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Admirers of the late Supreme Court Justice Louis Brandeis and other antitrust populists often trace the history of American anti-monopoly sentiments from the Founding Era through the Progressive Era’s passage of laws to fight the scourge of 19th century monopolists. For example, Matt Stoller of the American Economic Liberties Project, both in his book Goliath and in other writings, frames the story of America essentially as a battle between monopolists and anti-monopolists.

According to this reading, it was in the late 20th century that powerful corporations and monied interests ultimately succeeded in winning the battle in favor of monopoly power against antitrust authorities, aided by the scholarship of the “ideological” Chicago school of economics and more moderate law & economics scholars like Herbert Hovenkamp of the University of Pennsylvania Law School.

It is a framing that leaves little room for disagreements about economic theory or evidence. One is either anti-monopoly or pro-monopoly, anti-corporate power or pro-corporate power.

What this story muddles is that the dominant anti-monopoly strain from English common law, which continued well into the late 19th century, was opposed specifically to government-granted monopoly. In contrast, today’s “anti-monopolists” focus myopically on alleged monopolies that often benefit consumers, while largely ignoring monopoly power granted by government. The real monopoly problem antitrust law fails to solve is its immunization of anticompetitive government policies. Recovering the older anti-monopoly tradition would better focus activists today.

Common Law Anti-Monopoly Tradition

Scholars like Timothy Sandefur of the Goldwater Institute have written about the right to earn a living that arose out of English common law and was inherited by the United States. This anti-monopoly stance was aimed at government-granted privileges, not at successful business ventures that gained significant size or scale.

For instance, 1602’s Darcy v. Allein, better known as the “Case of Monopolies,” dealt with a “patent” originally granted by Queen Elizabeth I in 1576 to Ralph Bowes, and later bought by Edward Darcy, to make and sell playing cards. Darcy did not innovate playing cards; he merely had permission to be the sole purveyor. Thomas Allein, who attempted to sell playing cards he created, was sued for violating Darcy’s exclusive rights. Darcy’s monopoly ultimately was held to be invalid by the court, which refused to convict Allein.

Edward Coke, who actually argued on behalf of the patent in Darcy v. Allen, wrote that the case stood for the proposition that:

All trades, as well mechanical as others, which prevent idleness (the bane of the commonwealth) and exercise men and youth in labour, for the maintenance of themselves and their families, and for the increase of their substance, to serve the Queen when occasion shall require, are profitable for the commonwealth, and therefore the grant to the plaintiff to have the sole making of them is against the common law, and the benefit and liberty of the subject. (emphasis added)

In essence, Coke’s argument was more closely linked to a “right to work” than to market structures, business efficiency, or firm conduct.

The courts largely resisted royal monopolies in 17th century England, finding such grants to violate the common law. For instance, in The Case of the Tailors of Ipswich, the court cited Darcy and found:

…at the common law, no man could be prohibited from working in any lawful trade, for the law abhors idleness, the mother of all evil… especially in young men, who ought in their youth, (which is their seed time) to learn lawful sciences and trades, which are profitable to the commonwealth, and whereof they might reap the fruit in their old age, for idle in youth, poor in age; and therefore the common law abhors all monopolies, which prohibit any from working in any lawful trade. (emphasis added)

The principles enunciated in these cases were eventually codified in the Statute of Monopolies, which prohibited the crown from granting monopolies in most circumstances. This was especially the case when the monopoly prevented the right to otherwise lawful work.

This common-law tradition also had disdain for private contracts that created monopoly by restraining the right to work. For instance, the famous Dyer’s case of 1414 held that a contract in which John Dyer promised not to practice his trade in the same town as the plaintiff was void for being an unreasonable restraint on trade.The judge is supposed to have said in response to the plaintiff’s complaint that he would have imprisoned anyone who had claimed such a monopoly on his own authority.

Over time, the common law developed analysis that looked at the reasonableness of restraints on trade, such as the extent to which they were limited in geographic reach and duration, as well as the consideration given in return. This part of the anti-monopoly tradition would later constitute the thread pulled on by the populists and progressives who created the earliest American antitrust laws.

Early American Anti-Monopoly Tradition

American law largely inherited the English common law system. It also inherited the anti-monopoly tradition the common law embodied. The founding generation of American lawyers were trained on Edward Coke’s commentary in “The Institutes of the Laws of England,” wherein he strongly opposed government-granted monopolies.

This sentiment can be found in the 1641 Massachusetts Body of Liberties, which stated: “No monopolies shall be granted or allowed amongst us, but of such new Inventions that are profitable to the Countrie, and that for a short time.” In fact, the Boston Tea Party itself was in part a protest of the monopoly granted to the East India Company, which included a special refund from duties by Parliament that no other tea importers enjoyed.

This anti-monopoly tradition also can be seen in the debates at the Constitutional Convention. A proposal to give the federal government power to grant “charters of incorporation” was voted down on fears it could lead to monopolies. Thomas Jefferson, George Mason, and several Antifederalists expressed concerns about the new national government’s ability to grant monopolies, arguing that an anti-monopoly clause should be added to the Constitution. Six states wanted to include provisions that would ban monopolies and the granting of special privileges in the Constitution.

The American anti-monopoly tradition remained largely an anti-government tradition throughout much of the 19th century, rearing its head in debates about the Bank of the United States, publicly-funded internal improvements, and government-granted monopolies over bridges and seas. Pamphleteer Lysander Spooner even tried to start a rival to the Post Office by appealing to the strong American impulse against monopoly.

Coinciding with the Industrial Revolution, liberalization of corporate law made it easier for private persons to organize firms that were not simply grants of exclusive monopoly. But discontent with industrialization and other social changes contributed to the birth of a populist movement, and later to progressives like Brandeis, who focused on private combinations and corporate power rather than government-granted privileges. This is the strand of anti-monopoly sentiment that continues to dominate the rhetoric today.

What This Means for Today

Modern anti-monopoly advocates have largely forgotten the lessons of the long Anglo-American tradition that found government is often the source of monopoly power. Indeed, American law privileges government’s ability to grant favors to businesses through licensing, the tax code, subsidies, and even regulation. The state action doctrine from Parker v. Brown exempts state and municipal authorities from antitrust lawsuits even where their policies have anticompetitive effects. And the Noerr-Pennington doctrine protects the rights of industry groups to lobby the government to pass anticompetitive laws.

As a result, government is often used to harm competition, with no remedy outside of the political process that created the monopoly. Antitrust law is used instead to target businesses built by serving consumers well in the marketplace.

Recovering this older anti-monopoly tradition would help focus the anti-monopoly movement on a serious problem modern antitrust misses. While the consumer-welfare standard that modern antitrust advocates often decry has helped to focus the law on actual harms to consumers, antitrust more broadly continues to encourage rent-seeking by immunizing state action and lobbying behavior.

With the COVID-19 vaccine made by Moderna joining the one from Pfizer and BioNTech in gaining approval from the U.S. Food and Drug Administration, it should be time to celebrate the U.S. system of pharmaceutical development. The system’s incentives—notably granting patent rights to firms that invest in new and novel discoveries—have worked to an astonishing degree, producing not just one but as many as three or four effective approaches to end a viral pandemic that, just a year ago, was completely unknown.

Alas, it appears not all observers agree. Now that we have the vaccines, some advocate suspending or limiting patent rights—for example, by imposing a compulsory licensing scheme—with the argument that this is the only way for the vaccines to be produced in mass quantities worldwide. Some critics even assert that abolishing or diminishing property rights in pharmaceuticals is needed to end the pandemic.

In truth, we can effectively and efficiently distribute the vaccines while still maintaining the integrity of our patent system. 

What the false framing ignores are the important commercialization and distribution functions that patents provide, as well as the deep, long-term incentives the patent system provides to create medical innovations and develop a robust pharmaceutical supply chain. Unless we are sure this is the last pandemic we will ever face, repealing intellectual property rights now would be a catastrophic mistake.

The supply chains necessary to adequately scale drug production are incredibly complex, and do not appear overnight. The coordination and technical expertise needed to support worldwide distribution of medicines depends on an ongoing pipeline of a wide variety of pharmaceuticals to keep the entire operation viable. Public-spirited officials may in some cases be able to piece together facilities sufficient to produce and distribute a single medicine in the short term, but over the long term, global health depends on profit motives to guarantee the commercialization pipeline remains healthy. 

But the real challenge is in maintaining proper incentives to develop new drugs. It has long been understood that information goods like intellectual property will be undersupplied without sufficient legal protections. Innovators and those that commercialize innovations—like researchers and pharmaceutical companies—have less incentive to discover and market new medicines as the likelihood that they will be able to realize a return for their efforts diminishes. Without those returns, it’s far less certain the COVID vaccines would have been produced so quickly, or at all. The same holds for the vaccines we will need for the next crisis or badly needed treatments for other deadly diseases.

Patents are not the only way to structure incentives, as can be seen with the current vaccines. Pharmaceutical companies also took financial incentives from various governments in the form of direct payment or in purchase guarantees. But this enhances, rather than diminishes, the larger argument. There needs to be adequate returns for those who engage in large, risky undertakings like creating a new drug. 

Some critics would prefer to limit pharmaceutical companies’ returns solely to those early government investments, but there are problems with this approach. It is difficult for governments to know beforehand what level of profit is needed to properly incentivize firms to engage in producing these innovations.  To the extent that direct government investment is useful, it often will be as an additional inducement that encourages new entry by multiple firms who might each pursue different technologies. 

Thus, in the case of coronavirus vaccines, government subsidies may have enticed more competitors to enter more quickly, or not to drop out as quickly, in hopes that they would still realize a profit, notwithstanding the risks. Where there might have been only one or two vaccines produced in the United States, it appears likely we will see as many as four.

But there will always be necessary trade-offs. Governments cannot know how to set proper incentives to encourage development of every possible medicine for every possible condition by every possible producer.  Not only do we not know which diseases and which firms to prioritize, but we have no idea how to determine which treatment approaches to encourage. 

The COVID-19 vaccines provide a clear illustration of this problem. We have seen development of both traditional vaccines and experimental mRNA treatments to combat the virus. Thankfully, both have shown positive results, but there was no way to know that in March. In this perennial state of ignorance,t markets generally have provided the best—though still imperfect—way to make decisions. 

The patent system’s critics sometimes claim that prizes would offer a better way to encourage discovery. But if we relied solely on government-directed prizes, we might never have had the needed research into the technology that underlies mRNA. As one recent report put it, “before messenger RNA was a multibillion-dollar idea, it was a scientific backwater.” Simply put, without patent rights as the backstop to purely academic or government-led innovation and commercialization, it is far less likely that we would have seen successful COVID vaccines developed as quickly.

It is difficult for governments to be prepared for the unknown. Abolishing or diminishing pharmaceutical patents would leave us even less prepared for the next medical crisis. That would only add to the lasting damage that the COVID-19 pandemic has already wrought on the world.

This blog post summarizes the findings of a paper published in Volume 21 of the Federalist Society Review. The paper was co-authored by Dirk Auer, Geoffrey A. Manne, Julian Morris, & Kristian Stout. It uses the analytical framework of law and economics to discuss recent patent law reforms in the US, and their negative ramifications for inventors. The full paper can be found on the Federalist Society’s website, here.

Property rights are a pillar of the free market. As Harold Demsetz famously argued, they spur specialization, investment and competition throughout the economy. And the same holds true for intellectual property rights (IPRs). 

