The Economist seems to think so, relying on evidence from this new paper by Joel Waldfogel and Ben Shiller.  Waldfogel and Shiller find that, relative to uniform pricing at $.99, alternative pricing schemes including two part tariffs and various bundling schemes could raise producer surplus by somewhere between 17 and 30 percent.  Those are large numbers, which raises the obvious question: why is Apple leaving so much money on the table? Or are they? I doubt it.

Reading the Economist article reminded me of something that I heard from both Armen Alchian and Ben Klein at different points during my UCLA days.  If your model is not predicting the behavior of real world agents you have a choice — blame the model for not predicting the actions of the agents or blame the economic agents for not acting like the predictions of the model.  The right answer is very, very rarely to blame the economic agents.

To be fair, Waldfogel and Shiller themselves explicitly note that they aren’t passing judgment on the uniform pricing scheme (though its a bit unclear exactly what else readers are supposed to do with the results).

That’s from Firefox chief software architect Mike Connor in an interview with PCPro.  Here’s an excerpt suggesting that Mozilla fears that its recent success might lead to antitrust liability in the United States or elsewhere:

Firefox has only just tipped past the 20% mark in worldwide browser market share, and is still a long way away from achieving the 90%+ market share that Internet Explorer enjoyed in its heyday.

Yet, Firefox has a market share of more than 50% in some countries and is hugely popular among PC enthusiasts: Firefox was used by around 40% of visitors to PCPro.co.uk last month, and Connor claims the browser is used by about 80% of visitors to Digg.com.

Connor admits the prospect of achieving monopoly status – defined as two thirds of the market in the US – has been a topic of discussion at Mozilla HQ.

Perhaps there are too such things as false positives.

Its an interesting article (see also here) especially in light of the recent EU investigation of Microsoft’s bundling of IE to the operating system.  Connor also commented that Firefox did not want to be bundled with Windows as a remedy.  The most interesting line of all was that Opera’s complaint that bundling had harmed competition in the browser market was “provably false” because it is “asserting that bundling leads to market share” and “I don’t know how you can make that claim with a straight face.”

It is unknown whether Mozilla Foundation chairperson Mitchell Baker was straight-faced when he wrote this post supporting the EU’s investigation of IE bundling an, of course, offering Mozilla’s assistance in crafting the appropriate remedial response.   The most curious line in Baker’s post, however, is the rebuttal to the proposition that Mozilla’s increasing share across the world is evidence of a competitive marketplace or at least one would not impede equally efficient competitors:

Equally important, the success of Mozilla and Firefox does not indicate a healthy marketplace for competitive products. Mozilla is a non-profit organization; a worldwide movement of people who strive to build the Internet we want to live in. I am convinced that we could not have been, and will not be, successful except as a public benefit organization living outside the commercial motivations. And I certainly hope that neither the EU nor any other government expects to maintain a healthy Internet ecosystem based on non-profits stepping in to correct market deficiencies.

Leaving aside the bit about the non-profit worldwide movement “living outside commercial motivations”, wouldn’t this claim cut the opposite direction.  That is, if bundling IE couldn’t even exclude from the marketplace an apparently spontaneous collective invariant to the profit motive then surely the mere presence of the bundle couldn’t exclude a greedy, profit-seeking rival could it?  I’m not suggesting this is the appropriate way to think about the antitrust analysis here.  But I find the line of argument curious and likely counterproductive.

Randy Picker has posted The Google Book Settlement: A New Orphan Works Monopoly? to SSRN.  I have not been following the antitrust issues related to the settlement as closely as I should be and so I’m really looking forward to reading this.  Here is the abstract:

This paper considers the proposed settlement agreement between Google and the Authors Guild relating to Google Book Search. Google boldly launched Google Book Search in pursuing its goal of organizing the world’s information. Even though Google was sensitive to copyright values, the service relied on mass copying and thus Google undertook a substantial legal risk in setting up the service. That risk was realized with the lawsuits by the Authors Guild and the Association of American Publishers. The October, 2008 settlement agreement for those suits will create an important new copyright collective and will legitimate broad-scale online access to United States books registered before early January, 2009.

