing our FTC UMC Rulemaking symposium, today’s first guest post is from Richard J. Pierce Jr., the Lyle T. Alverson Professor of Law at George Washington University Law School. We are also publishing a related post today from Andrew K. Magloughlin and Randolph J. May of the Free State Foundation. You can find other posts at the symposium page here. Truth on the Market also invites academics, practitioners, and other antitrust/regulation commentators to send us 1,500-4,000 word responses for potential inclusion in the symposium.]

FTC Rulemaking Power

In 2021, President Joe Biden appointed a prolific young scholar, Lina Khan, to chair the Federal Trade Commission (FTC). Khan strongly dislikes almost every element of antitrust law. She has stated her intention to use notice and comment rulemaking to change antitrust law in many ways. She was unable to begin this process for almost a year because the FTC was evenly divided between Democratic and Republican appointees, and she has not been able to elicit any support for her agenda from the Republican members. She will finally get the majority she needs to act in the next few days, as the U.S. Senate appears set to confirm Alvaro Bedoya to the fifth spot on the commission.   

Chair Khan has argued that the FTC has the power to use notice-and-comment rulemaking to define the term “unfair methods of competition” as that term is used in Section 5 of the Federal Trade Commission Act. Section 5 authorizes the FTC to define and to prohibit both “unfair acts” and “unfair methods of competition.” For more than 50 years after the 1914 enactment of the statute, the FTC, Congress, courts, and scholars interpreted it to empower the FTC to use adjudication to implement Section 5, but not to use rulemaking for that purpose.

In 1973, the U.S. Court of Appeals for the D.C. Circuit held that the FTC has the power to use notice-and-comment rulemaking to implement Section 5. Congress responded by amending the statute in 1975 and 1980 to add many time-consuming and burdensome procedures to the notice-and-comment process. Those added procedures had the effect of making the rulemaking process so long that the FTC gave up on its attempts to use rulemaking to implement Section 5.

Khan claims that the FTC has the power to use notice-and-comment rulemaking to define “unfair methods of competition,” even though it must use the extremely burdensome procedures that Congress added in 1975 and 1980 to define “unfair acts.” Her claim is based on a combination of her belief that the current U.S. Supreme Court would uphold the 1973 D.C. Circuit decision that held that the FTC has the power to use notice-and-comment rulemaking to implement Section 5 and her belief that a peculiarly worded provision of the 1975 amendment to the FTC Act allows the FTC to use notice-and-comment rulemaking to define “unfair methods of competition,” even though it requires the FTC to use the extremely burdensome procedure to issue rules that define “unfair acts.” The FTC has not attempted to use notice-and-comment rulemaking to define “unfair methods of competition” since Congress amended the statute in 1975. 

I am skeptical of Khan’s argument. I doubt that the Supreme Court would uphold the 1973 D.C. Circuit opinion, because the D.C. Circuit used a method of statutory interpretation that no modern court uses and that is inconsistent with the methods of statutory interpretation that the Supreme Court uses today. I also doubt that the Supreme Court would interpret the 1975 statutory amendment to distinguish between “unfair acts” and “unfair methods of competition” for purposes of the procedures that the FTC is required to use to issue rules to implement Section 5.

Even if the FTC has the power to use notice-and-comment rulemaking to define “unfair methods of competition,” I am confident that the Supreme Court would not uphold an exercise of that power that has the effect of making a significant change in antitrust law. That would be a perfect candidate for application of the major questions doctrine. The court will not uphold an “unprecedented” action of “vast economic or political significance” unless it has “unmistakable legislative support.” I will now describe four hypothetical exercises of the rulemaking power that Khan believes that the FTC possesses to illustrate my point.

Hypothetical Exercises of FTC Rulemaking Power

Creation of a Right to Repair

President Biden has urged the FTC to create a right for an owner of any product to repair the product or to have it repaired by an independent service organization (ISO). The Supreme Court’s 1992 opinion in Eastman Kodak v. Image Technical Services tells us all we need to know about the likelihood that it would uphold a rule that confers a right to repair. When Kodak took actions that made it impossible for ISOs to repair Kodak photocopiers, the ISOs argued that Kodak’s action violated both Section 1 and Section 2 of the Sherman Act. The Court held that Kodak could prevail only if it could persuade a jury that its view of the facts was accurate. The Court remanded the case for a jury trial to address three contested issues of fact.

The Court’s reasoning in Kodak is inconsistent with any version of a right to repair that the FTC might attempt to create through rulemaking. The Court expressed its view that allowing an ISO to repair a product sometimes has good effects and sometimes has bad effects. It concluded that it could not decide whether Kodak’s new policy was good or bad without first resolving the three issues of fact on which the parties disagreed. In a 2021 report to Congress, the FTC agreed with the Supreme Court. It identified seven factual contingencies that can cause a prohibition on repair of a product by an ISO to have good effects or bad effects. It is naïve to expect the Supreme Court to change its approach to repair rights in response to a rule in which the FTC attempts to create a right to repair, particularly when the FTC told Congress that it agrees with the Court’s approach immediately prior to Khan’s arrival at the agency.

Prohibition of Reverse-Payment Settlements of Patent Disputes Involving Prescription Drugs

Some people believe that settlements of patent-infringement disputes in which the manufacturer of a generic drug agrees not to market the drug in return for a cash payment from the manufacturer of the brand-name drug are thinly disguised agreements to create a monopoly and to share the monopoly rents. Khan has argued that the FTC could issue a rule that prohibits such reverse-payment settlements. Her belief that a court would uphold such a rule is contradicted by the Supreme Court’s 2013 opinion in FTC v. Actavis. The Court unanimously rejected the FTC’s argument in support of a rebuttable presumption that reverse payments are illegal. Four justices argued that reverse-payment settlements can never be illegal if they are within the scope of the patent. The five-justice majority held that a court can determine that a reverse-payment settlement is illegal only after a hearing in which it applies the rule of reason to determine whether the payment was reasonable.

A Prohibition on Below-Cost Pricing When the Firm Cannot Recoup Its Losses

Khan believes that illegal predatory pricing by dominant firms is widespread and extremely harmful to competition. She particularly dislikes the Supreme Court’s test for identifying predatory pricing. That test requires proof that a firm that engages in below-cost pricing has a reasonable prospect of recouping its losses. She wants the FTC to issue a rule in which it defines predatory pricing as below-cost pricing without any prospect that the firm will be able to recoup its losses.

The history of the Court’s predatory-pricing test shows how unrealistic it is to expect the Court to uphold such a rule. The Court first announced the test in a Sherman Act case in 1986. Plaintiffs attempted to avoid the precedential effect of that decision by filing complaints based on predatory pricing under the Robinson-Patman Act. The Court rejected that attempt in a 1993 opinion. The Court made it clear that the test for determining whether a firm is engaged in illegal predatory pricing is the same no matter whether the case arises under the Sherman Act or the Robinson-Patman Act. The Court undoubtedly would reject the FTC’s effort to change the definition of predatory pricing by relying on the FTC Act instead of the Sherman Act or the Robinson-Patman Act.

A Prohibition of Noncompete Clauses in Contracts to Employ Low-Wage Employees

President Biden has expressed concern about the increasing prevalence of noncompete clauses in employment contracts applicable to low wage employees. He wants the FTC to issue a rule that prohibits inclusion of noncompete clauses in contracts to employ low-wage employees. The Supreme Court would be likely to uphold such a rule.

A rule that prohibits inclusion of noncompete clauses in employment contracts applicable to low-wage employees would differ from the other three rules I discussed in many respects. First, it has long been the law that noncompete clauses can be included in employment contracts only in narrow circumstances, none of which have any conceivable application to low-wage contracts. The only reason that competition authorities did not bring actions against firms that include noncompete clauses in low-wage employment contracts was their belief that state labor law would be effective in deterring firms from engaging in that practice. Thus, the rule would be entirely consistent with existing antitrust law.

Second, there are many studies that have found that state labor law has not been effective in deterring firms from including noncompete clauses in low-wage employment contracts and many studies that have found that the increasing use of noncompete clauses in low-wage contracts is causing a lot of damage to the performance of labor markets. Thus, the FTC would be able to support its rule with high-quality evidence.

Third, the Supreme Court’s unanimous 2021 opinion in NCAA v. Alstom indicates that the Court is receptive to claims that a practice that harms the performance of labor markets is illegal. Thus, I predict that the Court would uphold a rule that prohibits noncompete clauses in employment contracts applicable to low-wage employees if it holds that the FTC can use notice-and-comment rulemaking to define “unfair methods of competition,” as that term is used in Section 5 of the FTC Act. That caveat is important, however. As I indicated at the beginning of this essay, I doubt that the FTC has that power.