However, despite the many social benefits that have been attributed to intellectual property protection, the past decades have witnessed the birth and growth of an powerful intellectual movement seeking to reduce the legal protections offered to inventors by patent law.

These critics argue that excessive patent protection is holding back western economies. For instance, they posit that the owners of the standard essential patents (“SEPs”) are charging their commercial partners too much for the rights to use their patents (this is referred to as patent holdup and royalty stacking). Furthermore, they argue that so-called patent trolls (“patent-assertion entities” or “PAEs”) are deterring innovation by small startups by employing “extortionate” litigation tactics.

Unfortunately, this movement has led to a deterioration of appropriate remedies in patent disputes.

The many benefits of patent protection

While patents likely play an important role in providing inventors with incentives to innovate, their role in enabling the commercialization of ideas is probably even more important.

By creating a system of clearly defined property rights, patents empower market players to coordinate their efforts in order to collectively produce innovations. In other words, patents greatly reduce the cost of concluding mutually-advantageous deals, whereby firms specialize in various aspects of the innovation process. Critically, these deals occur in the shadow of patent litigation and injunctive relief. The threat of these ensures that all parties have an incentive to take a seat at the negotiating table.

This is arguably nowhere more apparent than in the standardization space. Many of the most high-profile modern technologies are the fruit of large-scale collaboration coordinated through standards developing organizations (SDOs). These include technologies such as Wi-Fi, 3G, 4G, 5G, Blu-Ray, USB-C, and Thunderbolt 3. The coordination necessary to produce technologies of this sort is hard to imagine without some form of enforceable property right in the resulting inventions.

The shift away from injunctive relief

Of the many recent reforms to patent law, the most significant has arguably been a significant limitation of patent holders’ availability to obtain permanent injunctions. This is particularly true in the case of so-called standard essential patents (SEPs). 

However, intellectual property laws are meaningless without the ability to enforce them and remedy breaches. And injunctions are almost certainly the most powerful, and important, of these remedies.

The significance of injunctions is perhaps best understood by highlighting the weakness of damages awards when applied to intangible assets. Indeed, it is often difficult to establish the appropriate size of an award of damages when intangible property—such as invention and innovation in the case of patents—is the core property being protected. This is because these assets are almost always highly idiosyncratic. By blocking all infringing uses of an invention, injunctions thus prevent courts from having to act as price regulators. In doing so, they also ensure that innovators are adequately rewarded for their technological contributions.

Unfortunately, the Supreme Court’s 2006 ruling in eBay Inc. v. MercExchange, LLC significantly narrowed the circumstances under which patent holders could obtain permanent injunctions. This predictably led lower courts to grant fewer permanent injunctions in patent litigation suits. 

But while critics of injunctions had hoped that reducing their availability would spur innovation, empirical evidence suggests that this has not been the case so far. 

Other reforms

And injunctions are not the only area of patent law that have witnessed a gradual shift against the interests of patent holders. Much of the same could be said about damages awards, revised fee shifting standards, and the introduction of Inter Partes Review.

Critically, the intellectual movement to soften patent protection has also had ramifications outside of the judicial sphere. It is notably behind several legislative reforms, particularly the America Invents Act. Moreover, it has led numerous private parties – most notably Standard Developing Organizations (SDOs) – to adopt stances that have advanced the interests of technology implementers at the expense of inventors.

For instance, one of the most noteworthy reforms has been IEEE’s sweeping reforms to its IP policy, in 2015. The new rules notably prevented SEP holders from seeking permanent injunctions against so-called “willing licensees”. They also mandated that royalties pertaining to SEPs should be based upon the value of the smallest saleable component that practices the patented technology. Both of these measures ultimately sought to tilt the bargaining range in license negotiations in favor of implementers.

Concluding remarks

The developments discussed in this article might seem like small details, but they are part of a wider trend whereby U.S. patent law is becoming increasingly inhospitable for inventors. This is particularly true when it comes to the enforcement of SEPs by means of injunction.

While the short-term effect of these various reforms has yet to be quantified, there is a real risk that, by decreasing the value of patents and increasing transaction costs, these changes may ultimately limit the diffusion of innovations and harm incentives to invent.

This likely explains why some legislators have recently put forward bills that seek to reinforce the U.S. patent system (here and here).

Despite these initiatives, the fact remains that there is today a strong undercurrent pushing for weaker or less certain patent protection. If left unchecked, this threatens to undermine the utility of patents in facilitating the efficient allocation of resources for innovation and its commercialization. Policymakers should thus pay careful attention to the changes this trend may bring about and move swiftly to recalibrate the patent system where needed in order to better protect the property rights of inventors and yield more innovation overall.

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Tim Brennan, (Professor, Economics & Public Policy, University of Maryland; former FCC; former FTC).]

Observers on TOTM and elsewhere have pointed out the importance of preserving patent rights as pharmaceutical and biotechnology companies pursue development of treatments for, and better vaccines against,  Covid-19. As the benefits of these treatments could reach into the trillions of dollars (see here for a casual estimate and here for a more serious one), it is hard to imagine a level of reward for successful innovations that is too high.

On the other hand, as these and other commentaries suggest if only implicitly, the high social value of a coronavirus treatment or vaccine may well lead to calls to limit the ability to profit from a patent. It is easy to imagine that a developer of a vaccine will not be able to charge the patent-protected price (note avoidance of the term “monopoly”). It almost certainly will not be able to do so if it cannot use price discrimination in order to allow those lacking the means to pay a uniform higher price to get the vaccine.

However, there is an alternative to patents that have not received much attention in the policy discussion—having the government (Treasury, NIH, CDC) offer a prize in exchange for open access to a successful vaccine or treatment. Prizes are not new; they go back at least to the early 18th century, when Britain offered a prize for improvements in clock accuracy to facilitate ocean-going navigation. Many prizes have been offered by the private sector, both for their own use—Netflix offering a prize for improvements to its movie recommendation algorithm—and to altruistically promote innovation. Charles Lindbergh’s 1927 first solo transatlantic flight, and previous attempts by others, were motivated at least in part by a $25,000 prize offered by a New York hotel owner. 

In light of the net benefits of an improved vaccine, indicated perhaps by the level of spending in enacted and proposed stimulus and rescue programs, a prize of, oh, $25 billion is practically chump change. But would a prize make sense here?

I and two former colleagues at Resources for the Future, Molly Macauley and Kate Whitefoot, analyzed the use of prizes in comparison to patents and other methods to solicit and procure innovation.  This work was inspired by Molly’s interest in NASA’s use of prizes to induce innovations in space exploration equipment. On the theory side, we were interested because models of patents typically treat patents as prizes—the successful innovator gets $X in expected profit—and thus were unable to explain why one might want to choose prizes rather than patents and vice versa

When is a prize a “prize”?

The answer to this question requires being clear on what I mean by a prize. A familiar type of prize is the “best” of something, from first prize in the middle school science fair to the Academy Award for Best Picture. This is not the kind of prize I’m talking about with regard to coming up with a treatment for or vaccine against Covid-19. (George Mason’s Mercatus Center is offering prizes of this sort for things like $50,000 for “best coronavirus policy writing” to $500,000 for “best effort to find a treatment rapidly”; h/t to Geoff Manne.) Rather, it is a prize for being first to achieve a specific outcome, for example, a solo flight across the Atlantic Ocean. 

A necessary component of such prizes is a winning condition, specified in advance. For example, the $10 million Ansari X Prize to promote commercial space travel was not awarded just for some general demonstration of feasibility that pleased a set of judges. Rather, it specifically went to the first team that could “carry three people 100 kilometers above the earth’s surface twice within two weeks.”  Contestants knew what they had to do, and there was no dispute when the winner met the criterion for getting the prize.

Prizes or patents?

The need for a winning condition highlights one of the two main criteria affecting the choice of patents or prizes: advance knowledge of the specific goal. Economy-wide, the advantage of patents over prizes is that entrepreneurial innovators are rewarded for coming up with sufficiently novel products or processes of value. Knowledge regarding what is worth innovative effort is decentralized and often tacit. On the other hand, if a funder, including the government, knows what it wants sufficiently well that it can specify a winning condition, a prize can be sensible as a way to focus innovative effort toward that desired objective.

The second criterion for choosing between patents and prizes is more subtle. Someone undertaking research effort to come up with a patent bears two risks. The first is the risk that the effort will not be successful, not just overall but in being the first to be able to file for a patent. That risk is essentially shared by those pursuing a prize, where being first involves not filing for a patent but meeting the winning condition. However, patent seekers bear another risk, which is how much the patent will be worth if they win it. Prize seekers do not bear that risk, as the prize is specified in advance. (Economic models of patent activity tend to ignore this variation.) Thus, a prize may induce more risk-averse innovators to compete for the prize.

Assuming a winning condition for a Covid-19 treatment or vaccine can be specified in advance—I leave that to the medical people—our present public health dilemma could be well suited for a prize. As observed earlier, with both net benefits and already made public spending responses in the trillions of dollars, such a prize could and should be quite large. That may be a difficult to sell politically but, as also observed earlier, the government may not be able to commit credibly to allow a patent winner to exploit the treatment or vaccine’s economic value.

Design issues, TBD

If prizes become an appealing way to encourage Covid-19 mitigation innovations, a few design issues remain on the table.

One is whether to have intermediate prizes, with their own winning conditions, to narrow down the field of contestants to those with more promising approaches. One would need some sort of winning condition for this, of course. A second is whether the innovation will be achieved more quickly by allowing contestants to combine efforts. The virtues of competition may be outweighed by being able to hedge bets rather than risk being stuck going down a blind alley.

A third is whether to go with winner-take-all or have second or third prizes. One advantage of multiple prizes is that it can mitigate some risk to innovators, at a potential cost of reducing the effort to win. However, one could imagine here that someone other than the winner might come up with a treatment or vaccine that does better than the winner but was found after the winner met the condition. This leads to a fourth policy choice—should contestants, the winner or others, retain patents, even if the winning treatment of vaccine is freely licensed, to be made available at marginal cost.

All of these choices, along with the choice of whether to offer a prize and what that prize should be, are matters of medical and pharmaceutical judgment. But economics does highlight the potential advantages of a prize and suggest that it may deserve some attention as other policy judgments are being made. 

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Kristian Stout, (Associate Director, International Center for Law & Economics]


The ongoing pandemic has been an opportunity to explore different aspects of the human condition. For myself, I have learned that, despite a deep commitment to philosophical (neo- or classical-) liberalism, at heart I am pragmatic. I would prefer a society that optimizes for more individual liberty, but I am emphatically not someone who would even entertain the idea of using crises to advance my agenda when it is not clearly in service to amelioration of immediate problems.

Sadly, I have also learned that there are those who are not similarly pragmatic, and are willing to advance their ideological agenda come hell or high water. In this regard, I was disappointed yesterday to see the Gurry IP/COVID Letter passing around Twitter calling for widespread, worldwide interference with the property rights of IPR holders. 

The letter calls for a scattershot set of “remedies” to the crisis that would open access to copyright- and patent-protected inventions and content, including (among other things): 

  • voluntary licensing and non-enforcement of IP;
  • abrogation of IPR by WIPO members using the  “flexibility” in the international IP regime; 
  • the removal of geographical restrictions on IP licenses;
  • forcing patents into COVID-19 patent pools; and 
  • the implementation of compulsory licensing. 