The settlement agreement is exceeding complex but I have focused on three issues that raise antitrust and competition policy concerns. First, the agreement calls for Google to act as agent for rights holders in setting the price of online access to consumers. Google is tasked with developing a pricing algorithm that will maximize revenues for each of those works. Direct competition among rights holders would push prices towards some measure of costs and would not be designed to maximize revenues. As I think that that level of direct coordination of prices is unlikely to mimic what would result in competition, I have real doubts about whether the consumer access pricing provision would survive a challenge under Section 1 of the Sherman Act.

Second, and much more centrally to the settlement agreement, the opt out class action will make it possible for Google to include orphan works in its book search service. Orphan works are works as to which the rightsholder can’t be identified or found. That means that a firm like Google can’t contract with an orphan holder directly to include his or her work in the service and that would result in large numbers of missing works. The opt out mechanism – which shifts the default from copyright’s usual out to the class action’s in – brings these works into the settlement.

But the settlement agreement also creates market power through this mechanism. Absent the lawsuit and the settlement, active rights holders could contract directly with Google, but it is hard to get large-scale contracting to take place and there is, again, no way to contract with orphan holders. The opt out class action then is the vehicle for large-scale collective action by active rights holders. Active rights holders have little incentive to compete with themselves by granting multiple licenses of their works or of the orphan works. Plus under the terms of the settlement agreement, active rights holders benefit directly from the revenues attributable to orphan works used in GBS.

We can mitigate the market power that will otherwise arise through the settlement by expanding the number of rights licenses available under the settlement agreement. Qualified firms should have the power to embrace the going-forward provisions of the settlement agreement. We typically find it hard to control prices directly and instead look to foster competition to control prices. Non-profits are unlikely to match up well with the overall terms of the settlement agreement, which is a share-the-revenues deal. But we should take the additional step of unbundling the orphan works deal from the overall settlement agreement and create a separate license to use those works. All of that will undoubtedly add more complexity to what is already a large piece of work, and it may make sense to push out the new licenses to the future. That would mean ensuring now that the court retains jurisdiction to do that and/or giving the new Registry created in the settlement the power to do this sort of licensing.

Third, there is a risk that approval by the court of the settlement could cause antitrust immunities to attach to the arrangements created by the settlement agreement. As it is highly unlikely that the fairness hearing will undertake a meaningful antitrust analysis of those arrangements, if the district court approves the settlement, the court should include a clause – call this a no Noerr clause – in the order approving the settlement providing that no antitrust immunities attach from the court’s approval.

I’d like to formally thank Mike Carrier, Geoff Manne, Phil Weiser, Dan Crane, Brett Frischmann, Scott Kieff and Dennis Crouch for participating in the first TOTM symposium on Mike’s book: Innovation for the 21st Century: Harnessing the Power of Intellectual Property and Antitrust Law.   Thanks also to Dennis for cross-posting at PatentlyO.  Each of the participants was asked to in a rather short time period to read the book and prepare a thoughtful and engaging post.  They all delivered marvelously.  We are grateful to them for making the symposium a success and, we hope, enjoyable for our readers.

Most of all, I’d like to thank Professor Carrier allowing his work to come center stage in our first blog symposium effort.  It is not easy to have one’s worked poked and prodded and critiqued from all possible angles.  As flattered as I am by Mike’s kind words about my efforts putting together the symposium and finding discussants, I’m quite sure his job was the tougher one (I didn’t write a book either!).  Besides, each of the discussants jumped at the opportunity and agreed to participate too quickly for it really to qualify as work.  In fact, by their individual and collective performance they’ve unwittingly ensured that I will come asking for more work from them down the road …

This was a new experiment for TOTM and one that we plan on continuing to try in the future.  If participants, commenters, or readers have comments or suggestions for possible future topics or for improving the format, I’d love to hear them via email or otherwise.

We do have one more exciting announcement about the symposium:

The folks at the Alabama Law Review have generously offered to publish modified and versions of the blog posts as essays in a forthcoming volume.  We will make sure to announce here when the final drafts are up and ready.

Finally, here are links to each of the posts and Professor Carrier’s response:

• Dan Crane
• Phil Weiser
• Geoff Manne
• Josh Wright
• Dennis Crouch
• Brett Frischmann
• Scott Kieff
• Michael Carrier

 First of all, I would like to express my deepest gratitude to Josh Wright. Only because of Josh’s creativity and tireless, flawless execution did this blog symposium come about and run so smoothly. I also would like to thank Dennis Crouch, who has generously cross-posted the symposium at PatentlyO. And I am grateful for the attention of the communities at TOTM and PatentlyO, which have patiently scrolled through countless pages and posts to learn about my book.