I would urge the FTC not to use notice-and comment rulemaking to address the problems that are caused by the increasing use of noncompete clauses in low-wage contracts. There is no reason for the FTC to put a lot of time and effort into a notice-and-comment rulemaking in the hope that the Court will conclude that the FTC has the power to use notice-and-comment rulemaking to implement Section 5. The FTC can implement an effective prohibition on the inclusion of noncompete clauses in employment contracts applicable to low-wage employees by using a combination of legal tools that it has long used and that it clearly has the power to use—issuance of interpretive rules and policy statements coupled with a few well-chosen enforcement actions.

Alternative Ways to Improve Antitrust Law       

There are many other ways in which Khan can move antitrust law in the directions that she prefers. She can make common cause with the many mainstream antitrust scholars who have urged incremental changes in antitrust law and who have conducted the studies needed to support those proposed changes. Thus, for instance, she can move aggressively against other practices that harm the performance of labor markets, change the criteria that the FTC uses to decide whether to challenge proposed mergers and acquisitions, and initiate actions against large platform firms that favor their products over the products of third parties that they sell on their platforms.     

[This post is the first in our FTC UMC Rulemaking symposium. You can find other posts at the symposium page here. Truth on the Market also invites academics, practitioners, and other antitrust/regulation commentators to send us 1500-4000 word responses for potential inclusion in the symposium.]

There is widespread interest in the potential tools that the Biden administration’s Federal Trade Commission (FTC) may use to address a range of competition-related and competition-adjacent concerns. A focal point for this interest is the potential that the FTC may use its broad authority to regulate unfair methods of competition (UMC) under Section 5 of the FTC Act to make rules that address a wide range of conduct. This “potential” is expected to become a “likelihood” with confirmation of Alvaro Bedoya, a third Democratic commissioner, expected to occur any day.

This post marks the start of a Truth on the Market symposium that brings together academics, practitioners, and other commentators to discuss issues relating to potential UMC-related rulemaking. Contributions to this symposium will cover a range of topics, including:

  • Constitutional and administrative-law limits on UMC rulemaking: does such rulemaking potentially present “major question” or delegation issues, or other issues under the Administrative Procedure Act (APA)? If so, what is the scope of permissible rulemaking?
  • Substantive issues in UMC rulemaking: costs and benefits to be considered in developing rules, prudential concerns, and similar concerns.
  • Using UMC to address competition-adjacent issues: consideration of how or whether the FTC can use its UMC authority to address firm conduct that is governed by other statutory or regulatory regimes. For instance, firms using copyright law and the Digital Millennium Copyright Act (DMCA) to limit competitors’ ability to alter or repair products, or labor or entry issues that might be governed by licensure or similar laws.

Timing and Structure of the Symposium

Starting tomorrow, one or two contributions to this symposium will be posted each morning. During the first two weeks of the symposium, we will generally try to group posts on similar topics together. When multiple contributions are posted on the same day, they will generally be implicitly or explicitly in dialogue with each other. The first week’s contributions will generally focus on constitutional and administrative law issues relating to UMC rulemaking, while the second week’s contributions will focus on more specific substantive topics. 

Readers are encouraged to engage with these posts through comments. In addition, academics, practitioners, and other antitrust and regulatory commentators are invited to submit additional contributions for inclusion in this symposium. Such contributions may include responses to posts published by others or newly developed ideas. Interested authors should submit pieces for consideration to Gus Hurwitz and Keith Fierro Benson.

This symposium will run through at least Friday, May 6. We do not, however, anticipate, ending or closing it at that time. To the contrary, it is very likely that topics relating to FTC UMC rulemaking will continue to be timely and of interest to our community—we anticipate keeping the symposium running for the foreseeable future, and welcome submissions on an ongoing basis. Readers interested in these topics are encouraged to check in regularly for new posts, including by following the symposium page, the FTC UMC Rulemaking tag, or by subscribing to Truth on the Market for notifications of new posts.

All too frequently, vocal advocates for “Internet Freedom” imagine it exists along just a single dimension: the extent to which it permits individuals and firms to interact in new and unusual ways.

But that is not the sum of the Internet’s social value. The technologies that underlie our digital media remain a relatively new means to distribute content. It is not just the distributive technology that matters, but also the content that is distributed. Thus, the norms and laws that facilitate this interaction of content production and distribution are critical.

Sens. Patrick Leahy (D-Vt.) and Thom Tillis (R-N.C.)—the chair and ranking member, respectively, of the Senate Judiciary Committee’s Subcommittee on Intellectual Property—recently introduced legislation that would require online service providers (OSPs) to comply with a slightly heightened set of obligations to deter copyright piracy on their platforms. This couldn’t come at a better time.

S. 3880, the SMART Copyright Act, would amend Section 512 of the Copyright Act, originally enacted as part of the Digital Millennium Copyright Act of 1998. Section 512, among other things, provides safe harbor for OSPs for copyright infringements by their users. The expectation at the time was that OSPs would work voluntarily with rights holders to develop industry best practices to deal with pirated content, while also allowing the continued growth of the commercial Internet.

Alas, it has become increasingly apparent in the nearly quarter-century since the DMCA was passed that the law has not adequately kept pace with the technological capabilities of digital piracy. In April 2020 alone, U.S. consumers logged 725 million visits to pirate sites for movies and television programming. Close to 90% of those visits were attributable to illegal streaming services that use internet protocol television to distribute pirated content. Such services now serve more than 9 million U.S. subscribers and generate more than $1 billion in annual revenue.

Globally, there are more than 26.6 billion annual illicit views of U.S.-produced movies and 126.7 billion views of U.S.-produced television episodes. A report produced for the U.S. Chamber of Commerce by NERA Economic Consulting estimates the annual impact to the United States to be $30 to $70 billion of lost revenue, 230,000 to 560,000 of lost jobs, and between $45 and $115 billion in lower GDP.

Thus far, the most effective preventative measures produced have been filtering solutions adopted by YouTube, Facebook, and Audible Magic, but neither filtering nor other solutions have been adopted industrywide. As the U.S. Copyright Office has observed:

Throughout the Study, the Office heard from participants that Congress’ intent to have multi-stakeholder consensus drive improvements to the system has not been borne out in practice. By way of example, more than twenty years after passage of the DMCA, although some individual OSPs have deployed DMCA+ systems that are primarily open to larger content owners, not a single technology has been designated a “standard technical measure” under section 512(i). While numerous potential reasons were cited for this failure— from a lack of incentives for ISPs to participate in standards to the inappropriateness of one-size-fits-all technologies—the end result is that few widely-available tools have been created and consistently implemented across the internet ecosystem. Similarly, while various voluntary initiatives have been undertaken by different market participants to address the volume of true piracy within the system, these initiatives, although initially promising, likewise have suffered from various shortcomings, from limited participation to ultimate ineffectiveness.

Given the lack of standard technical measures (STMs), the Leahy-Tillis bill would empower the Office of the Librarian of Congress (LOC) broad latitude to recommend STMs for everything from off-the-shelf software to open-source software to general technical strategies that can be applied to a wide variety of systems. This would include the power to initiate public rulemakings in which it could either propose new STMs or revise or rescind existing STMs. The STMs could be as broad or as narrow as the LOC deems appropriate, including being tailored to specific types of content and specific types of providers. Following rulemaking, subject firms would have at least one year to adopt a given STM.

Critically, the SMART Copyright Act would not hold OSPs liable for the infringing content itself, but for failure to make reasonable efforts to accommodate the STM (or for interference with the STM). Courts finding an OSP to have violated their obligation for good-faith compliance could award an injunction, damages, and costs.

The SMART Copyright Act is a directionally correct piece of legislation with two important caveats: it all depends on the kinds of STMs that the LOC recommends and on how a “violation” is determined for the purposes of awarding damages.

The law would magnify the incentive for private firms to work together with rights holders to develop STMs that more reasonably recruit OSPs into the fight against online piracy. In this sense, the LOC would be best situated as a convener, encouraging STMs to emerge from the broad group of OSPs and rights holders. The fact that the LOC would be able to adopt STMs with or without stakeholders’ participation should provide more incentive for collaboration among the relevant parties.

Short of a voluntary set of STMs, the LOC could nonetheless rely on the technical suggestions and concerns of the multistakeholder community to discern a minimum viable set of practices that constitute best efforts to control piracy. The least desirable outcome—and, I suspect, the one most susceptible to failure—would be for the LOC to examine and select specific technologies. If implemented sensibly, the SMART Copyright Act would create a mechanism to enforce the original goals of Section 512.

The damages provisions are likewise directionally correct but need more clarity. Repeat “violations” allow courts to multiply damages awards. But there is no definition of what counts as a “violation,” nor is there adequate clarity about how a “violation” interacts with damages. For example, is a single infringement on a platform a “violation” such that if three occur, the platform faces treble damages for all the infringements in a single case? That seems unlikely.

More reasonable would be to interpret the provision as saying that a final adjudication that the platform behaved unreasonably is what counts for the purposes of calculating whether damages are multiplied. Then, within each adjudication, damages are calculated for all infringements, up to the statutory damages cap. This interpretation would put teeth in the law, but it’s just one possible interpretation. Congress would need to ensure the final language is clear.