And, unlike many prior efforts to push the envelope on weakening IP protections, the Gurry Letter also calls for measures that would weaken trade secrets and expose confidential business information in order to “achieve universal and equitable access to COVID-19 medicines and medical technologies as soon as reasonably possible.”

Notably, nothing in the letter suggests that any of these measures should be regarded as temporary.

We all want treatments for infection, vaccines for prevention, and ample supply of personal protective equipment as soon as possible, but if all the demands in this letter were met, it would do little to increase the supply of any of these things in the short term, while undermining incentives to develop new treatments, vaccines and better preventative tools in the long run. 

Fundamentally, the letter  reflects a willingness to use the COVID-19 pandemic to pursue an agenda that lacks merit and would be dismissed in the normal course of affairs. 

What is most certainly the case is that we need more innovation now, and we need it faster. There is no reason to believe that mandating open source status or forcing compulsory licensing on the firms doing that work will encourage that work to proceed with all due haste—and every indication that the opposite is the case. 

Where there are short term shortages of certain products that might be produced in much larger quantities by relaxing IP, companies are responding by doing just that—voluntarily. But this is fundamentally different from the imposition of unlimited compulsory licenses.

Further, private actors have displayed an impressive willingness to provide free or low cost access to technologies and content—without government coercion. The following is a short list of some of the content and inventions that have been opened up:

Culture, Fitness & Entertainment

  • HBO Will Stream 500 Hours of Free Programming, Including Full Seasons of ‘Veep,’ ‘The Sopranos,’ ‘Silicon Valley’”
  • Dozens (or more) of artists, both famous and lesser known, are releasing free back catalog performances or are taking part in free live streaming sessions on social media platforms. Notably, viewers are often welcome to donate or “pay what they” want to help support these artists (more on this below).
  • The NBA, NFL, and NHL are offering free access to their back catalogue of games.
  • A large array of music production software can now be used free on extended trials for 3 months (or completely free and unlimited in some cases). 
  • CBS All Access expanded its free trial period.
  • Neil Gaiman and Harper Collins granted permission to Levar Burton to livestream readings from their catalogs.
  • Disney is releasing movies early onto its (paid) Disney+ services.
  • Gold’s Gym is providing free access to its app-based workouts.
  • The Met is streaming free recordings of its Live in HD series.
  • The Seattle Symphony is offering free access to some of its recorded performances.
  • The UK National Theater is streaming some of its most popular plays for free.
  • Andrew Lloyd Weber is streaming his shows online for free.

Science, News & Education

  • Scholastica released free content intended to help educate students stuck at home while sheltering-in-place. 
  • Nearly 100 academic journals, societies, institutes, and companies signed a commitment to make research and data on COVID-19 freely available, at least for the duration of the outbreak.
  • The Atlantic lifted paywall restrictions on access to its COVID-19-related content.
  • The New England Journal of Medicine is allowing free access to COVID-19-related resources.
  • The Lancet allows free access to research it publishes on COVID-19.
  • All material published by theBMJ on the coronavirus outbreak is freely available.
  • The AAAS-published Science allows free access to its coronavirus research and commentary.
  • Elsevier gave full access to its content on its COVID-19 Information Center for PubMed Central and other public health databases.
  • The American Economic Association announced open access to all of its journals until the end of June.
  • JSTOR expanded free access to some of its scholarship.

Medicine & Technology

  • The Global Center for Medical Design is developing license-free PPE designs that can be quickly implemented by manufacturers.
  • Medtronic published “design specifications for the Puritan Bennett 560 (PB560) to allow innovators, inventors, start-ups, and academic institutions to leverage their own expertise and resources to evaluate options for rapid ventilator manufacturing.” It additionally provided software licenses for this technology.
  • AbbVie announced it won’t enforce its patent rights for Kaletra—a drug that may provide treatment for COVID-19 infections. Israel had earlier indicated it would impose compulsory licenses for the drug, but AbbVie is allowing use worldwide. The company, moreover, had donated supplies of the drug to China earlier in the year when the outbreak first became apparent.
  • Google is working with health researchers to provide anonymized and aggregated user location data. 
  • Cisco has extended free licenses and expanded usage counts at no extra charge for three of its security technologies to help strained IT teams and partners ready themselves and their clients for remote work.”
  • Microsoft is offering free subscriptions to its Teams product for six months.
  • Zoom expanded its free access and other limitations for educational institutions around the world.

Incentivize innovation, now more than ever

In addition to undermining the short-term incentives to draw more research resources into the fight against COVID-19, using this crisis to weaken the IP regime will cause long-term damage to the economies of the world. We still will need creators making new cultural products and researchers developing new medicines and technologies; weakening the IP regime will undermine the delicate set of incentives that cultural and scientific production depends upon. 

Any clear-eyed assessment of the broader course of the pandemic and the response to it gives lie to the notion that IP rights are oppressive or counterproductive. It is the pharmaceutical industry—hated as they may be in some quarters—that will be able to marshall the resources and expertise to develop treatments and vaccines. And it is artists and educators producing cultural content who (theoretically) depend on the licensing revenues of their creations for survival. 

In fact, one of the things that the pandemic has exposed is the fragility of artists’ livelihoods and the callousness with which they are often treated. Shortly after the lockdowns began in the US, the well-established rock musician David Crosby said in an interview that, if he could not tour this year, he would face tremendous financial hardship. 

As unfortunate as that may be for Crosby, a world-famous musician, imagine how much harder it is for struggling musicians who can hardly hope to achieve a fraction of Crosby’s success for their own tours, let alone for licensing. If David Crosby cannot manage well for a few months on the revenue from his popular catalog, what hope do small artists have?

Indeed, the flood of unable-to-tour artists who are currently offering “donate what you can” streaming performances are a symptom of the destructive assault on IPR exemplified in the letter. For decades, these artists have been told that they can only legitimately make money through touring. Although the potential to actually make a living while touring is possibly out of reach for many or most artists,  those that had been scraping by have now been brought to the brink of ruin as the ability to tour is taken away. 

There are certainly ways the various IP regimes can be improved (like, for instance, figuring out how to help creators make a living from their creations), but now is not the time to implement wishlist changes to an otherwise broadly successful rights regime. 

And, critically, there is a massive difference between achieving wider distribution of intellectual property voluntarily as opposed to through government fiat. When done voluntarily the IP owner determines the contours and extent of “open sourcing” so she can tailor increased access to her own needs (including the need to eat and pay rent). In some cases this may mean providing unlimited, completely free access, but in other cases—where the particular inventor or creator has a different set of needs and priorities—it may be something less than completely open access. When a rightsholder opts to “open source” her property voluntarily, she still retains the right to govern future use (i.e. once the pandemic is over) and is able to plan for reductions in revenue and how to manage future return on investment. 

Our lawmakers can consider if a particular situation arises where a particular piece of property is required for the public good, should the need arise. Otherwise, as responsible individuals, we should restrain ourselves from trying to capitalize on the current crisis to ram through our policy preferences. 

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Daniel Takash,(Regulatory policy fellow at the Niskanen Center. He is the manager of Niskanen’s Captured Economy Project, https://capturedeconomy.com, and you can follow him @danieltakash or @capturedecon).]

The pharmaceutical industry should be one of the most well-regarded industries in America. It helps bring drugs to market that improve, and often save, people’s lives. Yet last year a Gallup poll found that of 25 major industries, the pharmaceutical industry was the most unpopular– trailing behind fossil fuels, lawyers, and even the federal government. The opioid crisis dominated the headlines for the past few years, but the high price of drugs is a top-of-mind issue that generates significant animosity toward the pharmaceutical industry. The effects of high drug prices are felt not just at every trip to the pharmacy, but also by those who are priced out of life-saving treatments. Many Americans simply can’t afford what their doctors prescribe. The pharmaceutical industry helps save lives, but it’s also been credibly accused of anticompetitive behavior–not just from generics, but even other brand manufacturers.

These extraordinary times are an opportunity to right the ship. AbbVie, roundly criticized for building a patent thicket around Humira, has donated its patent rights to a promising COVID-19 treatment. This is to be celebrated– yet pharma’s bad reputation is defined by its worst behaviors and the frequent apologetics for overusing the patent system. Hopefully corporate social responsibility will prevail, and such abuses will cease in the future.

The most effective long-term treatment for COVID-19 will be a vaccine. We also need drugs to treat those afflicted with COVID-19 to improve recovery and lower mortality rates for those that get sick before a vaccine is developed and widely available. This requires rapid drug development through effective public-private partnerships to bring these treatments to market.

Without a doubt, these solutions will come from the pharmaceutical industry. Increased funding for the National Institutes for Health, nonprofit research institutions, and private pharmaceutical researchers are likely needed to help accelerate the development of these treatments. But we must be careful to ensure whatever necessary upfront public support is given to these entities results in a fair trade-off for Americans. The U.S. taxpayer is one of the largest investors in early to mid-stage drug research, and we need to make sure that we are a good investor.

Basic research into the costs of drug development, especially when taxpayer subsidies are involved, is a necessary start. This is a feature of the We PAID Act, introduced by Senators Rick Scott (R-FL) and Chris Van Hollen (D-MD), which requires the Department of Health and Human Services to enter into a contract with the National Academy of Medicine to figure the reasonable price of drugs developed with taxpayer support. This reasonable price would include a suitable reward to the private companies that did the important work of finishing drug development and gaining FDA approval. This is important, as setting a price too low would reduce investments in indispensable research and development. But this must be balanced with the risk of using patents to charge prices above and beyond those necessary to finance research, development, and commercialization.

A little sunshine can go a long way. We should trust that pharmaceutical companies will develop a vaccine and treatments or coronavirus, but we must also verify these are affordable and accessible through public scrutiny. Take the drug manufacturer Gilead Science’s about-face on its application for orphan drug status on the possible COVID-19 treatment remdesivir. Remedesivir, developed in part with public funds and already covered by three Gilead patents, technically satisfied the definition of “orphan drug,” as COVID-19 (at the time of the application) afflicted fewer than 200,000 patents. In a pandemic that could infect tens of millions of Americans, this designation is obviously absurd, and public outcry led to Gilead to ask the FDA to rescind the application. Gilead claimed it sought the designation to speed up FDA review, and that might be true. Regardless, public attention meant that the FDA will give Gilead’s drug Remdesivir expedited review without Gilead needing a designation that looks unfair to the American people.

The success of this isolated effort is absolutely worth celebrating. But we need more research to better comprehend the pharmaceutical industry’s needs, and this is just what the study provisions of We PAID would provide.

There is indeed some existing research on this front. For example,the Pharmaceutical Researchers and Manufacturers of America (PhRMA) estimates it costs an average of $2.6 billion to bring a new drug to market, and research from the Journal of the American Medical Association finds this average to be closer to $1.3 billion, with the median cost of development to be $985 million.

But a thorough analysis provided under We PAID is the best way for us to fully understand just how much support the pharmaceutical industry needs, and just how successful it has been thus far. The NIH, one of the major sources of publicly funded research, invests about $41.7 billion annually in medical research. We need to better understand how these efforts link up, and how the torch is passed from public to private efforts.