Finally, I would like to thank Dan Crane, Dennis Crouch, Brett Frischmann, Scott Kieff, Geoff Manne, Phil Weiser, and Josh Wright for their insightful and incisive comments. Though they each had busy schedules, they managed to squeeze in a look at some or all of a book that is not the shortest ever written. And wasting no time, they focused like a laser on the book’s most ambitious proposals, as well as its omissions. If I didn’t know better, I would think that the commentators divided the market of my book to minimize overlap in treatment. I do know better, though, enough to know that the breadth of critiques and lack of overlap reflect Josh’s skill in putting together such a diverse and impressive group of commentators.

Without further ado, let me address the comments by substantive area, starting with antitrust law, proceeding through patent and copyright law, and concluding with the most general critiques.

(more…)

This post is from F. Scott Kieff (Wash U./ Hoover)

I, too, join the rest of the participants in congratulating Michael Carrier on this great book about this great topic.  I have enjoyed reading Michael’s work in the past and I enjoyed meeting him at a conference last year.  He is a wonderfully warm, bright, and engaging person.  Although I wish that I had more of an opportunity to fully read his impressive text before the date of this on-line symposium, I am grateful for the opportunity to read a great deal of the book and to at least skim the remainder.  The wonderful conference that Damien Geradin and his colleagues hosted on these same issues in Amsterdam these past few days was a pleasant distraction.  (For Damien’s conference click here).

Because I share everyone’s support for Michael and his new book, as already detailed by others, I will focus my contribution here on some ways in which the book might have been able to achieve a greater impact.  Recognizing that every project could be improved in some ways, and that ultimately the author must make the difficult choices between completeness and clarity, about his own voice and message, etc, I offer my comments on the chance that those who read Michael’s great book might wonder whether there happens to have been or remain different approaches to the ideas he explores.

As it turns out, the interface between patents and antitrust was one of the two central motivators behind the present US patent statutes, which were codified as the 1952 Patent Act.  In fact, one of the two principle drafters of the ’52 Act, Giles Rich, wrote a series of five articles in the 1940’s that bear a title not unlikely to show up in a computer search on this topic.  (The other principle drafter who also wrote a great deal about the statute was Pat Federico).  And while the 1940’s were indeed a long time ago, because Giles Rich went on to be the longest sitting federal judge, the world’s most famous patent scholar and jurist, the widely recognized father of the modern American Patent System, and a judge on the court that hears most patent appeals, these papers were conveniently republished in a 2004-2005 volume of the Federal Circuit Bar Journal.  The citation is:  Giles S. Rich, “The Relation Between Patent Practices and the Anti-Monopoly Laws,” 14 Fed. Circuit B.J., at pages 5, 21, 37, 67, and 87 (2004-2005).  (The other articles by Judge Rich that are republished in that volume also are instructive on the points explored in Michael’s book).

Judge Rich explored an approach that is focused on predictable validity and enforcement rules rather than the more flexible approaches advocated by Michael (and many others).  Rich was not alone.  His approach was followed in the writings of a diverse group of leading commercial jurists at the time like Learned Hand and Jerome Frank.  (It is worth noting for reasons explored below that if using modern political labels, Judge Frank would be seen as a liberal populist).

The judiciary was not the only branch of government to follow Rich’s view.  Rich provided extensive explicit testimony before Congress about the goals of the ’52 Act in re-aligning the interface between patents and antitrust and in creating an objective standard for determining patent validity.   Congress agreed with the approach he offered in his testimony when it voted for the statute.  The Supreme Court in turn expressly and extensively relied on that legislative history, and especially Judge Rich’s testimony, in the well-known Dawson decision on patents and antitrust in 1980.  That approach was also affirmed by the current Supreme Court in the ITW v. III case. 

As Judge Pauline Newman has reminded on several occasions in law review articles and speeches, we can fast forward to the late 1970’s, when the economy was in difficult times, like it was in the 1940’s and is today, to see that a very diverse pair of US Presidents decided to also adopt an approach to patents like that urged by Rich, Federico, Hand, Frank, and others.  President Carter decided, after a careful study, to put forth a statute designed to strengthen the patent system by creating the Federal Circuit, and President Reagan signed the bill after Congress passed it.