An even better would be to make Section 512’s safe harbor contingent on an OSP’s reasonable compliance. Unreasonable behavior, in that case, provides a much more straightforward way to assess damages, without needing to leave it up to court interpretations about what counts as a “violation.” Particularly since courts have historically tended to interpret the DMCA in ways that are unfavorable to rights holders (e.g., “red flag” knowledge), it would be much better to create a simple standard here.

This is not to say there are no potential problems. Among the concerns that surround promulgating new STMs are potentially creating cybersecurity vulnerabilities, sources for privacy leaks, or accidentally chilling speech. Of course, it’s possible that there will be costs to implementing an STM, just as there are costs when private firms operate their own content-protection mechanisms. But just because harms can happen doesn’t mean they will happen, or that they are insurmountable when they do. The criticisms that have emerged have so far taken on the breathless quality of the empirically unfounded claims that 2012’s SOPA/PIPA legislation would spell doom for the Internet. If Section 512 reforms are well-calibrated and sufficiently flexible to adapt to the market realities, I think we can reasonably expect them to be, on net, beneficial.

Toward this end, the SMART Copyright Act contemplates, for each proposed STM, a public comment period and at least one meeting with relevant stakeholders, to allow time to understand its likely costs and benefits. This process would provide ample opportunities to alert the LOC to potential shortcomings.

But the criticisms do suggest a potentially valuable change to the bill’s structure. If a firm does indeed discover that a particular STM, in practice, leads to unacceptable security or privacy risks, or is systematically biased against lawful content, there should be a legal mechanism that would allow for good-faith compliance while also mitigating STMs’ unforeseen flaws. Ideally, this would involve working with the LOC in an iterative process to refine relevant compliance obligations.

Congress will soon be wrapped up in the volatile midterm elections, which could make it difficult for relatively low-salience issues like copyright to gain traction. Nonetheless, the Leahy-Tillis bill marks an important step toward addressing online piracy, and Congress should move deliberatively toward that goal.

For decades, consumer-welfare enhancement appeared to be a key enforcement goal of competition policy (antitrust, in the U.S. usage) in most jurisdictions:

  • The U.S. Supreme Court famously proclaimed American antitrust law to be a “consumer welfare prescription” in Reiter v. Sonotone Corp. (1979).
  • A study by the current adviser to the European Competition Commission’s chief economist found that that there are “many statements indicating that, seen from the European Commission, modern EU competition policy to a large extent is about protecting consumer welfare.”
  • A comprehensive international survey presented at the 2011 Annual International Competition Network Conference, found that a majority of competition authorities state that “their national [competition] legislation refers either directly or indirectly to consumer welfare,” and that most competition authorities “base their enforcement efforts on the premise that they enlarge consumer welfare.”  

Recently, however, the notion that a consumer welfare standard (CWS) should guide antitrust enforcement has come under attack (see here). In the United States, this movement has been led by populist “neo-Brandeisians” who have “call[ed] instead for enforcement that takes into account firm size, fairness, labor rights, and the protection of smaller enterprises.” (Interestingly, there appear to be more direct and strident published attacks on the CWS from American critics than from European commentators, perhaps reflecting an unspoken European assumption that “ordoliberal” strong government oversight of markets advances the welfare of consumers and society in general.) The neo-Brandeisian critique is badly flawed and should be rejected.

Assuming that the focus on consumer welfare in U.S. antitrust enforcement survives this latest populist challenge, what considerations should inform the design and application of a CWS? Before considering this question, one must confront the context in which it arises—the claim that the U.S. economy has become far less competitive in recent decades and that antitrust enforcement has been ineffective at addressing this problem. After dispatching with this flawed claim, I advance four principles aimed at properly incorporating consumer-welfare considerations into antitrust-enforcement analysis.  

Does the US Suffer from Poor Antitrust Enforcement and Declining Competition?

Antitrust interventionists assert that lax U.S. antitrust enforcement has coincided with a serious decline in competition—a claim deployed to argue that, even if one assumes that promoting consumer welfare remains an overarching goal, U.S. antitrust policy nonetheless requires a course correction. After all, basic price theory indicates that a reduction in market competition raises deadweight loss and reduces consumers’ relative share of total surplus. As such, it might seem to follow that “ramping up antitrust” would lead to more vigorously competitive markets, featuring less deadweight loss and relatively more consumer surplus.

This argument, of course, avoids error cost, rent seeking, and public choice issues that raise serious questions about the welfare effects of more aggressive “invigorated” enforcement (see here, for example). But more fundamentally, the argument is based on two incorrect premises:

  1. That competition has declined; and
  2. That U.S. trustbusters have applied the CWS in a narrow manner ineffective to address competitive problems.

Those premises (which also underlie President Joe Biden’s July 2021 Executive Order on Promoting Competition in the American Economy) do not stand up to scrutiny.

In a recent article in the Stigler Center journal Promarket, Yale University economics professor Fiona Scott-Morton and Yale Law student Leah Samuel accepted those premises in complaining about poor antitrust enforcement and substandard competition (hyperlinks omitted and emphasis in the original):

In recent years, the [CWS] term itself has become the target of vocal criticism in light of mounting evidence that recent enforcement—and what many call the “consumer welfare standard era” of antitrust enforcement—has been a failure. …

This strategy of non-enforcement has harmed markets and consumers. Today we see the evidence of this under-enforcement in a range of macroeconomic measures, studies of markups, as well as in merger post-mortems and studies of anticompetitive behavior that agencies have not pursued. Non-economist observers– journalists, advocates, and lawyers – who have noticed the lack of enforcement and the pernicious results have learned to blame “economics” and the CWS. They are correct that using CWS, as defined and warped by Chicago-era jurists and economists, has been a failure. That kind of enforcement—namely, insufficient enforcement—does not protect competition. But we argue that the “economics” at fault are the corporate-sponsored Chicago School assumptions, which are at best outdated, generally unjustified, and usually incorrect.

While the Chicago School caused the “consumer welfare standard” to become associated with an anti-enforcement philosophy in the legal community, it has never changed its meaning among PhD-trained economists.

To an economist, consumer welfare is a well-defined concept. Price, quality, and innovation are all part of the demand curve and all form the basis for the standard academic definition of consumer welfare. CW is the area under the demand curve and above the quality-adjusted price paid. … Quality-adjusted price represents all the value consumers get from the product less the price they paid, and therefore encapsulates the role of quality of any kind, innovation, and price on the welfare of the consumer.

In my published response to Scott-Morton and Samuel, I summarized recent economic literature that contradicts the “competition is declining” claim. I also demonstrated that antitrust enforcement has been robust and successful, refuting the authors’ claim to the contrary (cross links to economic literature omitted):

There are only two problems with the [authors’] argument. First, it is not clear at all that competition has declined during the reign of this supposedly misused [CWS] concept. Second, the consumer welfare standard has not been misapplied at all. Indeed, as antitrust scholars and enforcement officials have demonstrated … modern antitrust enforcement has not adopted a narrow “Chicago School” view of the world. To the contrary, it has incorporated the more sophisticated analysis the authors advocate, and enforcement initiatives have been vigorous and largely successful. Accordingly, the authors’ call for an adjustment in antitrust enforcement is a solution in search of a non-existent problem.

In short, competitive conditions in U.S. markets are robust and have not been declining. Moreover, U.S. antitrust enforcement has been sophisticated and aggressive, fully attuned to considerations of quality and innovation.

A Suggested Framework for Consumer Welfare Analysis

Although recent claims of “weak” U.S. antitrust enforcement are baseless, they do, nevertheless, raise “front and center” the nature of the CWS. The CWS is a worthwhile concept, but it eludes a precise definition. That is as it should be. In our common law system, fact-specific analyses of particular competitive practices are key to determining whether welfare is or is not being advanced in the case at hand. There is no simple talismanic CWS formula that is readily applicable to diverse cases.

While Scott-Morton argues that the area under the demand curve (consumer surplus) is essentially coincident with the CWS, other leading commentators take account of the interests of producers as well. For example, the leading antitrust treatise writer, Herbert Hovenkamp, suggests thinking about consumer welfare in terms of “maxim[izing] output that is consistent with sustainable competition. Output includes quantity, quality, and improvements in innovation. As an aside, it is worth noting that high output favors suppliers, including labor, as well as consumers because job opportunities increase when output is higher.” (Hovenkamp, Federal Antitrust Policy 102 (6th ed. 2020).)

Federal Trade Commission (FTC) Commissioner Christine Wilson (like Ken Heyer and other scholars) advocates a “total welfare standard” (consumer plus producer surplus). She stresses that it would beneficially:

  1. Make efficiencies more broadly cognizable, capturing cost reductions not passed through in the short run;
  2. Better enable the agencies to consider multi-market effects (whether consumer welfare gains in one market swamp consumer welfare losses in another market); and
  3. Better capture dynamic efficiencies (such as firm-specific efficiencies that are emulated by other “copycat” firms in the market).