Patents are essential to the functioning of the pharmaceutical industry by incentivizing drug development through temporary periods of exclusivity. But it is equally essential, in light of the considerable investment already made by taxpayers in drug research and development, to make sure we understand the effects of these incentives and calibrate them to balance the interests of patients and pharmaceutical companies. Most drugs require research funding from both public and private sources as well as patent protection. And the U.S. is one of the biggest investors of drug research worldwide (even compared to drug companies), yet Americans pay the highest prices in the world. Are these prices justified, and can we improve patent policy to bring these costs down without harming innovation?

Beyond a thorough analysis of drug pricing, what makes We PAID one of the most promising solutions to the problem of excessively high drug prices are the accountability mechanisms included. The bill, if made law, would establish a Drug Access and Affordability Committee. The Committee would use the methodology from the joint HHS and NAM study to determine a reasonable price for affected drugs (around 20 percent of drugs currently on the market, if the bill were law today). Any companies that price drugs granted exclusivity by a patent above the reasonable price would lose their exclusivity.

This may seem like a price control at first blush, but it isn’t–for two reasons. First, this only applies to drugs developed with taxpayer dollars, which any COVID-19 treatments or cures almost certainly would be considering the $785 million spent by the NIH since 2002 researching coronaviruses. It’s an accountability mechanism that would ensure the government is getting its money’s worth. This tool is akin to ensuring that a government contractor is not charging more than would be reasonable, lest it loses its contract.

Second, it is even less stringent than pulling a contract with a private firm overcharging the government for the services provided. Why? Losing a patent does not mean losing the ability to make a drug, or any other patented invention for that matter.This basic fact is often lost in the patent debate, but it cannot be stressed enough.

If patents functioned as licenses, then every patent expiration would mean another product going off the market. In reality, that means that any other firm can compete and use the patented design. Even if a firm violated the price regulations included in the bill and lost its patent, it could continue manufacturing the drug. And so could any other firm, bringing down prices for all consumers by opening up market competition.

The We PAID Act could be a dramatic change for the drug industry, and because of that many in Congress may want to first debate the particulars of the bill. This is fine, assuming  this promising legislation isn’t watered down beyond recognition. But any objections to the Drug Affordability and Access Committee and reasonable pricing regulations aren’t an excuse to not, at a bare minimum, pass the study included in the bill as part of future coronavirus packages, if not sooner. It is an inexpensive way to get good information in a single, reputable source that would allow us to shape good policy.

Good information is needed for good policy. When the government lays the groundwork for future innovations by financing research and development, it can be compared to a venture capitalist providing the financing necessary for an innovative product or service. But just like in the private sector, the government should know what it’s getting for its (read: taxpayers’) money and make recipients of such funding accountable to investors.

The COVID-19 outbreak will be the most pressing issue for the foreseeable future, but determining how pharmaceuticals developed with public research are priced is necessary in good times and bad. The final prices for these important drugs might be fair, but the public will never know without a trusted source examining this information. Trust, but verify. The pharmaceutical industry’s efforts in fighting the COVID-19 pandemic might be the first step to improving Americans’ relationship with the industry. But we need good information to make that happen. Americans need to know when they are being treated fairly, and that policymakers are able to protect them when they are treated unfairly. The government needs to become a better-informed investor, and that won’t happen without something like the We PAID Act.

A pending case in the U.S. Court of Appeals for the 3rd Circuit has raised several interesting questions about the FTC enforcement approach and patent litigation in the pharmaceutical industry.  The case, FTC v. AbbVie, involves allegations that AbbVie (and Besins) filed sham patent infringement cases against generic manufacturer Teva (and Perrigo) for the purpose of preventing or delaying entry into the testosterone gel market in which AbbVie’s AndroGel had a monopoly.  The FTC further alleges that AbbVie and Teva settled the testosterone gel litigation in AbbVie’s favor while making a large payment to Teva in an unrelated case, behavior that, considered together, amounted to an illegal reverse payment settlement. The district court dismissed the reverse payment claims, but concluded that the patent infringement cases were sham litigation. It ordered disgorgement damages of $448 million against AbbVie and Besins which was the profit they gained from maintaining the AndroGel monopoly.

The 3rd Circuit has been asked to review several elements of the district court’s decision including whether the original patent infringement cases amounted to sham litigation, whether the payment to Teva in a separate case amounted to an illegal reverse payment, and whether the FTC has the authority to seek disgorgement damages.  The decision will help to clarify outstanding issues relating to patent litigation and the FTC’s enforcement abilities, but it also has the potential to chill pro-competitive behavior in the pharmaceutical market encouraged under Hatch-Waxman. 

First, the 3rd Circuit will review whether AbbVie’s patent infringement case was sham litigation by asking whether the district court applied the right standard and how plaintiffs must prove that lawsuits are baseless.  The district court determined that the case was a sham because it was objectively baseless (AbbVie couldn’t reasonably expect to win) and subjectively baseless (AbbVie brought the cases solely to delay generic entry into the market).  AbbVie argues that the district court erred by not requiring affirmative evidence of bad faith and not requiring the FTC to present clear and convincing evidence that AbbVie and its attorneys believed the lawsuits were baseless.

While sham litigation should be penalized and deterred, especially when it produces anticompetitive effects, the 3rd Circuit’s decision, depending on how it comes out, also has the potential to deter brand drug makers from filing patent infringement cases in the first place.  This threatens to disrupt the delicate balance that Hatch-Waxman sought to establish between protecting generic entry while encouraging brand competition.

The 3rd Circuit will also determine whether AbbVie’s payment to Teva in a separate case involving cholesterol medicine was an illegal reverse payment, otherwise known as a “pay-for-delay” settlement.  The FTC asserts that the actions in the two cases—one involving testosterone gel and the other involving cholesterol medicine—should be considered together, but the district court disagreed and determined there was no illegal reverse payment.  True pay-for-delay settlements are anticompetitive and harm consumers by delaying their access to cheaper generic alternatives.  However, an overly-liberal definition of what constitutes an illegal reverse payment will deter legitimate settlements, thereby increasing expenses for all parties that choose to litigate and possibly dissuading generics from bringing patent challenges in the first place.  Moreover, FTC’s argument that two settlements occurring in separate cases around the same time is suspicious overlooks the reality that the pharmaceutical industry has become increasingly concentrated and drug companies often have more than one pending litigation matter against another company involving entirely different products and circumstances. 

Finally, the 3rd Circuit will determine whether the FTC has the authority to seek disgorgement damages on past acts like settled patent litigation.  AbbVie has argued that the agency has no right to disgorgement because it isn’t enumerated in the FTC Act and because courts can’t order injunctive relieve, including disgorgement, on completed past acts. 

The FTC has sought disgorgement damages only sparingly, but the frequency with which the agency seeks disgorgement and the amount of the damages have increased in recent years. Proponents of the FTC’s approach argue that the threat of large disgorgement damages provides a strong deterrent to anticompetitive behavior.  While true, FTC-ordered disgorgement (even if permissible) may go too far and end up chilling economic activity by exposing businesses to exorbitant liability without clear guidance on when disgorgement will be awarded. The 3rd Circuit will determine whether the FTC’s enforcement approach is authorized, a decision that has important implications for whether the agency’s enforcement can deter unfair practices without depressing economic activity.

Qualcomm is currently in the midst of a high-profile antitrust case against the FTC. At the heart of these proceedings lies Qualcomm’s so-called “No License, No Chips” (NLNC) policy, whereby it purportedly refuses to sell chips to OEMs that have not concluded a license agreement covering its underlying intellectual property. According to the FTC and Qualcomm’s opponents, this ultimately thwarts competition in the chipset market.

Against this backdrop, Mark Lemley, Douglas Melamed, and Steven Salop penned a high-profile amicus brief supporting the FTC’s stance. 

We responded to their brief in a Truth on the Market blog post, and this led to a series of blog exchanges between the amici and ourselves. 

This post summarizes these exchanges.

1. Amicus brief supporting the FTC’s stance, and ICLE brief in support of Qualcomm’s position

The starting point of this blog exchange was an Amicus brief written by Mark Lemley, Douglas Melamed, and Steven Salop (“the amici”) , and signed by 40 law and economics scholars. 

The amici made two key normative claims:

  • Qualcomm’s no license, no chips policy is unlawful under well-established antitrust principles: 
    Qualcomm uses the NLNC policy to make it more expensive for OEMs to purchase competitors’ chipsets, and thereby disadvantages rivals and creates artificial barriers to entry and competition in the chipset markets.”
  • Qualcomm’s refusal to license chip-set rivals reinforces the no license, no chips policy and violates the antitrust laws:
    Qualcomm’s refusal to license chipmakers is also unlawful, in part because it bolsters the NLNC policy.16 In addition, Qualcomm’s refusal to license chipmakers increases the costs of using rival chipsets, excludes rivals, and raises barriers to entry even if NLNC is not itself illegal.

It is important to note that ICLE also filed an amicus brief in these proceedings. Contrary to the amici, ICLE’s scholars concluded that Qualcomm’s behavior did not raise any antitrust concerns and was ultimately a matter of contract law and .

2. ICLE response to the Lemley, Melamed and Salop Amicus brief.

We responded to the amici in a first blog post

The post argued that the amici failed to convincingly show that Qualcomm’s NLNC policy was exclusionary. We notably highlighted two important factors.

  • First, Qualcomm could not use its chipset position and NLNC policy to avert the threat of FRAND litigation, thus extracting supracompetitve royalties:
    Qualcomm will be unable to charge a total price that is significantly above the price of rivals’ chips, plus the FRAND rate for its IP (and expected litigation costs).”
  • Second, Qualcomm’s behavior did not appear to fall within standard patterns of strategic behavior:
    The amici attempt to overcome this weakness by implicitly framing their argument in terms of exclusivity, strategic entry deterrence, and tying […]. But none of these arguments totally overcomes the flaw in their reasoning.” 

3. Amici’s counterargument 

The amici wrote a thoughtful response to our post. Their piece rested on two main arguments:

  • The Amici underlined that their theory of anticompetitive harm did not imply any form of profit sacrifice on Qualcomm’s part (in the chip segment):
    Manne and Auer seem to think that the concern with the no license/no chips policy is that it enables inflated patent royalties to subsidize a profit sacrifice in chip sales, as if the issue were predatory pricing in chips.  But there is no such sacrifice.
  • The deleterious effects of Qualcomm’s behavior were merely a function of its NLNC policy and strong chipset position. In conjunction, these two factors deterred OEMs from pursuing FRAND litigation:
    Qualcomm is able to charge more than $2 for the license only because it uses the power of its chip monopoly to coerce the OEMs to give up the option of negotiating in light of the otherwise applicable constraints on the royalties it can charge.

4. ICLE rebuttal

We then responded to the amici with the following points:

  • We agreed that it would be a problem if Qualcomm could prevent OEMs from negotiating license agreements in the shadow of FRAND litigation:
    The critical question is whether there is a realistic threat of litigation to constrain the royalties commanded by Qualcomm (we believe that Lemley et al. agree with us on this point).”
  • However, Qualcomm’s behavior did not preclude OEMs from pursuing this type of strategy:
    We believe the following facts support our assertion:
    OEMs have pursued various litigation strategies in order to obtain lower rates on Qualcomm’s IP. […]
    For the most part, Qualcomm’s threats to cut off chip supplies were just that: threats. […]
    OEMs also wield powerful threats. […]
    Qualcomm’s chipsets might no longer be “must-buys” in the future.”