For the past several years, there has been a number of academics writing about this approach to patents – an approach that might be seen as focused on the theory of property more generally (as compared with just intellectual property).  The group includes Richard Epstein, Steve Haber, Troy Paredes (now on leave from this academic work), Henry Smith, Joseph Straus, David Teece, Polk Wagner, Josh Wright, and me (these folks listed so far have worked together on a range of recent works arising out of the Hoover Project on Commercializing Innovation), as well as Michael Abramowicz, John Duffy, and Adam Mossoff.  While a recent posting on Patently-O labels one of these folks listed here (me) as “conservative,” it is not clear what is meant by that term.  If the term is given its normal modern political meaning then it is curious to note that Charles Burson, Al Gore’s former Chief of Staff, co-authored one the recent opinion pieces I helped put together on patent reform, since it is not clear that he would fit that definition of the term.  Then again, this is an approach also advocated by President Carter and Jerome Frank, who also don’t easily fit the modern political use of the term conservative.  Put differently, the issues don’t break down nicely along mainstream political lines.  Nor do most people for that matter.  Nor do folks break down along lines of being pro patent or anti-patent.  These issues are more complex.  And so is any good academic. 

The most direct reason why it makes sense to go though all of this intellectual history, naming all of these names of folks who have written about the topics Michael explores (but in a different way than he does), is that Michael’s book does not seriously address any of them or their work.  Indeed, Michael has confirmed that his book doesn’t cite to or even mention most of these names or their work.  And the few times when he does mention some of them, it is in a very minor way, for propositions that are uncontroversial and different from the potential areas of debate they would have with him.  Two notable exceptions, which I appreciate, are Joseph Straus and me.   Michael mentions me once in a short catalog of different approaches to patent theory.  And while he does mention one or two of Joseph’s pieces that have discussed a lack of evidence of a patent hold up problem in the European biotechnology setting, and Michael seems to conclude in that section of his book that patents have posed less of a problem for basic science than some might have feared, he still concludes that “A few high-profile lawsuits against researchers would knock out the scaffolding currently supporting this precarious state of affairs.”  What is so precarious about this state of affairs and why would a few lawsuits disrupt it?  A few airlines crash once in a while and yet the airline sector still does business and people who elect for safety reasons to drive over taking commercial flights are generally not seen as acting in a sufficiently rational way to drive prudent policy on the issue.  Rather than trying to sit as a seemingly neutral judge weighing the empirical evidence Michael elects to discuss in this part of the book, a reader might want to know more about the reasons why patent hold up in this area is not a big issue (and why an “experimental” or “fair” use exception may be) and the book would have made a greater impact in this area if it had addressed more of that work. 

The bottom line is that while Michael has good reasons for not engaging the body of work discussed here, readers might like to at least know about the work, as well as the history, so that they can make up their own minds about these issues after due consideration of the range of views.  For those who are interested, much of it is available for free download on the web at www.innovation.hoover.org. 

A more indirect reason why it matters to consider these other views is that many of them apply a form of comparative institutional analysis generally associated with the field of New Institutional Economics.  In addition to taking seriously the transaction cost problems of property rights that underlie a big part of Michael’s analysis, this comparative approach also takes seriously the political economy problems that underlie how government actors will apply different decision-making rules.  Application of this comparative analytical framework highlights some of the complexities of the more flexible approaches Michael recommends in his book. 

For example, when it comes to dealing with the problem of bad patents (and there are many such patents – ones that don’t really meet the requirements for validity but have nonetheless been issued by the PTO), Michael endorses the currently-popular proposals for more flexible approaches to weeding out.  These proposals generally go by several names including “second window,” “opposition,” “reexamination,” etc.  In his words:

“An added bonus of the proposal would be its effect on antitrust. By providing a low-cost avenue to remove invalid patents, it would reduce the incidence of market power”

But as economists love to say, there is no such thing as a free lunch.  Faster and less financially expensive proceedings for policing bad patents are not without their costs.  The way they go faster and burn fewer dollars per hour in attorney time is that they allow an official actor, whether in the PTO or the courts, the flexibility and discretion to deny patents based on a subjective report about what was within the skill of those in the prior art, rather than the objective and more-fact-based inquiry into the contents and existence of actual laboratory notebooks, printed publications, and sample products which has been the rule since the 1952 Act. 