Hovenkamp and Wilson point to the fact that efficiency-enhancing business conduct often has positive ramifications for both consumers and producers. As such, a CWS that focuses narrowly on short-term consumer surplus may prompt antitrust challenges to conduct that, properly understood, will prove beneficial to both consumers and producers over time.

With this in mind, I will now suggest four general “framework principles” to inform a CWS analysis that properly accounts for innovation and dynamic factors. These principles are tentative and merely suggestive, intended to prompt a further dialogue on CWS among interested commentators. (Also, many practical details will need to be filled in, based on further analysis.)

  1. Enforcers should consider all effects on consumer welfare in evaluating a transaction. Under the rule of reason, a reduction in surplus to particular defined consumers should not condemn a business practice (merger or non-merger) if other consumers are likely to enjoy accretions to surplus and if aggregate consumer surplus appears unlikely to decline, on net, due to the practice. Surplus need not be quantified—the likely direction of change in surplus is all that is required. In other words, “actual welfare balancing” is not required, consistent with the practical impossibility of quantifying new welfare effects in almost all cases (see, e.g., Hovenkamp, here). This principle is unaffected by market definition—all affected consumers should be assessed, whether they are “in” or “out” of a hypothesized market.
  2. Vertical intellectual-property-licensing contracts should not be subject to antitrust scrutiny unless there is substantial evidence that they are being used to facilitate horizontal collusion. This principle draws on the “New Madison Approach” associated with former Assistant Attorney General for Antitrust Makan Delrahim. It applies to a set of practices that further the interests of both consumers and producers. Vertical IP licensing (particularly patent licensing) “is highly important to the dynamic and efficient dissemination of new technologies throughout the economy, which, in turn, promotes innovation and increased welfare (consumer and producer surplus).” (See here, for example.) The 9th U.S. Circuit Court of Appeals’ refusal to condemn Qualcomm’s patent-licensing contracts (which had been challenged by the FTC) is consistent with this principle; it “evinces a refusal to find anticompetitive harm in licensing markets without hard empirical support.” (See here.)
  3. Furthermore, enforcers should carefully assess the ability of “non-standard” commercial contracts—horizontal and vertical—to overcome market failures, as described by transaction-cost economics (see here, and here, for example). Non-standard contracts may be designed to deal with problems (for instance) of contractual incompleteness and opportunism that stymie efforts to advance new commercial opportunities. To the extent that such contracts create opportunities for transactions that expand or enhance market offerings, they generate new consumer surplus (new or “shifted out” demand curves) and enhance consumer welfare. Thus, they should enjoy a general (though rebuttable) presumption of legality.
  4. Fourth, and most fundamentally, enforcers should take account of cost-benefit analysis, rooted in error-cost considerations, in their enforcement initiatives, in order to further consumer welfare. As I have previously written:

Assuming that one views modern antitrust enforcement as an exercise in consumer welfare maximization, what does that tell us about optimal antitrust enforcement policy design? In order to maximize welfare, enforcers must have an understanding of – and seek to maximize the difference between – the aggregate costs and benefits that are likely to flow from their policies. It therefore follows that cost-benefit analysis should be applied to antitrust enforcement design. Specifically, antitrust enforcers first should ensure that the rules they propagate create net welfare benefits. Next, they should (to the extent possible) seek to calibrate those rules so as to maximize net welfare. (Significantly, Federal Trade Commissioner Josh Wright also has highlighted the merits of utilizing cost-benefit analysis in the work of the FTC.) [Eight specific suggestions for implementing cost-beneficial antitrust evaluations are then put forth in this article.]

Conclusion

One must hope that efforts to eliminate consumer welfare as the focal point of U.S. antitrust will fail. But even if they do, market-oriented commentators should be alert to any efforts to “hijack” the CWS by interventionist market-skeptical scholars. A particular threat may involve efforts to define the CWS as merely involving short-term consumer surplus maximization in narrowly defined markets. Such efforts could, if successful, justify highly interventionist enforcement protocols deployed against a wide variety of efficient (though too often mischaracterized) business practices.

To counter interventionist antitrust proposals, it is important to demonstrate that claims of faltering competition and inadequate antitrust enforcement under current norms simply are inaccurate. Such an effort, though necessary, is not enough.

In order to win the day, it will be important for market mavens to explain that novel business practices aimed at promoting producer surplus tend to increase consumer surplus as well. That is because efficiency-enhancing stratagems (often embodied in restrictive IP-licensing agreements and non-standard contracts) that further innovation and overcome transaction-cost difficulties frequently pave the way for innovation and the dissemination of new technologies throughout the economy. Those effects, in turn, expand and create new market opportunities, yielding huge additions to consumer surplus—accretions that swamp short-term static effects.

Enlightened enforcers should apply enforcement protocols that allow such benefits to be taken into account. They should also focus on the interests of all consumers affected by a practice, not just a narrow subset of targeted potentially “harmed” consumers. Finally, public officials should view their enforcement mission through a cost-benefit lens, which is designed to promote welfare. 

U.S. antitrust policy seeks to promote vigorous marketplace competition in order to enhance consumer welfare. For more than four decades, mainstream antitrust enforcers have taken their cue from the U.S. Supreme Court’s statement in Reiter v. Sonotone (1979) that antitrust is “a consumer welfare prescription.” Recent suggestions (see here and here) by new Biden administration Federal Trade Commission (FTC) and U.S. Justice Department (DOJ) leadership that antitrust should promote goals apart from consumer welfare have yet to be embodied in actual agency actions, and they have not been tested by the courts. (Given Supreme Court case law, judicial abandonment of the consumer welfare standard appears unlikely, unless new legislation that displaces it is enacted.)   

Assuming that the consumer welfare paradigm retains its primacy in U.S. antitrust, how do the goals of antitrust match up with those of national security? Consistent with federal government pronouncements, the “basic objective of U.S. national security policy is to preserve and enhance the security of the United States and its fundamental values and institutions.” Properly applied, antitrust can retain its consumer welfare focus in a manner consistent with national security interests. Indeed, sound antitrust and national-security policies generally go hand-in-hand. The FTC and the DOJ should keep that in mind in formulating their antitrust policies (spoiler alert: they sometimes have failed to do so).

Discussion

At first blush, it would seem odd that enlightened consumer-welfare-oriented antitrust enforcement and national-security policy would be in tension. After all, enlightened antitrust enforcement is concerned with targeting transactions that harmfully reduce output and undermine innovation, such as hard-core collusion and courses of conduct that inefficiently exclude competition and weaken marketplace competition. U.S. national security would seem to be promoted (or, at least, not harmed) by antitrust enforcement directed at supporting stronger, more vibrant American markets.

This initial instinct is correct, if antitrust-enforcement policy indeed reflects economically sound, consumer-welfare-centric principles. But are there examples where antitrust enforcement falls short and thereby is at odds with national security? An evaluation of three areas of interaction between the two American policy interests is instructive.

The degree of congruence between national security and appropriate consumer welfare-enhancing antitrust enforcement is illustrated by a brief discussion of:

  1. defense-industry mergers;
  2. the intellectual property-antitrust interface, with a focus on patent licensing; and
  3. proposed federal antitrust legislation.

The first topic presents an example of clear consistency between consumer-welfare-centric antitrust and national defense. In contrast, the second topic demonstrates that antitrust prosecutions (and policies) that inappropriately weaken intellectual-property protections are inconsistent with national defense interests. The second topic does not manifest a tension between antitrust and national security; rather, it illustrates a tension between national security and unsound antitrust enforcement. In a related vein, the third topic demonstrates how a change in the antitrust statutes that would undermine the consumer welfare paradigm would also threaten U.S. national security.

Defense-Industry Mergers

The consistency between antitrust goals and national security is relatively strong and straightforward in the field of defense-industry-related mergers and joint ventures. The FTC and DOJ traditionally have worked closely with the U.S. Defense Department (DOD) to promote competition and consumer welfare in evaluating business transactions that affect national defense needs.

The DOD has long supported policies to prevent overreliance on a single supplier for critical industrial-defense needs. Such a posture is consistent with the antitrust goal of preventing mergers to monopoly that reduce competition, raise prices, and diminish quality by creating or entrenching a dominant firm. As then-FTC Commissioner William Kovacic commented about an FTC settlement that permitted the United Launch Alliance (an American spacecraft launch service provider established in 2006 as a joint venture between Lockheed Martin and Boeing), “[i]n reviewing defense industry mergers, competition authorities and the DOD generally should apply a presumption that favors the maintenance of at least two suppliers for every weapon system or subsystem.”

Antitrust enforcers have, however, worked with DOD to allow the only two remaining suppliers of a defense-related product or service to combine their operations, subject to appropriate safeguards, when presented with scale economy and quality rationales that advanced national-security interests (see here).