 5. Amici’s surrebuttal

The amici sent us a final response (reproduced here in full) :

In their original post, Manne and Auer argued that the antitrust argument against Qualcomm’s no license/no chips policy was based on bad economics and bad law.  They now seem to have abandoned that argument and claim instead – contrary to the extensive factual findings of the district court – that, while Qualcomm threatened to cut off chips, it was a paper tiger that OEMs could, and knew they could, ignore.  The implication is that the Ninth Circuit should affirm the district court on the no license/ no chips issue unless it sets aside the court’s fact findings.  That seems like agreement with the position of our amicus brief.

We will not in this post review the huge factual record.  We do note, however, that Manne and Auer cite in support of their factual argument only that 3 industry giants brought and then settled litigation against Qualcomm.  But all 3 brought antitrust litigation; their doing so hardly proves that contract litigation or what Manne and Auer call “holdout” were viable options for anyone, much less for smaller OEMs.  The fact that Qualcomm found it necessary to actually cut off only one OEM – and then it only took the OEM only 7 days to capitulate – certainly does not prove that Qualcomm’s threats lacked credibility.   Notably, Manne and Auer do not claim that any OEMs bought chips from competitors of Qualcomm (although Apple bought some chips from Intel for a short while). No license/no chips appears to have been a successful, coercive policy, not an easily ignored threat.                                                                                                                                              

6. Concluding remarks

First and foremost, we would like to thank the Amici for thoughtfully engaging with us. This is what the law & economics tradition is all about: moving the ball forward by taking part in vigorous, multidisciplinary, debates.

With that said, we do feel compelled to leave readers with two short remarks. 

First, contrary to what the amici claim, we believe that our position has remained the same throughout these debates. 

Second, and more importantly, we think that everyone agrees that the critical question is whether OEMs were prevented from negotiating licenses in the shadow of FRAND litigation. 

We leave it up to Truth on the Market readers to judge which side of this debate is correct.

[This guest post is authored by Mark A. Lemley, Professor of Law and the Director of Program in Law, Science & Technology at Stanford Law School; A. Douglas Melamed, Professor of the Practice of Law at Stanford Law School and Former Senior Vice President and General Counsel of Intel from 2009 to 2014; and Steven Salop, Professor of Economics and Law at Georgetown Law School. It is part of an ongoing debate between the authors, on one side, and Geoffrey Manne and Dirk Auer, on the other, and has been integrated into our ongoing series on the FTC v. Qualcomm case, where all of the posts in this exchange are collected.]

In their original post, Manne and Auer argued that the antitrust argument against Qualcomm’s no license/no chips policy was based on bad economics and bad law. They now seem to have abandoned that argument and claim instead – contrary to the extensive factual findings of the district court – that, while Qualcomm threatened to cut off chips, it was a paper tiger that OEMs could, and knew they could, ignore. The implication is that the Ninth Circuit should affirm the district court on the no license/ no chips issue unless it sets aside the court’s fact findings. That seems like agreement with the position of our amicus brief.

We will not in this post review the huge factual record. We do note, however, that Manne and Auer cite in support of their factual argument only that 3 industry giants brought and then settled litigation against Qualcomm. But all 3 brought antitrust litigation; their doing so hardly proves that contract litigation or what Manne and Auer call “holdout” were viable options for anyone, much less for smaller OEMs. The fact that Qualcomm found it necessary to actually cut off only one OEM – and then it only took the OEM only 7 days to capitulate – certainly does not prove that Qualcomm’s threats lacked credibility. Notably, Manne and Auer do not claim that any OEMs bought chips from competitors of Qualcomm (although Apple bought some chips from Intel for a short while). No license/no chips appears to have been a successful, coercive policy, not an easily ignored threat.

[This guest post is authored by Mark A. Lemley, Professor of Law and the Director of Program in Law, Science & Technology at Stanford Law School; A. Douglas Melamed, Professor of the Practice of Law at Stanford Law School and Former Senior Vice President and General Counsel of Intel from 2009 to 2014; and Steven Salop, Professor of Economics and Law at Georgetown Law School. It is a response to the post, “Exclusionary Pricing Without the Exclusion: Unpacking Qualcomm’s No License, No Chips Policy,” by Geoffrey Manne and Dirk Auer, which is itself a response to Lemley, Melamed, and Salop’s amicus brief in FTC v. Qualcomm.]

Geoffrey Manne and Dirk Auer’s defense of Qualcomm’s no license/no chips policy is based on a fundamental misunderstanding of how that policy harms competition.  The harm is straightforward in light of facts proven at trial. In a nutshell, OEMs must buy some chips from Qualcomm or else exit the handset business, even if they would also like to buy additional chips from other suppliers. OEMs must also buy a license to Qualcomm’s standard essential patents, whether they use Qualcomm’s chips or other chips implementing the same industry standards. There is a monopoly price for the package of Qualcomm’s chips plus patent license. Assume that the monopoly price is $20. Assume further that, if Qualcomm’s patents were licensed in a standalone transaction, as they would be if they were owned by a firm that did not also make chips, the market price for the patent license would be $2. In that event, the monopoly price for the chip would be $18, and a chip competitor could undersell Qualcomm if Qualcomm charged the monopoly price of $18 and the competitor could profitably sell chips for a lower price. If the competitor’s cost of producing and selling chips was $11, for example, it could easily undersell Qualcomm and force Qualcomm to lower its chip prices below $18, thereby reducing the price for the package to a level below $20.

However, the no license/no chips policy enables Qualcomm to allocate the package price of $20 any way it wishes. Because the OEMs must buy some chips from Qualcomm, Qualcomm is able to coerce the OEMs to accept any such allocation by threatening not to sell them chips if they do not agree to a license at the specified terms. The prices could thus be $18 and $2; or, for example, they could be $10 for the chips and $10 for the license. If Qualcomm sets the license price at $10 and a chip price of $10, it would continue to realize the monopoly package price of $20. But in that case, a competitor could profitably undersell Qualcomm only if its chip cost were less than 10. A competitor with a cost of $11 would then not be able to successfully enter the market, and Qualcomm would not need to lower its chip prices. That is how the no license/no chip policy blocks entry of chip competitors and maintains Qualcomm’s chip monopoly. 

Manne and Auer’s defense of the no license/no chips policy is deeply flawed. In the first place, Manne and Auer mischaracterize the problem as one in which “Qualcomm undercuts [chipset rivals] on chip prices and recoups its losses by charging supracompetitive royalty rates on its IP.” On the basis of this description of the issue, they argue that, if Qualcomm cannot charge more than $2 for the license, it cannot use license revenues to offset the chip price reduction. And if Qualcomm can charge more than $2 for the license, it does not need a chip monopoly in order to make supracompetitive licensing profits. This argument is wrong both factually and conceptually.  

As a factual matter, there are constraints on Qualcomm’s ability to charge more than $2 for the license if the license is sold by itself. If sold by itself, the license would be negotiated in the shadow of infringement litigation and the royalty would be constrained by the value of the technology claimed by the patent, the risk that the patent would be found to be invalid or not infringed, the “reasonable royalty” contemplated by the patent laws, and the contractual commitment to license on FRAND terms. But Qualcomm is able to circumvent those constraints by coercing OEMs to pay a higher price or else lose access to essential Qualcomm chips. In other words, Qualcomm’s ability to charge more than $2 for the license is not exogenous. Qualcomm is able to charge more than $2 for the license only because it uses the power of its chip monopoly to coerce the OEMs to give up the option of negotiating in light of the otherwise applicable constraints on the royalties it can charge. It is a simple story of bundling with simultaneous recoupment.  

As a conceptual matter, Manne and Auer seem to think that the concern with the no license/no chips policy is that it enables inflated patent royalties to subsidize a profit sacrifice in chip sales, as if the issue were predatory pricing in chips.  But there is no such sacrifice. Money is fungible, and Manne and Auer have it backwards. The problem is that the no license/no chips policy enables Qualcomm to make purely nominal changes by allocating some of its monopoly chip price to the license price. Qualcomm offsets that nominal license price increase when the OEM buys chips from it by lowering the chip price by that amount in order to maintain the package price at the monopoly price.  There is no profit sacrifice for Qualcomm because the lower chip price simply offsets the higher license price. Qualcomm offers no such offset when the OEM buys chips from other suppliers. To the contrary, by using its chip monopoly to increase the license price, it increases the cost to OEMs of using competitors’ chips and is thus able to perpetuate its chip monopoly and maintain its monopoly chip prices and profits. Absent this policy, OEMs would buy more chips from third parties; Qualcomm’s prices and profits would fall; and consumers would benefit.

At the end of the day, Manne and Auer rely on the old “single monopoly profit” or “double counting” idea that a monopolist cannot both charge a monopoly price and extract additional consideration as well. But, again, they have it backwards. Manne and Auer describe the issue as whether Qualcomm can leverage its patent position in the technology markets to increase its market power in chips. But that is not the issue. Qualcomm is not trying to increase profits by leveraging monopoly power from one market into a different market in order to gain additional monopoly profits in the second market. Instead, it is using its existing monopoly power in chips to maintain that monopoly power in the first place. Assuming Qualcomm has a chip monopoly, it is true that it earns the same revenue from OEMs regardless of how it allocates the all-in price of $20 to its chips versus its patents. But by allocating more of the all-in price to the patents (i.e., in our example, $10 instead of $2), Qualcomm is able to maintain its monopoly by preventing rival chipmakers from undercutting the $20 monopoly price of the package. That is how competition and consumers are harmed.

Qualcomm is currently in the midst of a high-profile antitrust case against the FTC. At the heart of these proceedings lies Qualcomm’s so-called “No License, No Chips” (NLNC) policy, whereby it purportedly refuses to sell chips to OEMs that have not concluded a license agreement covering its underlying intellectual property. According to the FTC and Qualcomm’s opponents, this ultimately thwarts competition in the chipset market.

But Qualcomm’s critics fail to convincingly explain how NLNC averts competition — a failing that is particularly evident in the short hypothetical put forward in the amicus brief penned by Mark Lemley, Douglas Melamed, and Steven Salop. This blog post responds to their brief. 

The amici’s hypothetical

In order to highlight the most salient features of the case against Qualcomm, the brief’s authors offer the following stylized example:

A hypothetical example can illustrate how Qualcomm’s strategy increases the royalties it is able to charge OEMs. Suppose that the reasonable royalty Qualcomm could charge OEMs if it licensed the patents separately from its chipsets is $2, and that the monopoly price of Qualcomm’s chips is $18 for an all-in monopoly cost to OEMs of $20. Suppose that a new chipmaker entrant is able to manufacture chipsets of comparable quality at a cost of $11 each. In that case, the rival chipmaker entrant could sell its chips to OEMs for slightly more than $11. An OEM’s all-in cost of buying from the new entrant would be slightly above $13 (i.e., the Qualcomm reasonable license royalty of $2 plus the entrant chipmaker’s price of slightly more than $11). This entry into the chipset market would induce price competition for chips. Qualcomm would still be entitled to its patent royalties of $2, but it would no longer be able to charge the monopoly all-in price of $20. The competition would force Qualcomm to reduce its chipset prices from $18 down to something closer to $11 and its all-in price from $20 down to something closer to $13.