Flexibility sounds cool – who wants to be rigid? – but it has a significant Achilles heel.  Giving courts and examiners a pass from having to get the hard evidence that used to be required to prove invalidity over the prior art does not come without serious cost. Asking a decision maker to use her legal or technical expertise as the primary basis for her decision about what she thinks the state of the art was at a particular time in history gives her greater discretion than asking an ordinary jury whether a particular document or sample product existed at a particular time and what that document actually contains. By increasing the discretion of government bureaucrats, flexibility increases uncertainty, not decreases it, and it gives a built-in advantage to large companies with hefty lobbying and litigation budgets. That may be a big reason why some big firms want it, but what’s good for some big businesses is not always good for business overall.

Indeed, while much is made about the uncertainty of patents – it’s all the rage today – one of the central problems with many of the legal changes that Michael proposes is that these changes inject into the patent system a much greater uncertainty, and an uncertainty of a much more pernicious type.  Business can deal well with factual uncertainty – in fact many forms of business thrive on it (think options, futures, insurance, etc) – but the one type of uncertainty that is particularly bad for business overall is the uncertainty caused by having the underlying legal rules of the game enforced as a function of fashion and politics. But this is what you get when the enforcement mechanism (the details of the particular framework of the legal institutional design) are matters of flexible discretion. 

And to take things back to where they started, we have already run this experiment in this country.  The relevant legal framework for adjudicating patentability before the 1952 Act was that courts were asked to determine whether a patented invention constituted an “invention.”  A bit of a tautology.  And very flexible. 

The drafters of the 1952 Act did not think that the words “obviousness” and “nonobviousness” were any clearer, on their face.  But they picked these words precisely because they wanted to jettison the interpretive baggage associated with the old legal framework and create a new body of case law that focused on more objective factors. 

History can sometimes offer us some good ideas; and while we often like to emphasize the importance of invention, our efforts to re-invent our legal thinking in this area without the benefit of that historical wisdom may not play out so well. 

This post is from Brett Frischmann (Loyola/ Cornell (Visiting))

I enjoyed reading Mike’s book very much. It provides an excellent primer on antitrust, IP, and innovation.  He synthesizes the legal and economic foundations, contours, and controversies in an accessible fashion. I applaud him for doing this because frankly, it is tough to do given that the fields are quite technical and specialized.  The book really is appropriate for a general audience.  That said, I agree with some of the previous commentators that at times Mike oversimplifies some of the very heated debates he summarizes; given the breadth and complexity of issues, I cannot imagine how he wouldn’t do so.  Still, I think readers should recognize that the debates Mike wades into are incredibly contentious and considerably nuanced.  Nonetheless, the primer is excellent, and the rest of the book is quite provocative.  Ambitiously, Mike makes 10 specific proposals to improve the copyright, patent, and antitrust laws.  I’ll focus my comments on his discussion of dual use technologies and the Sony rule.

In his first chapter focused on proposals for copyright law, Mike discusses dual use technologies (e.g., telephone, cameras, radio, photocopier, VCR, computer, Internet, P2P file-sharing software, etc.).  He explains that dual use technologies are often a form of disruptive innovation that creates new markets, opportunities and even more innovation along with new risks to copyright owners’ rights to control reproduction and distribution.  Copyright law has struggled with technological change in general and dual use technologies in particular throughout its history.  Mike explains how secondary liability theories of contributory liability and vicarious liability can be employed by copyright owners to hold dual use technology vendors accountable for copyright infringement of technology users, and he also explains how the US Supreme Court’s decision in Sony Corporation of America v. Universal City Studios (“Sony”) erected a doctrinal shield to protect technology companies from contributory liability claims where their technologies are “widely used for legitimate, unobjectionable purposes, or even if merely capable of substantial noninfringing uses.”  He then talks about P2P file sharing technologies, P2P litigation, and different interpretations of and challenges to the Sony rule.

The basic issue:  What should be the secondary liability regime for dual-use technologies such as P2P file sharing?   Mike’s proposal is essentially to preserve the Sony shield in its broad form.  He prefers the more protective version—where the defendant is off the hook if the technology is merely capable of substantial noninfringing uses—to the less protective version— where the defendant is off the hook if the technology is widely used for legitimate, unobjectionable purposes.  He offers a few reasons:  most important, the broad, bright line rule is easier to apply by courts and practitioners than other rules that take into account the primacy of certain uses, subjective intent of technology providers, and potential technological design options (e.g., whether a technology provider employed adequate technological precautions to limit infringement).