Antitrust enforcers have also consulted and found common cause with DOD in opposing anticompetitive mergers that have national-security overtones. For example, antitrust enforcement actions targeting vertical defense-sector mergers that threaten anticompetitive input foreclosure or facilitate anticompetitive information exchanges are in line with the national-security goal of preserving vibrant markets that offer the federal government competitive, high-quality, innovative, and reasonably priced purchase options for its defense needs.

The FTC’s recent success in convincing Lockheed Martin to drop its proposed acquisition of Aerojet Rocketdyne holdings fits into this category. (I express no view on the merits of this matter; I merely cite it as an example of FTC-DOD cooperation in considering a merger challenge.) In its February 2022 press release announcing the abandonment of this merger, the FTC stated that “[t]he acquisition would have eliminated the country’s last independent supplier of key missile propulsion inputs and given Lockheed the ability to cut off its competitors’ access to these critical components.” The FTC also emphasized the full consistency between its enforcement action and national-security interests:

Simply put, the deal would have resulted in higher prices and diminished quality and innovation for programs that are critical to national security. The FTC’s enforcement action in this matter dovetails with the DoD report released this week recommending stronger merger oversight of the highly concentrated defense industrial base.

Intellectual-Property Licensing

Shifts in government IP-antitrust patent-licensing policy perspectives

Intellectual-property (IP) licensing, particularly involving patents, is highly important to the dynamic and efficient dissemination of new technologies throughout the economy, which, in turn, promotes innovation and increased welfare (consumers’ and producers’ surplus). See generally, for example, Daniel Spulber’s The Case for Patents and Jonathan Barnett’s Innovation, Firms, and Markets. Patents are a property right, and they do not necessarily convey market power, as the federal government has recognized (see 2017 DOJ-FTC Antitrust Guidelines for the Licensing of Intellectual Property).

Standard setting through standard setting organizations (SSOs) has been a particularly important means of spawning valuable benchmarks (standards) that have enabled new patent-backed technologies to drive innovation and enable mass distribution of new high-tech products, such as smartphones. The licensing of patents that cover and make possible valuable standards—“standard-essential patents” or SEPs—has played a crucial role in bringing to market these products and encouraging follow-on innovations that have driven fast-paced welfare-enhancing product and process quality improvements.

The DOJ and FTC have recognized specific efficiency benefits of IP licensing in their 2017 Antitrust Guidelines for the Licensing of Intellectual Property, stating (citations deleted):

Licensing, cross-licensing, or otherwise transferring intellectual property (hereinafter “licensing”) can facilitate integration of the licensed property with complementary factors of production. This integration can lead to more efficient exploitation of the intellectual property, benefiting consumers through the reduction of costs and the introduction of new products. Such arrangements increase the value of intellectual property to consumers and owners. Licensing can allow an innovator to capture returns from its investment in making and developing an invention through royalty payments from those that practice its invention, thus providing an incentive to invest in innovative efforts. …

[L]imitations on intellectual property licenses may serve procompetitive ends by allowing the licensor to exploit its property as efficiently and effectively as possible. These various forms of exclusivity can be used to give a licensee an incentive to invest in the commercialization and distribution of products embodying the licensed intellectual property and to develop additional applications for the licensed property. The restrictions may do so, for example, by protecting the licensee against free riding on the licensee’s investments by other licensees or by the licensor. They may also increase the licensor’s incentive to license, for example, by protecting the licensor from competition in the licensor’s own technology in a market niche that it prefers to keep to itself.

Unfortunately, however, FTC and DOJ antitrust policies over the last 15 years have too often belied this generally favorable view of licensing practices with respect to SEPs. (See generally here, here, and here). Notably, the antitrust agencies have at various times taken policy postures and enforcement actions indicating that SEP holders may face antitrust challenges if:

  1. they fail to license all comers, including competitors, on fair, reasonable, and nondiscriminatory (FRAND) terms; and
  2. seek to obtain injunctions against infringers.

In addition, antitrust policy officials (see 2011 FTC Report) have described FRAND price terms as cabined by the difference between the licensing rates for the first (included in the standard) and second (not included in the standard) best competing patented technologies available prior to the adoption of a standard. This pricing measure—based on the “incremental difference” between first and second-best technologies—has been described as necessary to prevent SEP holders from deriving artificial “monopoly rents” that reflect the market power conferred by a standard. (But see then FTC-Commissioner Joshua Wright’s 2013 essay to the contrary, based on the economics of incomplete contracts.)

This approach to SEPs undervalues them, harming the economy. Limitations on seeking injunctions (which are a classic property-right remedy) encourages opportunistic patent infringements and artificially disfavors SEP holders in bargaining over licensing terms with technology implementers, thereby reducing the value of SEPs. SEP holders are further disadvantaged by the presumption that they must license all comers. They also are harmed by the implication that they must be limited to a relatively low hypothetical “ex ante” licensing rate—a rate that totally fails to take into account the substantial economic welfare value that will accrue to the economy due to their contribution to the standard. Considered individually and as a whole, these negative factors discourage innovators from participating in standardization, to the detriment of standards quality. Lower-quality standards translate into inferior standardized produces and processes and reduced innovation.

Recognizing this problem, in 2018 DOJ, Assistant Attorney General for Antitrust Makan Delrahim announced a “New Madison Approach” (NMA) to SEP licensing, which recognized:

  1. antitrust remedies are inappropriate for patent-licensing disputes between SEP-holders and implementers of a standard;
  2. SSOs should not allow collective actions by standard-implementers to disfavor patent holders;
  3. SSOs and courts should be hesitant to restrict SEP holders’ right to exclude implementers from access to their patents by seeking injunctions; and
  4. unilateral and unconditional decisions not to license a patent should be per se legal. (See, for example, here and here.)

Acceptance of the NMA would have counter-acted the economically harmful degradation of SEPs stemming from prior government policies.

Regrettably, antitrust-enforcement-agency statements during the last year effectively have rejected the NMA. Most recently, in December 2021, the DOJ issued for public comment a Draft Policy Statement on Licensing Negotiations and Remedies, SEPs, which displaces a 2019 statement that had been in line with the NMA. Unless the FTC and Biden DOJ rethink their new position and decide instead to support the NMA, the anti-innovation approach to SEPs will once again prevail, with unfortunate consequences for American innovation.

The “weaker patents” implications of the draft policy statement would also prove detrimental to national security, as explained in a comment on the statement by a group of leading law, economics, and business scholars (including Nobel Laureate Vernon Smith) convened by the International Center for Law & Economics:

China routinely undermines U.S. intellectual property protections through its industrial policy. The government’s stated goal is to promote “fair and reasonable” international rules, but it is clear that China stretches its power over intellectual property around the world by granting “anti-suit injunctions” on behalf of Chinese smartphone makers, designed to curtail enforcement of foreign companies’ patent rights. …

Insufficient protections for intellectual property will hasten China’s objective of dominating collaborative standard development in the medium to long term. Simultaneously, this will engender a switch to greater reliance on proprietary, closed standards rather than collaborative, open standards. These harmful consequences are magnified in the context of the global technology landscape, and in light of China’s strategic effort to shape international technology standards. Chinese companies, directed by their government authorities, will gain significant control of the technologies that will underpin tomorrow’s digital goods and services.

A Center for Security and International Studies submission on the draft policy statement (signed by a former deputy secretary of the DOD, as well as former directors of the U.S. Patent and Trademark Office and the National Institute of Standards and Technology) also raised China-related national-security concerns:

[T]he largest short-term and long-term beneficiaries of the 2021 Draft Policy Statement are firms based in China. Currently, China is the world’s largest consumer of SEP-based technology, so weakening protection of American owned patents directly benefits Chinese manufacturers. The unintended effect of the 2021 Draft Policy Statement will be to support Chinese efforts to dominate critical technology standards and other advanced technologies, such as 5G. Put simply, devaluing U.S. patents is akin to a subsidized tech transfer to China.

Furthermore, in a more general vein, leading innovation economist David Teece also noted the negative national-security implications in his submission on the draft policy statement:

The US government, in reviewing competition policy issues that might impact standards, therefore needs to be aware that the issues at hand have tremendous geopolitical consequences and cannot be looked at in isolation. … Success in this regard will promote competition and is our best chance to maintain technological leadership—and, along with it, long-term economic growth and consumer welfare and national security.

That’s not all. In its public comment warning against precipitous finalization of the draft policy statement, the Innovation Alliance noted that, in recent years, major foreign jurisdictions have rejected the notion that SEP holders should be deprived the opportunity to seek injunctions. The Innovation Alliance opined in detail on the China national-security issues (footnotes omitted):

[T]he proposed shift in policy will undermine the confidence and clarity necessary to incentivize investments in important and risky research and development while simultaneously giving foreign competitors who do not rely on patents to drive investment in key technologies, like China, a distinct advantage. …

The draft policy statement … would devalue SEPs, and undermine the ability of U.S. firms to invest in the research and development needed to maintain global leadership in 5G and other critical technologies.