Qualcomm’s NLNC policy prevents this competition. To illustrate, suppose instead that Qualcomm implements the NLNC policy, raising its patent royalty to $10 and cutting the chip price to $10. The all-in cost to an OEM that buys Qualcomm chips will be maintained at the monopoly level of $20. But the OEM’s cost of using the rival entrant’s chipsets now will increase to a level above $21 (i.e., the slightly higher than $11 price for the entrant’s chipset plus the $10 royalty that the OEM pays to Qualcomm of $10). Because the cost of using the entrant’s chipsets will exceed Qualcomm’s all-in monopoly price, Qualcomm will face no competitive pressure to reduce its chipset or all-in prices.

A close inspection reveals that this hypothetical is deeply flawed

There appear to be five steps in the amici’s reasoning:

  1. Chips and IP are complementary goods that are bought in fixed proportions. So buyers have a single reserve price for both; 
  2. Because of its FRAND pledges, Qualcomm is unable to directly charge a monopoly price for its IP;
  3. But, according to the amici, Qualcomm can obtain these monopoly profits by keeping competitors out of the chipset market [this would give Qualcomm a chipset monopoly and, theoretically at least, enable it to charge the combined (IP + chips) monopoly price for its chips alone, thus effectively evading its FRAND pledges]; 
  4. To keep rivals out of the chipset market, Qualcomm undercuts them on chip prices and recoups its losses by charging supracompetitive royalty rates on its IP.
  5. This is allegedly made possible by the “No License, No Chips” policy, which forces firms to obtain a license from Qualcomm, even when they purchase chips from rivals.

While points 1 and 3 of the amici’s reasoning are uncontroversial, points 2 and 4 are mutually exclusive. This flaw ultimately undermines their entire argument, notably point 5. 

The contradiction between points 2 and 4 is evident. The amici argue (using hypothetical but representative numbers) that its FRAND pledges should prevent Qualcomm from charging more than $2 in royalties per chip (“the reasonable royalty Qualcomm could charge OEMs if it licensed the patents separately from its chipsets is $2”), and that Qualcomm deters entry in the chip market by charging $10 in royalties per chip sold (“raising its patent royalty to $10 and cutting the chip price to $10”).

But these statements cannot both be true. Qualcomm either can or it cannot charge more than $2 in royalties per chip. 

There is, however, one important exception (discussed below): parties can mutually agree to depart from FRAND pricing. But let us momentarily ignore this limitation, and discuss two baseline scenarios: One where Qualcomm can evade its FRAND pledges and one where it cannot. Comparing these two settings reveals that Qualcomm cannot magically increase its profits by shifting revenue from chips to IP.

For a start, if Qualcomm cannot raise the price of its IP beyond the hypothetical FRAND benchmark ($2, in the amici’s hypo), then it cannot use its standard essential technology to compensate for foregone revenue in the chipset market. Any supracompetitive profits that it earns must thus result from its competitive position in the chipset market.

Conversely, if it can raise its IP revenue above the $2 benchmark, then it does not require a strong chipset position to earn supracompetitive profits. 

It is worth unpacking this second point. If Qualcomm can indeed evade its FRAND pledges and charge royalties of $10 per chip, then it need not exclude chipset rivals to obtain supracompetitive profits. 

Take the amici’s hypothetical numbers and assume further that Qualcomm has the same cost as its chipsets rivals (i.e. $11), and that there are 100 potential buyers with a uniform reserve price of $20 (the reserve price assumed by the amici). 

As the amici point out, Qualcomm can earn the full monopoly profits by charging $10 for IP and $10 for chips. Qualcomm would thus pocket a total of $900 in profits ((10+10-11)*100). What the amici brief fails to acknowledge is that Qualcomm could also earn the exact same profits by staying out of the chipset market. Qualcomm could let its rivals charge $11 per chip (their cost), and demand $9 for its IP. It would thus earn the same $900 of profits (9*100). 

In this hypothetical, the only reason for Qualcomm to enter the chip market is if it is a more efficient chipset producer than its chipset rivals, or if it can out-compete them with better chipsets. For instance, if Qualcomm’s costs are only $10 per chip, Qualcomm could earn a total of $1000 in profits by driving out these rivals ((10+10-10)*100). Or, if it can produce better chips, though at higher cost and price (say, $12 per chip), it could earn the same $1000 in profits ((10+12-12)*100). Both of the situations would benefit purchasers, of course. Conversely, at a higher production cost of $12 per chip, but without any quality improvement, Qualcomm would earn only $800 in profits ((10+10-12)*100) and would thus do better to exit the chipset market.

Let us recap:

  • If Qualcomm can easily evade its FRAND pledges, then it need not enter the chipset market to earn supracompetitive profits; 
  • If it cannot evade these FRAND obligations, then it will be hard-pressed to leverage its IP bottleneck so as to dominate chipsets. 

The upshot is that Qualcomm would need to benefit from exceptional circumstances in order to improperly leverage its FRAND-encumbered IP and impose anticompetitive harm by excluding its rivals in the chipset market

The NLNC policy

According to the amici, that exceptional circumstance is the NLNC policy. In their own words:

The competitive harm is a result of the royalty being higher than it would be absent the NLNC policy.

This is best understood by adding an important caveat to our previous hypothetical: The $2 FRAND benchmark of the amici’s hypothetical is only a fallback option that can be obtained via litigation. Parties are thus free to agree upon a higher rate, for instance $10. This could, notably, be the case if Qualcomm offsetted the IP increase by reducing its chipset price, such that OEMs who purchase both chipsets and IP from Qualcomm were indifferent between contracts with either of the two royalty rates.

At first sight, this caveat may appear to significantly improve the FTC’s case against Qualcomm — it raises the specter of Qualcomm charging predatory prices on its chips and then recouping its losses on IP. But further examination suggests that this is an unlikely scenario.

Though firms may nominally be paying $10 for Qualcomm’s IP and $10 for its chips, there is no escaping the fact that buyers have an outside option in both the IP and chip segments (respectively, litigation to obtain FRAND rates, and buying chips from rivals). As a result, Qualcomm will be unable to charge a total price that is significantly above the price of rivals’ chips, plus the FRAND rate for its IP (and expected litigation costs).

This is where the amici’s hypothetical is most flawed. 

It is one thing to argue that Qualcomm can charge $10 per chipset and $10 per license to firms that purchase all of their chips and IP from it (or, as the amici point out, charge a single price of $20 for the bundle). It is another matter entirely to argue — as the amici do — that Qualcomm can charge $10 for its IP to firms that receive little or no offset in the chip market because they purchase few or no chips from Qualcomm, and who have the option of suing Qualcomm, thus obtaining a license at $2 per chip (if that is, indeed, the maximum FRAND rate). Firms would have to be foolish to ignore this possibility and to acquiesce to contracts at substantially higher rates. 

Indeed, two of the largest and most powerful OEMs — Apple and Samsung — have entered into such contracts with Qualcomm. Given their ability (and, indeed, willingness) to sue for FRAND violations and to produce their own chips or assist other manufacturers in doing so, it is difficult to conclude that they have assented to supracompetitive terms. (The fact that they would prefer even lower rates, and have supported this and other antitrust suits against Qualcomm doesn’t, change this conclusion; it just means they see antitrust as a tool to reduce their costs. And the fact that Apple settled its own FRAND and antitrust suit against Qualcomm (and paid Qualcomm $4.5 billion and entered into a global licensing agreement with it) after just one day of trial further supports this conclusion).

Double counting

The amici attempt to overcome this weakness by implicitly framing their argument in terms of exclusivity, strategic entry deterrence, and tying:

An OEM cannot respond to Qualcomm’s NLNC policy by purchasing chipsets only from a rival chipset manufacturer and obtaining a license at the reasonable royalty level (i.e., $2 in the example). As the district court found, OEMs needed to procure at least some 3G CDMA and 4G LTE chipsets from Qualcomm.

* * *

The surcharge burdens rivals, leads to anticompetitive effects in the chipset markets, deters entry, and impedes follow-on innovation. 

* * *

As an economic matter, Qualcomm’s NLNC policy is analogous to the use of a tying arrangement to maintain monopoly power in the market for the tying product (here, chipsets).

But none of these arguments totally overcomes the flaw in their reasoning. Indeed, as Aldous Huxley once pointed out, “several excuses are always less convincing than one”.

For a start, the amici argue that Qualcomm uses its strong chipset position to force buyers into accepting its supracompetitive IP rates, even in those instances where they purchase chipsets from rivals. 

In making this point, the amici fall prey to the “double counting fallacy” that Robert Bork famously warned about in The Antitrust Paradox: Monopolists cannot simultaneously charge a monopoly price AND purchase exclusivity (or other contractual restrictions) from their buyers/suppliers.

The amici fail to recognize the important sacrifices that Qualcomm would have to make in order for the above strategy to be viable. In simple terms, Qualcomm would have to offset every dollar it charges above the FRAND benchmark in the IP segment with an equivalent price reduction in the chipset segment.

This has important ramifications for the FTC’s case.

Qualcomm would have to charge lower — not higher — IP fees to OEMs who purchased a large share of their chips from third party chipmakers. Otherwise, there would be no carrot to offset its greater-than-FRAND license fees, and these OEMs would have significant incentives to sue (especially in a post-eBay world where the threat of injunctions is reduced if they happen to lose). 

And yet, this is the exact opposite of what the FTC alleged:

Qualcomm sometimes expressly charged higher royalties on phones that used rivals’ chips. And even when it did not, its provision of incentive funds to offset its license fees when OEMs bought its chips effectively resulted in a discriminatory surcharge. (emphasis added)

The infeasibility of alternative explanations

One theoretical workaround would be for Qualcomm to purchase exclusivity from its OEMs, in an attempt to foreclose chipset rivals. 

Once again, Bork’s double counting argument suggests that this would be particularly onerous. By accepting exclusivity-type requirements, OEMs would not only be reducing potential competition in the chipset market, they would also be contributing to an outcome where Qualcomm could evade its FRAND pledges in the IP segment of the market. This is particularly true for pivotal OEMs (such as Apple and Samsung), who may single-handedly affect the market’s long-term trajectory. 

The amici completely overlook this possibility, while the FTC argues that this may explain the rebates that Qulacomm gave to Apple. 

But even if the rebates Qualcomm gave Apple amounted to de facto exclusivity, there are still important objections. Authorities would notably need to prove that Qualcomm could recoup its initial losses (i.e. that the rebate maximized Qualcomm’s long-term profits). If this was not the case, then the rebates may simply be due to either efficiency considerations or Apple’s significant bargaining power (Apple is routinely cited as a potential source of patent holdout; see, e.g., here and here). 

Another alternative would be for Qualcomm to evict its chipset rivals through strategic entry deterrence or limit pricing (see here and here, respectively). But while the economic literature suggests that incumbents may indeed forgo short-term profits in order to deter rivals from entering the market, these theories generally rest on assumptions of imperfect information and/or strategic commitments. Neither of these factors was alleged in the case at hand.

In particular, there is no sense that Qualcomm’s purported decision to shift royalties from chips to IP somehow harms its short-term profits, or that it is merely a strategic device used to deter the entry of rivals. As the amici themselves seem to acknowledge, the pricing structure maximizes Qualcomm’s short term revenue (even ignoring potential efficiency considerations). 

Note that this is not just a matter of economic policy. The case law relating to unilateral conduct infringements — be it Brooke Group, Alcoa, or Aspen Skiing — almost systematically requires some form of profit sacrifice on the part of the monopolist. (For a legal analysis of this issue in the Qualcomm case, see ICLE’s Amicus brief, and yesterday’s blog post on the topic).