Generally, I am sympathetic to his approach (I wrote a brief essay on the topic here.)  My concern with his analysis is that he did not engage arguments made by Doug Lichtman and others concerning the potential benefits of crafting a rule that forces technology providers to implement cheap, easy technological fixes to deter or disable infringement or perhaps better enable copyright owners to detect infringers.  Mike touches on the arguments lightly in his discussion of Judge Posner’s decision in Aimster, but I would have liked to see a bit more.  The argument for a more nuanced rule that places some responsibility on technology providers is stronger in the context of dual use technologies that enable widespread copying and distribution—e.g., P2P file sharing technologies; the threat to copyright owners is arguably much greater and technological precautions implemented by technology providers may (or may not) be relatively cheap.

I enjoyed Mike’s discussion of asymmetries—innovation asymmetry, error-costs asymmetry, and litigation asymmetry.  He claims that innovation asymmetry occurs in dual use cases because courts tend to “systematically overemphasize the infringing uses and underappreciate the noninfringing uses.”  (p.128)  The reasons for this asymmetry are that the former are more readily observed and quantified while the latter are “less tangible, less obvious at the onset of a technology, and not advanced by an army of motivated advocates.”  (p.129)  The noninfringing uses are difficult to quantify and value.  As Mike puts it, “how do we put a dollar figure on the benefits of enhanced communication and interaction?”  Moreover, the noninfringing uses tend to develop over time in ways that are difficult to predict upfront. 

I agree with Mike’s observations about the innovation asymmetry and think that he is correct to emphasize how it leads to a systematic bias in how courts (and commentators) evaluate technologies and develop the rules to regulate technologies.  Of course, the asymmetry is not unique to the creativity-innovation dichotomy; it also exists when courts analyze different uses of a work protected by copyright.  That is, the quantification and valuation problems are more general that dual use technologies.  (I must note that I am still working my way through part of the book, and frankly, I hope to see this argument made elsewhere because I think the innovation asymmetry he highlights is pervasive.)  In fact, as I have argued elsewhere; see also here and here, this type of asymmetry provides a relatively strong argument in favor of the broad version of the Sony rule for some types of general purpose—multi-use—technologies.

As for error-costs asymmetry, his discussion is very brief, and I have my doubts about the utility of the error cost framework, because it does not seem to account for accuracy benefits very well (i.e., the framework focuses on the costs of false positive and false negatives but does not deal directly with the benefits of positive positives and positive negatives – some preliminary thoughts on this are here). Moreover, I think Mike is too quick to say that in the case of a type II error (where a court mistakenly upholds a technology), “Congress can always step in to compensate copyright holders”— (really, Congress can? It is that easy?), and in the case of a type I error (where a court mistakenly holds a technology provider liable), a technology will be abandoned and “consumers will never know what they are missing”—is this always the case? The claims seem a bit strong.

Mike’s discussion of litigation asymmetry is also important. He notes how the high litigation costs alone can stifle technological innovation and create substantial holdup problems. He gives a number of high profile examples to make his point.  Mike claims that the litigation asymmetry, along with the other asymmetries, “exert[s] a strong, though often hidden, pull in the evaluation of infringing and noninfringing uses.”  This is one of those claims that are quite difficult to prove empirically, but nonetheless, at least in my view, ring true.  In the end, Mike recommends a return to Sony, at least for P2P file sharing technologies.  While one might say it is too late to return to Sony, given Napster, Aimster, and especially Grokster, I think it is fair to say that Sony is alive and well, perhaps even in its broad form. 

In closing, I will note that Mike’s discussion of statutory damages in chapter 7 is probably the least controversial in the book.  Maybe I am wrong, but I suspect that most people would agree with Mike that “applying statutory damages to secondary infringers has startling, unjustifiable consequences [described well by Mike], which are not needed to carry out Congress’s purposes and which pose great peril for innovation.”  (p. 160)

 This post is from Dennis Crouch(Missouri/PatentlyO)

I am enjoying Professor Carrier’s new book Innovation in the 21st Century: Harnessing the Power of Intellectual Property and Antitrust Law. I will focus my discussion here on patent issues discussed in Part III of the book.