Without robust American investments, China—which has clear aspirations to control and lead in critical standards and technologies that are essential to our national security—will be left without any competition. Since 2015, President Xi has declared “whoever controls the standards controls the world.” China has rolled out the “China Standards 2035” plan and has outspent the United States by approximately $24 billion in wireless communications infrastructure, while China’s five-year economic plan calls for $400 billion in 5G-related investment.

Simply put, the draft policy statement will give an edge to China in the standards race because, without injunctions, American companies will lose the incentive to invest in the research and development needed to lead in standards setting. Chinese companies, on the other hand, will continue to race forward, funded primarily not by license fees, but by the focused investment of the Chinese government. …

Public hearings are necessary to take into full account the uncertainty of issuing yet another policy on this subject in such a short time period.

A key part of those hearings and further discussions must be the national security implications of a further shift in patent enforceability policy. Our future safety depends on continued U.S. leadership in areas like 5G and artificial intelligence. Policies that undermine the enforceability of patent rights disincentivize the substantial private sector investment necessary for research and development in these areas. Without that investment, development of these key technologies will begin elsewhere—likely China. Before any policy is accepted, key national-security stakeholders in the U.S. government should be asked for their official input.

These are not the only comments that raised the negative national-security ramifications of the draft policy statement (see here and here). For example, current Republican and Democratic senators, prior International Trade Commissioners, and former top DOJ and FTC officials also noted concerns. What’s more, the Patent Protection Society of China, which represents leading Chinese corporate implementers, filed a rather nonanalytic submission in favor of the draft statement. As one leading patent-licensing lawyer explains: “UC Berkley Law Professor Mark Cohen, whose distinguished government service includes serving as the USPTO representative in China, submitted a thoughtful comment explaining how the draft Policy Statement plays into China’s industrial and strategic interests.”

Finally, by weakening patent protection, the draft policy statement is at odds with  the 2021 National Security Commission on Artificial Intelligence Report, which called for the United States to “[d]evelop and implement national IP policies to incentivize, expand, and protect emerging technologies[,]” in response to Chinese “leveraging and exploiting intellectual property (IP) policies as a critical tool within its national strategies for emerging technologies.”

In sum, adoption of the draft policy statement would raise antitrust risks, weaken key property rights protections for SEPs, and undercut U.S. technological innovation efforts vis-à-vis China, thereby undermining U.S. national security.

FTC v. Qualcomm: Misguided enforcement and national security

U.S. national-security interests have been threatened by more than just the recent SEP policy pronouncements. In filing a January 2017 antitrust suit (at the very end of the Obama administration) against Qualcomm’s patent-licensing practices, the FTC (by a partisan 2-1 vote) ignored the economic efficiencies that underpinned this highly successful American technology company’s practices. Had the suit succeeded, U.S. innovation in a critically important technology area would have needlessly suffered, with China as a major beneficiary. A recent Federalist Society Regulatory Transparency Project report on the New Madison Approach underscored the broad policy implications of FTC V. Qualcomm (citations deleted):

The FTC’s Qualcomm complaint reflected the anti-SEP bias present during the Obama administration. If it had been successful, the FTC’s prosecution would have seriously undermined the freedom of the company to engage in efficient licensing of its SEPs.

Qualcomm is perhaps the world’s leading wireless technology innovator. It has developed, patented, and licensed key technologies that power smartphones and other wireless devices, and continues to do so. Many of Qualcomm’s key patents are SEPs subject to FRAND, directed to communications standards adopted by wireless devices makers. Qualcomm also makes computer processors and chips embodied in cutting edge wireless devices. Thanks in large part to Qualcomm technology, those devices have improved dramatically over the last decade, offering consumers a vast array of new services at a lower and lower price, when quality is factored in. Qualcomm thus is the epitome of a high tech American success story that has greatly benefited consumers.

Qualcomm: (1) sells its chips to “downstream” original equipment manufacturers (OEMs, such as Samsung and Apple), on the condition that the OEMs obtain licenses to Qualcomm SEPs; and (2) refuses to license its FRAND-encumbered SEPs to rival chip makers, while allowing those rivals to create and sell chips embodying Qualcomm SEP technologies to those OEMS that have entered a licensing agreement with Qualcomm.

The FTC’s 2017 antitrust complaint, filed in federal district court in San Francisco, charged that Qualcomm’s “no license, no chips” policy allegedly “forced” OEM cell phone manufacturers to pay elevated royalties on products that use a competitor’s baseband processors. The FTC deemed this an illegal “anticompetitive tax” on the use of rivals’ processors, since phone manufacturers “could not run the risk” of declining licenses and thus losing all access to Qualcomm’s processors (which would be needed to sell phones on important cellular networks). The FTC also argued that Qualcomm’s refusal to license its rivals despite its SEP FRAND commitment violated the antitrust laws. Finally, the FTC asserted that a 2011-2016 Qualcomm exclusive dealing contract with Apple (in exchange for reduced patent royalties) had excluded business opportunities for Qualcomm competitors.

The federal district court held for the FTC. It ordered that Qualcomm end these supposedly anticompetitive practices and renegotiate its many contracts. [Among the beneficiaries of new pro-implementer contract terms would have been a leading Chinese licensee of Qualcomm’s, Huawei, the huge Chinese telecommunications company that has been accused by the U.S. government of using technological “back doors” to spy on the United States.]

Qualcomm appealed, and in August 2020 a panel of the Ninth Circuit Court of Appeals reversed the district court, holding for Qualcomm. Some of the key points underlying this holding were: (1) Qualcomm had no antitrust duty to deal with competitors, consistent with established Supreme Court precedent (a very narrow exception to this precedent did not apply); (2) Qualcomm’s rates were chip supplier neutral because all OEMs paid royalties, not just rivals’ customers; (3) the lower court failed to show how the “no license, no chips” policy harmed Qualcomm’s competitors; and (4) Qualcomm’s agreements with Apple did not have the effect of substantially foreclosing the market to competitors. The Ninth Circuit as a whole rejected the FTC’s “en banc” appeal for review of the panel decision.

The appellate decision in Qualcomm largely supports pillar four of the NMA, that unilateral and unconditional decisions not to license a patent should be deemed legal under the antitrust laws. More generally, the decision evinces a refusal to find anticompetitive harm in licensing markets without hard empirical support. The FTC and the lower court’s findings of “harm” had been essentially speculative and anecdotal at best. They had ignored the “big picture” that the markets in which Qualcomm operates had seen vigorous competition and the conferral of enormous and growing welfare benefits on consumers, year-by-year. The lower court and the FTC had also turned a deaf ear to a legitimate efficiency-related business rationale that explained Qualcomm’s “no license, no chips” policy – a fully justifiable desire to obtain a fair return on Qualcomm’s patented technology.

Qualcomm is well reasoned, and in line with sound modern antitrust precedent, but it is only one holding. The extent to which this case’s reasoning proves influential in other courts may in part depend on the policies advanced by DOJ and the FTC going forward. Thus, a preliminary examination of the Biden administration’s emerging patent-antitrust policy is warranted. [Subsequent discussion shows that the Biden administration apparently has rejected pro-consumer policies embodied in the 9th U.S. Circuit’s Qualcomm decision and in the NMA.]

Although the 9th Circuit did not comment on them, national-security-policy concerns weighed powerfully against the FTC v. Qualcomm suit. In a July 2019 Statement of Interest (SOI) filed with the circuit court, DOJ cogently set forth the antitrust flaws in the district court’s decision favoring the FTC. Furthermore, the SOI also explained that “the public interest” favored a stay of the district court holding, due to national-security concerns (described in some detail in statements by the departments of Defense and Energy, appended to the SOI):

[T]he public interest also takes account of national security concerns. Winter v. NRDC, 555 U.S. 7, 23-24 (2008). This case presents such concerns. In the view of the Executive Branch, diminishment of Qualcomm’s competitiveness in 5G innovation and standard-setting would significantly impact U.S. national security. A251-54 (CFIUS); LD ¶¶10-16 (Department of Defense); ED ¶¶9-10 (Department of Energy). Qualcomm is a trusted supplier of mission-critical products and services to the Department of Defense and the Department of Energy. LD ¶¶5-8; ED ¶¶8-9. Accordingly, the Department of Defense “is seriously concerned that any detrimental impact on Qualcomm’s position as global leader would adversely affect its ability to support national security.” LD ¶16.