The amici are thus left with the argument that Qualcomm could structure its prices differently, so as to maximize the profits of its rivals. Why it would choose to do so, or should indeed be forced to, is a whole other matter.

Finally, the amici refer to the strategic tying literature (here), typically associated with the Microsoft case and the so-called “platform threat”. But this analogy is highly problematic. 

Unlike Microsoft and its Internet Explorer browser, Qualcomm’s IP is de facto — and necessarily — tied to the chips that practice its technology. This is not a bug, it is a feature of the patent system. Qualcomm is entitled to royalties, whether it manufactures chips itself or leaves that task to rival manufacturers. In other words, there is no counterfactual world where OEMs could obtain Qualcomm-based chips without entering into some form of license agreement (whether directly or indirectly) with Qualcomm. The fact that OEMs must acquire a license that covers Qualcomm’s IP — even when they purchase chips from rivals — is part and parcel of the IP system.

In any case, there is little reason to believe that Qualcomm’s decision to license its IP at the OEM level is somehow exclusionary. The gist of the strategic tying literature is that incumbents may use their market power in a primary market to thwart entry in the market for a complementary good (and ultimately prevent rivals from using their newfound position in the complementary market in order to overthrow the incumbent in the primary market; Carlton & Waldman, 2002). But this is not the case here.

Qualcomm does not appear to be using what little power it might have in the IP segment in order to dominate its rivals in the chip market. As has already been explained above, doing so would imply some profit sacrifice in the IP segment in order to encourage OEMs to accept its IP/chipset bundle, rather than rivals’ offerings. This is the exact opposite of what the FTC and amici allege in the case at hand. The facts thus cut against a conjecture of strategic tying.

Conclusion

So where does this leave the amici and their brief? 

Absent further evidence, their conclusion that Qualcomm injured competition is untenable. There is no evidence that Qualcomm’s pricing structure — enacted through the NLNC policy — significantly harmed competition to the detriment of consumers. 

When all is done and dusted, the amici’s brief ultimately amounts to an assertion that Qualcomm should be made to license its intellectual property at a rate that — in their estimation — is closer to the FRAND benchmark. That judgment is a matter of contract law, not antitrust.

On November 22, the FTC filed its answering brief in the FTC v. Qualcomm litigation. As we’ve noted before, it has always seemed a little odd that the current FTC is so vigorously pursuing this case, given some of the precedents it might set and the Commission majority’s apparent views on such issues. But this may also help explain why the FTC has now opted to eschew the district court’s decision and pursue a novel, but ultimately baseless, legal theory in its brief.

The FTC’s decision to abandon the district court’s reasoning constitutes an important admission: contrary to the district court’s finding, there is no legal basis to find an antitrust duty to deal in this case. As Qualcomm stated in its reply brief (p. 12), “the FTC disclaims huge portions of the decision.” In its effort to try to salvage its case, however, the FTC reveals just how bad its arguments have been from the start, and why the case should be tossed out on its ear.

What the FTC now argues

The FTC’s new theory is that SEP holders that fail to honor their FRAND licensing commitments should be held liable under “traditional Section 2 standards,” even though they do not have an antitrust duty to deal with rivals who are members of the same standard-setting organizations (SSOs) under the “heightened” standard laid out by the Supreme Court in Aspen and Trinko:  

To be clear, the FTC does not contend that any breach of a FRAND commitment is a Sherman Act violation. But Section 2 liability is appropriate when, as here, a monopolist SEP holder commits to license its rivals on FRAND terms, and then implements a blanket policy of refusing to license those rivals on any terms, with the effect of substantially contributing to the acquisition or maintenance of monopoly power in the relevant market…. 

The FTC does not argue that Qualcomm had a duty to deal with its rivals under the Aspen/Trinko standard. But that heightened standard does not apply here, because—unlike the defendants in Aspen, Trinko, and the other duty-to-deal precedents on which it relies—Qualcomm entered into a voluntary contractual commitment to deal with its rivals as part of the SSO process, which is itself a derogation from normal market competition. And although the district court applied a different approach, this Court “may affirm on any ground finding support in the record.” Cigna Prop. & Cas. Ins. Co. v. Polaris Pictures Corp., 159 F.3d 412, 418-19 (9th Cir. 1998) (internal quotation marks omitted) (emphasis added) (pp.69-70).

In other words, according to the FTC, because Qualcomm engaged in the SSO process—which is itself “a derogation from normal market competition”—its evasion of the constraints of that process (i.e., the obligation to deal with all comers on FRAND terms) is “anticompetitive under traditional Section 2 standards.”

The most significant problem with this new standard is not that it deviates from the basis upon which the district court found Qualcomm liable; it’s that it is entirely made up and has no basis in law.

Absent an antitrust duty to deal, patent law grants patentees the right to exclude rivals from using patented technology

Part of the bundle of rights connected with the property right in patents is the right to exclude, and along with it, the right of a patent holder to decide whether, and on what terms, to sell licenses to rivals. The law curbs that right only in select circumstances. Under antitrust law, such a duty to deal, in the words of the Supreme Court in Trinko, “is at or near the outer boundary of §2 liability.” The district court’s ruling, however, is based on the presumption of harm arising from a SEP holder’s refusal to license, rather than an actual finding of anticompetitive effect under §2. The duty to deal it finds imposes upon patent holders an antitrust obligation to license their patents to competitors. (While, of course, participation in an SSO may contractually obligate an SEP-holder to license its patents to competitors, that is an entirely different issue than whether it operates under a mandatory requirement to do so as a matter of public policy).  

The right of patentees to exclude is well-established, and injunctions enforcing that right are regularly issued by courts. Although the rate of permanent injunctions has decreased since the Supreme Court’s eBay decision, research has found that federal district courts still grant them over 70% of the time after a patent holder prevails on the merits. And for patent litigation involving competitors, the same research finds that injunctions are granted 85% of the time.  In principle, even SEP holders can receive injunctions when infringers do not act in good faith in FRAND negotiations. See Microsoft Corp. v. Motorola, Inc., 795 F.3d 1024, 1049 n.19 (9th Cir. 2015):

We agree with the Federal Circuit that a RAND commitment does not always preclude an injunctive action to enforce the SEP. For example, if an infringer refused to accept an offer on RAND terms, seeking injunctive relief could be consistent with the RAND agreement, even where the commitment limits recourse to litigation. See Apple Inc., 757 F.3d at 1331–32

Aside from the FTC, federal agencies largely agree with this approach to the protection of intellectual property. For instance, the Department of Justice, the US Patent and Trademark Office, and the National Institute for Standards and Technology recently released their 2019 Joint Policy Statement on Remedies for Standards-Essential Patents Subject to Voluntary F/RAND Commitments, which clarifies that:

All remedies available under national law, including injunctive relief and adequate damages, should be available for infringement of standards-essential patents subject to a F/RAND commitment, if the facts of a given case warrant them. Consistent with the prevailing law and depending on the facts and forum, the remedies that may apply in a given patent case include injunctive relief, reasonable royalties, lost profits, enhanced damages for willful infringement, and exclusion orders issued by the U.S. International Trade Commission. These remedies are equally available in patent litigation involving standards-essential patents. While the existence of F/RAND or similar commitments, and conduct of the parties, are relevant and may inform the determination of appropriate remedies, the general framework for deciding these issues remains the same as in other patent cases. (emphasis added).

By broadening the antitrust duty to deal well beyond the bounds set by the Supreme Court, the district court opinion (and the FTC’s preferred approach, as well) eviscerates the right to exclude inherent in patent rights. In the words of retired Federal Circuit Judge Paul Michel in an amicus brief in the case: 

finding antitrust liability premised on the exercise of valid patent rights will fundamentally abrogate the patent system and its critical means for promoting and protecting important innovation.

And as we’ve noted elsewhere, this approach would seriously threaten consumer welfare:

Of course Qualcomm conditions the purchase of its chips on the licensing of its intellectual property; how could it be any other way? The alternative would require Qualcomm to actually facilitate the violation of its property rights by forcing it to sell its chips to device makers even if they refuse its patent license terms. In that world, what device maker would ever agree to pay more than a pittance for a patent license? The likely outcome is that Qualcomm charges more for its chips to compensate (or simply stops making them). Great, the FTC says; then competitors can fill the gap and — voila: the market is more competitive, prices will actually fall, and consumers will reap the benefits.

Except it doesn’t work that way. As many economists, including both the current [now former] and a prominent former chief economist of the FTC, have demonstrated, forcing royalty rates lower in such situations is at least as likely to harm competition as to benefit it. There is no sound theoretical or empirical basis for concluding that using antitrust to move royalty rates closer to some theoretical ideal will actually increase consumer welfare. All it does for certain is undermine patent holders’ property rights, virtually ensuring there will be less innovation.

The FTC realizes the district court doesn’t have the evidence to support its duty to deal analysis

Antitrust law does not abrogate the right of a patent holder to exclude and to choose when and how to deal with rivals, unless there is a proper finding of a duty to deal. In order to find a duty to deal, there must be a harm to competition, not just a competitor, which, under the Supreme Court’s Aspen and Trinko cases can be inferred in the duty-to-deal context only where the challenged conduct leads to a “profit sacrifice.” But the record does not support such a finding. As we wrote in our amicus brief:

[T]he Supreme Court has identified only a single scenario from which it may plausibly be inferred that defendant’s refusal to deal with rivals harms consumers: The existence of a prior, profitable course of dealing, and the termination and replacement of that arrangement with an alternative that not only harms rivals, but also is less profitable for defendant. 

A monopolist’s willingness to forego (short-term) profits plausibly permits an inference that conduct is not procompetitive, because harm to a rival caused by an increase in efficiency should lead to higher—not lower—profits for defendant. And “[i]f a firm has been ‘attempting to exclude rivals on some basis other than efficiency,’ it’s fair to characterize its behavior as predatory.” Aspen Skiing, 472 U.S. at 605 (quoting Robert Bork, The Antitrust Paradox 138 (1978)).

In an effort to satisfy this standard, the district court states that “because Qualcomm previously licensed its rivals, but voluntarily stopped licensing rivals even though doing so was profitable, Qualcomm terminated a voluntary and profitable course of dealing.” Slip op. at 137. 

But it is not enough merely that the prior arrangement was profitable. Rather, Trinko and Aspen Skiing hold that when a monopolist ends a profitable relationship with a rival, anticompetitive exclusion may be inferred only when it also refuses to engage in an ongoing arrangement that, in the short run, is more profitable than no relationship at all. The key is the relative value to the monopolist of the current options on offer, not the value to the monopolist of the terminated arrangement. See Trinko, 540 U.S. at 409 (“a willingness to forsake short-term profits”); Aspen Skiing, 472 U.S. at 610–11 (“it was willing to sacrifice short-run benefits”)…

The record here uniformly indicates Qualcomm expected to maximize its royalties by dealing with OEMs rather than rival chip makers; it neither anticipated nor endured short-term loss. As the district court itself concluded, Qualcomm’s licensing practices avoided patent exhaustion and earned it “humongously more lucrative” royalties. Slip op. at 1243–254. That Qualcomm anticipated greater profits from its conduct precludes an inference of anticompetitive harm.

Moreover, Qualcomm didn’t refuse to allow rivals to use its patents; it simply didn’t sell them explicit licenses to do so. As discussed in several places by the district court:

According to Andrew Hong (Legal Counsel at Samsung Intellectual Property Center), during license negotiations, Qualcomm made it clear to Samsung that “Qualcomm’s standard business practice was not to provide licenses to chip manufacturers.” Hong Depo. 161:16-19. Instead, Qualcomm had an “unwritten policy of not going after chip manufacturers.” Id. at 161:24-25… (p.123)

* * *

Alex Rogers (QTL President) testified at trial that as part of the 2018 Settlement Agreement between Samsung and Qualcomm, Qualcomm did not license Samsung, but instead promised only that Qualcomm would offer Samsung a FRAND license before suing Samsung: “Qualcomm gave Samsung an assurance that should Qualcomm ever seek to assert its cellular SEPs against that component business, against those components, we would first make Samsung an offer on fair, reasonable, and non-discriminatory terms.” Tr. at 1989:5-10. (p.124)

This is an important distinction. Qualcomm allows rivals to use its patented technology by not asserting its patent rights against them—which is to say: instead of licensing its technology for a fee, Qualcomm allows rivals to use its technology to develop their own chips royalty-free (and recoups its investment by licensing the technology to OEMs that choose to implement the technology in their devices). 

The irony of this analysis, of course, is that the district court effectively suggests that Qualcomm must charge rivals a positive, explicit price in exchange for a license in order to facilitate competition, while allowing rivals to use its patented technology for free (or at the “cost” of some small reduction in legal certainty, perhaps) is anticompetitive.

Nonetheless, the district court’s factual finding that Qualcomm’s licensing scheme was “humongously” profitable shows there was no profit sacrifice as required for a duty to deal finding. The general presumption that patent holders can exclude rivals is not subject to an antitrust duty to deal where there is no profit sacrifice by the patent holder. Here, however, Qualcomm did not sacrifice profits by adopting the challenged licensing scheme. 

It is perhaps unsurprising that the FTC chose not to support the district court’s duty-to-deal argument, even though its holding was in the FTC’s favor. But, while the FTC was correct not to countenance the district court’s flawed arguments, the FTC’s alternative argument in its reply brief is even worse.

The FTC’s novel theory of harm is unsupported and weak

As noted, the FTC’s alternative theory is that Qualcomm violated Section 2 simply by failing to live up to its contractual SSO obligations. For the FTC, because Qualcomm joined an SSO, it is no longer in a position to refuse to deal legally. Moreover, there is no need to engage in an Aspen/Trinko analysis in order to find liability. Instead, according to the FTC’s brief, liability arises because the evasion of an exogenous pricing constraint (such as an SSO’s FRAND obligation) constitutes an antitrust harm:

Of course, a breach of contract, “standing alone,” does not “give rise to antitrust liability.” City of Vernon v. S. Cal. Edison Co., 955 F.2d 1361, 1368 (9th Cir. 1992); cf. Br. 52 n.6. Instead, a monopolist’s conduct that breaches such a contractual commitment is anticompetitive only when it satisfies traditional Section 2 standards—that is, only when it “tends to impair the opportunities of rivals and either does not further competition on the merits or does so in an unnecessarily restrictive way.” Cascade Health, 515 F.3d at 894. The district court’s factual findings demonstrate that Qualcomm’s breach of its SSO commitments satisfies both elements of that traditional test. (emphasis added)

To begin, it must be noted that the operative language quoted by the FTC from Cascade Health is attributed in Cascade Health to Aspen Skiing. In other words, even Cascade Health recognizes that Aspen Skiing represents the Supreme Court’s interpretation of that language in the duty-to-deal context. And in that case—in contrast to the FTC’s argument in its brief—the Court required demonstration of such a standard to mean that a defendant “was not motivated by efficiency concerns and that it was willing to sacrifice short-run benefits and consumer goodwill in exchange for a perceived long-run impact on its… rival.” (Aspen Skiing at 610-11) (emphasis added).

The language quoted by the FTC cannot simultaneously justify an appeal to an entirely different legal standard separate from that laid out in Aspen Skiing. As such, rather than dispensing with the duty to deal requirements laid out in that case, Cascade Health actually reinforces them.

Second, to support its argument the FTC points to Broadcom v. Qualcomm, 501 F.3d 297 (3rd Cir. 2007) as an example of a court upholding an antitrust claim based on a defendant’s violation of FRAND terms. 

In Broadcom, relying on the FTC’s enforcement action against Rambus before it was overturned by the D.C. Circuit, the Third Circuit found that there was an actionable issue when Qualcomm deceived other members of an SSO by promising to

include its proprietary technology in the… standard by falsely agreeing to abide by the [FRAND policies], but then breached those agreements by licensing its technology on non-FRAND terms. The intentional acquisition of monopoly power through deception… violates antitrust law. (emphasis added)

Even assuming Broadcom were good law post-Rambus, the case is inapposite. In Broadcom the court found that Qualcomm could be held to violate antitrust law by deceiving the SSO (by falsely promising to abide by FRAND terms) in order to induce it to accept Qualcomm’s patent in the standard. The court’s concern was that, by falsely inducing the SSO to adopt its technology, Qualcomm deceptively acquired monopoly power and limited access to competing technology:

When a patented technology is incorporated in a standard, adoption of the standard eliminates alternatives to the patented technology…. Firms may become locked in to a standard requiring the use of a competitor’s patented technology. 

Key to the court’s finding was that the alleged deception induced the SSO to adopt the technology in its standard:

We hold that (1) in a consensus-oriented private standard-setting environment, (2) a patent holder’s intentionally false promise to license essential proprietary technology on FRAND terms, (3) coupled with an SDO’s reliance on that promise when including the technology in a standard, and (4) the patent holder’s subsequent breach of that promise, is actionable conduct. (emphasis added)

Here, the claim is different. There is no allegation that Qualcomm engaged in deceptive conduct that affected the incorporation of its technology into the relevant standard. Indeed, there is no allegation that Qualcomm’s alleged monopoly power arises from its challenged practices; only that it abused its lawful monopoly power to extract supracompetitive prices. Even if an SEP holder may be found liable for falsely promising not to evade a commitment to deal with rivals in order to acquire monopoly power from its inclusion in a technological standard under Broadcom, that does not mean that it can be held liable for evading a commitment to deal with rivals unrelated to its inclusion in a standard, nor that such a refusal to deal should be evaluated under any standard other than that laid out in Aspen Skiing.

Moreover, the FTC nowhere mentions the DC Circuit’s subsequent Rambus decision overturning the FTC and calling the holding in Broadcom into question, nor does it discuss the Supreme Court’s NYNEX decision in any depth. Yet these cases stand clearly for the opposite proposition: a court cannot infer competitive harm from a company’s evasion of a FRAND pricing constraint. As we wrote in our amicus brief

In Rambus Inc. v. FTC, 522 F.3d 456 (D.C. Cir. 2008), the D.C. Circuit, citing NYNEX, rejected the FTC’s contention that it may infer anticompetitive effect from defendant’s evasion of a constraint on its monopoly power in an analogous SEP-licensing case: “But again, as in NYNEX, an otherwise lawful monopolist’s end-run around price constraints, even when deceptive or fraudulent, does not alone present a harm to competition.” Id. at 466 (citation omitted). NYNEX and Rambus reinforce the Court’s repeated holding that an inference is permissible only where it points clearly to anticompetitive effect—and, bad as they may be, evading obligations under other laws or violating norms of “business morality” do not permit a court to undermine “[t]he freedom to switch suppliers [which] lies close to the heart of the competitive process that the antitrust laws seek to encourage. . . . Thus, this Court has refused to apply per se reasoning in cases involving that kind of activity.” NYNEX, 525 U.S. at 137 (citations omitted).

Essentially, the FTC’s brief alleges that Qualcomm’s conduct amounts to an evasion of the constraint imposed by FRAND terms—without which the SSO process itself is presumptively anticompetitive. Indeed, according to the FTC, it is only the FRAND obligation that saves the SSO agreement from being inherently anticompetitive. 

In fact, when a firm has made FRAND commitments to an SSO, requiring the firm to comply with its commitments mitigates the risk that the collaborative standard-setting process will harm competition. Product standards—implicit “agreement[s] not to manufacture, distribute, or purchase certain types of products”—“have a serious potential for anticompetitive harm.” Allied Tube, 486 U.S. at 500 (citation and footnote omitted). Accordingly, private SSOs “have traditionally been objects of antitrust scrutiny,” and the antitrust laws tolerate private standard-setting “only on the understanding that it will be conducted in a nonpartisan manner offering procompetitive benefits,” and in the presence of “meaningful safeguards” that prevent the standard-setting process from falling prey to “members with economic interests in stifling product competition.” Id. at 500- 01, 506-07; see Broadcom, 501 F.3d at 310, 314-15 (collecting cases). 

FRAND commitments are among the “meaningful safeguards” that SSOs have adopted to mitigate this serious risk to competition…. 

Courts have therefore recognized that conduct that breaches or otherwise “side-steps” these safeguards is appropriately subject to conventional Sherman Act scrutiny, not the heightened Aspen/Trinko standard… (p.83-84)

In defense of the proposition that courts apply “traditional antitrust standards to breaches of voluntary commitments made to mitigate antitrust concerns,” the FTC’s brief cites not only Broadcom, but also two other cases:

While this Court has long afforded firms latitude to “deal or refuse to deal with whomever [they] please[] without fear of violating the antitrust laws,” FountWip, Inc. v. Reddi-Wip, Inc., 568 F.2d 1296, 1300 (9th Cir. 1978) (citing Colgate, 250 U.S. at 307), it, too, has applied traditional antitrust standards to breaches of voluntary commitments made to mitigate antitrust concerns. In Mount Hood Stages, Inc. v. Greyhound Corp., 555 F.2d 687 (9th Cir. 1977), this Court upheld a judgment holding that Greyhound violated Section 2 by refusing to interchange bus traffic with a competing bus line after voluntarily committing to do so in order to secure antitrust approval from the Interstate Commerce Commission for proposed acquisitions. Id. at 69723; see also, e.g., Biovail Corp. Int’l v. Hoechst Aktiengesellschaft, 49 F. Supp. 2d 750, 759 (D.N.J. 1999) (breach of commitment to deal in violation of FTC merger consent decree exclusionary under Section 2). (p.85-86)

The cases the FTC cites to justify the proposition all deal with companies sidestepping obligations in order to falsely acquire monopoly power. The two cases cited above both involve companies making promises to government agencies to win merger approval and then failing to follow through. And, as noted, Broadcom deals with the acquisition of monopoly power by making false promises to an SSO to induce the choice of proprietary technology in a standard. While such conduct in the acquisition of monopoly power may be actionable under Broadcom (though this is highly dubious post-Rambus), none of these cases supports the FTC’s claim that an SEP holder violates antitrust law any time it evades an SSO obligation to license its technology to rivals. 

Conclusion

Put simply, the district court’s opinion in FTC v. Qualcomm runs headlong into the Supreme Court’s Aspen decision and founders there. This is why the FTC is trying to avoid analyzing the case under Aspen and subsequent duty-to-deal jurisprudence (including Trinko, the 9th Circuit’s MetroNet decision, and the 10th Circuit’s Novell decision): because it knows that if the appellate court applies those standards, the district court’s duty-to-deal analysis will fail. The FTC’s basis for applying a different standard is unsupportable, however. And even if its logic for applying a different standard were valid, the FTC’s proffered alternative theory is groundless in light of Rambus and NYNEX. The Ninth Circuit should vacate the district court’s finding of liability.