The [district] court’s remedy [requiring the renegotiation of Qualcomm’s licensing contracts] is intended to deprive, and risks depriving, Qualcomm of substantial licensing revenue that could otherwise fund time-sensitive R&D and that Qualcomm cannot recover later if it prevails. See, e.g., Op. 227-28. To be sure, if Qualcomm ultimately prevails, vacatur of the injunction will limit the severity of Qualcomm’s revenue loss and the consequent impairment of its ability to perform functions critical to national security. The Department of Defense “firmly believes,” however, “that any measure that inappropriately limits Qualcomm’s technological leadership, ability to invest in [R&D], and market competitiveness, even in the short term, could harm national security. The risks to national security include the disruption of [the Department’s] supply chain and unsure U.S. leadership in 5G.” LD ¶3. Consequently, the public interest necessitates a stay pending this Court’s resolution of the merits. In these rare circumstances, the interest in preventing even a risk to national security—“an urgent objective of the highest order”—presents reason enough not to enforce the remedy immediately. Int’l Refugee Assistance Project, 137 S. Ct. at 2088 (internal quotations omitted).

Not all national-security arguments against antitrust enforcement may be well-grounded, of course. The key point is that the interests of national security and consumer-welfare-centric antitrust are fully aligned when antitrust suits would inefficiently undermine the competitive vigor of a firm or firms that play a major role in supporting U.S. national-security interests. Such was the case in FTC v. Qualcomm. More generally, heightened antitrust scrutiny of efficient patent-licensing practices (as threatened by the Biden administration) would tend to diminish innovation by U.S. patentees, particularly in areas covered by standards that are key to leading global technologies. Such a diminution in innovation will tend to weaken American advantages in important industry sectors that are vital to U.S. national-security interests.

Proposed Federal Antitrust Legislation

Proposed federal antitrust legislation being considered by Congress (see here, here, and here for informed critiques) would prescriptively restrict certain large technology companies’ business transactions. If enacted, such legislation would thereby preclude case-specific analysis of potential transaction-specific efficiencies, thereby undermining the consumer welfare standard at the heart of current sound and principled antitrust enforcement. The legislation would also be at odds with our national-security interests, as a recent U.S. Chamber of Commerce paper explains:

Congress is considering new antitrust legislation which, perversely, would weaken leading U.S. technology companies by crafting special purpose regulations under the guise of antitrust to prohibit those firms from engaging in business conduct that is widely acceptable when engaged in by rival competitors.

A series of legislative proposals – some of which already have been approved by relevant Congressional committees – would, among other things: dismantle these companies; prohibit them from engaging in significant new acquisitions or investments; require them to disclose sensitive user data and sensitive IP and trade secrets to competitors, including those that are foreign-owned and controlled; facilitate foreign influence in the United States; and compromise cybersecurity.  These bills would fundamentally undermine American security interests while exempting from scrutiny Chinese and other foreign firms that do not meet arbitrary user and market capitalization thresholds specified in the legislation. …

The United States has never used legislation to punish success. In many industries, scale is important and has resulted in significant gains for the American economy, including small businesses.  U.S. competition law promotes the interests of consumers, not competitors. It should not be used to pick winners and losers in the market or to manage competitive outcomes to benefit select competitors.  Aggressive competition benefits consumers and society, for example by pushing down prices, disrupting existing business models, and introducing innovative products and services.

If enacted, the legislative proposals would drag the United States down in an unfolding global technological competition.  Companies captured by the legislation would be required to compete against integrated foreign rivals with one hand tied behind their backs.  Those firms that are the strongest drivers of U.S. innovation in AI, quantum computing, and other strategic technologies would be hamstrung or even broken apart, while foreign and state-backed producers of these same technologies would remain unscathed and seize the opportunity to increase market share, both in the U.S. and globally. …

Instead of warping antitrust law to punish a discrete group of American companies, the U.S. government should focus instead on vigorous enforcement of current law and on vocally opposing and effectively countering foreign regimes that deploy competition law and other legal and regulatory methods as industrial policy tools to unfairly target U.S. companies.  The U.S. should avoid self-inflicted wounds to our competitiveness and national security that would result from turning antitrust into a weapon against dynamic and successful U.S. firms.      

Consistent with this analysis, former Obama administration Defense Secretary Leon Panetta and former Trump administration Director of National Intelligence Dan Coats argued in a letter to U.S. House leadership (see here) that “imposing severe restrictions solely on U.S. giants will pave the way for a tech landscape dominated by China — echoing a position voiced by the Big Tech companies themselves.”

The national-security arguments against current antitrust legislative proposals, like the critiques of the unfounded FTC v. Qualcomm case, represent an alignment between sound antitrust policy and national-security analysis. Unfounded antitrust attacks on efficient business practices by large firms that help maintain U.S. technological leadership in key areas undermine both principled antitrust and national security.

Conclusion

Enlightened antitrust enforcement, centered on consumer welfare, can and should be read in a manner that is harmonious with national-security interests.

The cooperation between U.S. federal antitrust enforcers and the DOD in assessing defense-industry mergers and joint ventures is, generally speaking, an example of successful harmonization. This success reflects the fact that antitrust enforcers carry out their reviews of those transactions with an eye toward accommodating efficiencies that advance defense goals without sacrificing consumer welfare. Close antitrust-agency consultation with DOD is key to that approach.

Unfortunately, federal enforcement directed toward efficient intellectual-property licensing, as manifested in the Qualcomm case, reflects a disharmony between antitrust and national security. This disharmony could be eliminated if DOJ and the FTC adopted a dynamic view of intellectual property and the substantial economic-welfare benefits that flow from restrictive patent-licensing transactions.

In sum, a dynamic analysis reveals that consumer welfare is enhanced, not harmed, by not subjecting such licensing arrangements to antitrust threat. A more permissive approach to licensing is thus consistent with principled antitrust and with the national security interest of protecting and promoting strong American intellectual property (and, in particular, patent) protection. The DOJ and the FTC should keep this in mind and make appropriate changes to their IP-antitrust policies forthwith.

Finally, proposed federal antitrust legislation would bring about statutory changes that would simultaneously displace consumer welfare considerations and undercut national security interests. As such, national security is supported by rejecting unsound legislation, in order to keep in place consumer-welfare-based antitrust enforcement.

The acceptance and implementation of due-process standards confer a variety of welfare benefits on society. As Christopher Yoo, Thomas Fetzer, Shan Jiang, and Yong Huang explain, strong procedural due-process protections promote: (1) compliance with basic norms of impartiality; (2) greater accuracy of decisions; (3) stronger economic growth; (4) increased respect for government; (5) better compliance with the law; (6) better control of the bureaucracy; (7) restraints on the influence of special-interest groups; and (8) reduced corruption.  

Recognizing these benefits (and consistent with the long Anglo-American tradition of recognizing due-process rights that dates back to Magna Carta), the U.S. government (USG) has long been active in advancing the adoption of due-process principles by competition-law authorities around the world, working particularly through the Organisation for Economic Co-operation and Development (OECD) and the International Competition Network (ICN). More generally, due process may be seen as an aspect of the rule of law, which is as important in antitrust as in other legal areas.

The USG has supported OECD Competition Committee work on due-process safeguards which began in 2010, and which culminated in the OECD ministers’ October 2021 adoption of a “Recommendation on Transparency and Procedural Fairness in Competition Law Enforcement.” This recommendation calls for: (1) competition and predictability in competition-law enforcement; (2) independence, impartiality, and professionalism of competition authorities; (3) non-discrimination, proportionality, and consistency in the treatment of parties subject to scrutiny; (4) timeliness in handling cases; (5) meaningful engagement with parties (including parties’ right to respond and be heard); (6) protection of confidential and privileged information; (7) impartial judicial review of enforcement decisions; and (8) periodic review of policies, rules, procedures, and guidelines, to ensure that they are aligned with the preceding seven principles.

The USG has also worked through the International Competition Network (ICN) to generate support for the acceptance of due-process principles by ICN member competition agencies and their governments. In describing ICN due-process initiatives, James Rill and Jana Seidl have explained that “[t]he current challenge is to determine the extent to which the ICN, as a voluntary organization, can or should establish mechanisms to evaluate implementation of … [due process] norms by its members and even non-members.”

In 2019, the ICN announced creation of a Framework for Competition Agency Procedures (CAP), open to both ICN and non-ICN national and multinational (most prominently, the EU’s Directorate General for Competition) competition agencies. The CAP essentially embodied the principles of a June 2018 U.S. Justice Department (DOJ) framework proposal. A September 2021 CAP Report (footnotes omitted) issued at an ICN steering-group meeting noted that the CAP had 73 members, and summarized the history and goals of the CAP as follows:

The ICN CAP is a non-binding, opt-in framework. It makes use of the ICN infrastructure to maximize visibility and impact while minimizing the administrative burden for participants that operate in different legal regimes and enforcement systems with different resource constraints. The ICN CAP promotes agreement among competition agencies worldwide on fundamental procedural norms. The Multilateral Framework for Procedures project, launched by the US Department of Justice in 2018, was the starting point for what is now the ICN CAP.

The ICN CAP rests on two pillars: the first pillar is a catalogue of fundamental, consensus principles for fair and effective agency procedures that reflect the broad consensus within the global competition community. The principles address: non-discrimination, transparency, notice of investigations, timely resolution, confidentiality protections, conflicts of interest, opportunity to defend, representation, written decisions, and judicial review.

The second pillar of the ICN CAP consists of two processes: the “CAP Cooperation Process,” which facilitates a dialogue between participating agencies, and the “CAP Review Process,” which enhances transparency about the rules governing participants’ investigation and enforcement procedures.

The ICN CAP template is the practical implementation tool for the CAP. Participants each submit CAP templates, outlining how their agencies adhere to each of the CAP principles. The templates allow participants to share and explain important features of their systems, including links and other references to related materials such as legislation, rules, regulations, and guidelines. The CAP templates are a useful resource for agencies to consult when they would like to gain a quick overview of other agencies’ procedures, benchmark with peer agencies, and develop new processes and procedures.

Through the two pillars and the template, the CAP provides a framework for agencies to affirm the importance of the CAP principles, to confer with other jurisdictions, and to illustrate how their regulations and guidelines adhere to those principles.

In short, the overarching goal of the ICN CAP is to give agencies a “nudge” to implement due-process principles by encouraging consultation with peer CAP members and exposing to public view agencies’ actual due-process record. The extent to which agencies will prove willing to strengthen their commitment to due process because of the CAP, or even join the CAP, remains to be seen. (China’s competition agency, the State Administration for Market Regulation (SAMR), has not joined the ICN CAP.)

Antitrust, Due Process, and the Rule of Law at the DOJ and the FTC  

Now that the ICN CAP and OECD recommendation are in place, it is important that the DOJ and Federal Trade Commission (FTC), as long-time international promoters of due process, lead by example in adhering to all of those multinational instruments’ principles. A failure to do so would, in addition to having negative welfare consequences for affected parties (and U.S. economic welfare), undermine USG international due-process advocacy. Less effective advocacy efforts could, of course, impose additional costs on American businesses operating overseas, by subjecting them to more procedurally defective foreign antitrust prosecutions than otherwise.

With those considerations in mind, let us briefly examine the current status of due-process protections afforded by the FTC and DOJ. Although traditionally robust procedural safeguards remain strong overall, some worrisome developments during the first year of the Biden administration merit highlighting. Those developments implicate classic procedural issues and some broader rule of law concerns. (This commentary does not examine due-process and rule-of-law issues associated with U.S. antitrust enforcement at the state level, a topic that warrants scrutiny as well.)

The FTC

  • New FTC leadership has taken several actions that have unfortunate due-process and rule-of-law implications (many of them through highly partisan 3-2 commission votes featuring strong dissents).

Consider the HSR Act, a Congressional compromise that gave enforcers advance notice of deals and parties the benefit of repose. HSR review [at the FTC] now faces death by a thousand cuts. We have hit month nine of a “temporary” and “brief” suspension of early termination. Letters are sent to parties when their waiting periods expire, warning them to close at their own risk. Is the investigation ongoing? Is there a set amount of time the parties should wait? No one knows! The new prior approval policy will flip the burden of proof and capture many deals below statutory thresholds. And sprawling investigations covering non-competition concerns exceed our Clayton Act authority.

These policy changes impose a gratuitous tax on merger activity – anticompetitive and procompetitive alike. There are costs to interfering with the market for corporate control, especially as we attempt to rebound from the pandemic. If new leadership wants the HSR Act rewritten, they should persuade Congress to amend it rather than taking matters into their own hands.

Uncertainty and delay surrounding merger proposals and new merger-review processes that appear to flaunt tension with statutory commands are FTC “innovations” that are in obvious tension with due-process guarantees.

  • FTC rulemaking initiatives have due-process and rule-of-law problems. As Commissioner Wilson noted (footnotes omitted), “[t]he [FTC] majority changed our rules of practice to limit stakeholder input and consolidate rulemaking power in the chair’s office. In Commissioner [Noah] Phillips’ words, these changes facilitate more rules, but not better ones.” Lack of stakeholder input offends due process. Even more serious, however, is the fact that far-reaching FTC competition rules are being planned (see the December 2021 FTC Statement of Regulatory Priorities). FTC competition rulemaking is likely beyond its statutory authority and would fail a cost-benefit analysis (see here). Moreover, even if competition rules survived, they would offend the rule of law (see here) by “lead[ing] to disparate legal treatment of a firm’s business practices, depending upon whether the FTC or the U.S. Justice Department was the investigating agency.”
  • The FTC’s July 2021 withdrawal of its 2015 “Statement of Enforcement Principles Regarding ‘Unfair Methods of Competition’ [UMC] Under Section 5 of the FTC Act” likewise undercuts the rule of law (see here). The 2015 Statement had tended to increase predictability in enforcement by tying the FTC’s exercise of its UMC authority to well-understood antitrust rule-of-reason principles and the generally accepted consumer welfare standard. By withdrawing the statement (over the dissents of Commissioners Wilson and Phillips) without promulgating a new policy, the FTC majority reduced enforcement guidance and generated greater legal uncertainty. The notion that the FTC may apply the UMC concept in an unbounded fashion lacks legal principle and threatens to chill innovative and welfare-enhancing business conduct.
  • Finally, the FTC’s abrupt September 2021 withdrawal of its approval of jointly issued 2020 DOJ-FTC Vertical Merger Guidelines (again over a dissent by Commissioners Wilson and Phillips), offends the rule of law in three ways. As Commissioner Wilson explains, it engenders confusion as to FTC policies regarding vertical-merger analysis going forward; it appears to reflect flawed economic thinking regarding vertical integration (which may in turn lead to enforcement error); and it creates a potential tension between DOJ and FTC approaches to vertical acquisitions (the third concern may disappear if and when DOJ and FTC agree to new merger guidelines).  

The DOJ

As of now, the Biden administration DOJ has not taken as many actions that implicate rule-of-law and due-process concerns. Two recent initiatives with significant rule-of-law implications, however, deserve mention.

  • First, on Dec. 6, 2021, DOJ suddenly withdrew a 2019 policy statement on “Licensing Negotiations and Remedies for Standards-Essential Patents Subject to Voluntary F/RAND Commitments.” In so doing, DOJ simultaneously released a new draft policy statement on the same topic, and requested public comments. The timing of the withdrawal was peculiar, since the U.S. Patent and Trademark Office (PTO) and the National Institute of Standards and Technology (NIST)—who had joined with DOJ in the 2019 policy statement (which itself had replaced a 2013 policy statement)—did not yet have new Senate-confirmed leadership and were apparently not involved in the withdrawal. What’s more, DOJ originally requested that public comments be filed by the beginning of January, a ridiculously short amount of time for such a complex topic. (It later relented and established an early February deadline.) More serious than these procedural irregularities, however, are two new features of the Draft Policy Statement: (1) its delineation of a suggested private-negotiation framework for patent licensing; and (2) its assertion that standard essential patent (SEP) holders essentially forfeit the right to seek an injunction. These provisions, though not binding, may have a coercive effect on some private negotiators, and they problematically insert the government into matters that are appropriately the province of private businesses and the courts. Such an involvement by government enforcers in private negotiations, which treats one category of patents (SEPs) less favorably than others, raises rule-of-law questions.
  • Second, in January 2018, DOJ and the FTC jointly issued a “Request for Information on Merger Enforcement” [RIF] that contemplated the issuance of new merger guidelines (see my recent analysis, here). The RIF was chock full of numerous queries to prospective commentators that generally reflected a merger-skeptical tone. This suggests a predisposition to challenge mergers that, if embodied in guidelines language, could discourage some (or perhaps many) non-problematic consolidations from being proposed. New merger guidelines that impliedly were anti-merger would be a departure from previous guidelines, which stated in neutral fashion that they would consider both the anticompetitive risks and procompetitive benefits of mergers being reviewed. A second major concern is that the enforcement agencies might produce long and detailed guidelines containing all or most of the many theories of competitive harm found in the RIF. Overly complex guidelines would not produce any true guidance to private parties, inconsistent with the principle that individuals should be informed what the law is. Such guidelines also would give enforcers greater flexibility to selectively pick and choose theories best suited to block particular mergers. As such, the guidelines might be viewed by judges as justifications for arbitrary, rather than principled, enforcement, at odds with the rule of law.    

Conclusion

No man is an island entire of itself.” In today’s world of multinational antitrust cooperation, the same holds true for competition agencies. Efforts to export due process in competition law, which have been a USG priority for many years, will inevitably falter if other jurisdictions perceive the FTC and DOJ as not practicing what they preach.

It is to be hoped that the FTC and DOJ will take into account this international dimension in assessing the merits of antitrust “reforms” now under consideration. New enforcement policies that sow delay and uncertainty undermine the rule of law and are inconsistent with due-process principles. The consumer welfare harm that may flow from such deficient policies may be substantial. The agency missteps identified above should be rectified and new polices that would weaken due-process protections and undermine the rule of law should be avoided.