As other commentaries have noted the book is long on conclusions and proposals but somewhat short on justifications for the conclusions. In the words of Geoff Manne: “with what seems to me to be little support (and with only essentially-anecdotal empirical support), Carrier then chooses sides.” On the patent side, Carrier rather consistently chooses sides in favor of weaker patents.

Thank you Supreme Court: Like many academics, Carrier knows that patent law circa 2006 was in a bad-state. The problems stem from the Federal Circuit and its “formalistic rules”; from “patent trolls [who] do not manufacture products and thus do not face patent infringement counterclaims, emboldening them to file lawsuits”; and from the PTO and its insufficient resources.  The pendulum had swung too far in favor of the patent applicant and litigious patent holder. In Carrier’s history, the Supreme Court at least partially saved the day by weakening patent rights in eBay (no injunctive relief), KSR (easing obviousness rules), and MedImmune (greater access to declaratory judgment actions). Seeing the light, the Federal Circuit also rolled-back the scourge of treble damages for willful infringement in a way that “promises to promote disclosure and innovation.” Because of the Supreme Court’s action, many of the proposals needed in 2006 “are no longer needed.” From an antitrust harm perspective, eBay and MedImmune are theoretically important because they help prevent potential hold-ups. We are left without any answer, however, as to whether it is worth the added litigation expense and reduced patent incentive in order to shadow box with these mythical holdups. It is interesting that the best example that Carrier provides is the NTP Blackberry case which RIM eventually settled for $600+ million. In that case, RIM had taken on the risk of a large settlement by declining early opportunities to settle. In addition, because of the competitive nature of the wireless market, there is no indication that the settlement raised prices or limited access in any way.

On KSR, my reading is that Carrier sees this case as benefiting patent quality – at least the likelihood that issued patents are valid. Later, Carrier links elimination of invalid patents with a pro-competitive benefit. (p.229). What I don’t understand is if Carrier’s argument is special to invalid patents – or is he simply saying that the marketplace would be more competitive without patent rights?

Post-Grant Opposition: Chapter 9 is devoted to a new post-grant opposition layered over the reexamination and interference procedures. Carrier’s proposal is a close parallel to the proposals in the Patent Reform Act of 2009, and I agree with his rejection of current alternatives. (1) It would be prohibitively expensive (and I would argue detrimental to innovation) to ensure that only valid patents issue on the first pass through the PTO; (2) challenging patents during litigation is expensive and financially risky; and (3) current reexamination proceedings are too limited in scope and procedure (and I would argue too slow).

I have a small problem with Carrier’s explanation of the benefits of his proposed system. He first indicates that stronger post grant review will lower prices because competitors will less often need to spend money to design around a would-be invalid patent. Then, in the next breath, Carrier promises spillover technology benefits derived from money spent on reviewing competitors patents for opposition. Of course, these two arguments are on the same coin. If money spent designing around is wasteful so is money spent reviewing the validity of patents. Likewise, if reviewing competitor’s patents leads to additional innovation, so will time spent designing around.

Carrier also notes the “antitrust benefit” that invalidated patents will no longer create any market power problems. Glaringly absent from the discussion is how the opposition proceedings would impact the innovation incentive – especially under the PTO’s current mantra favoring rejection.

Material Transfer Agreements: Carrier includes Chapter 12 on MTA’s in the patent section as well. It is an important topic, although it is unclear why it fits in patents. The closest link is that many material transfer agreements include restrictions on public disclosure and a declaration of ownership of any future patent rights. MTA’s are generally negotiated. A researcher typically wants access to some materials such as a stem cell line, seed-line, or tissue. The owner of those physical item ordinarily demands some consideration from the researcher as inducement for sharing.

Carrier’s problems with the current MTA approach appears three-fold. First, some researchers are unwilling to pay the consideration and thus cannot access the materials. Second, the negotiation has high transaction costs – including delay. And, third, the public loses when the researchers are restricted or delayed from publishing. His solution: require all agencies receiving federal funding to agree to a standard universal MTA (the UBMTA). The proposal is nice, but we really don’t know its impact. Parties that care about non-standard terms would still do side-deals — adding more complexity than before the rule. Alternatively, those parties may simply walk away because the terms are not acceptable — further limiting access to the materials.

Pricing: Finally, I have a word to say about Oxford Press. The books are great, but they are entirely too expensive. List price for this book is $65 while the Bessen Meurer book by Princeton University Press was only $30. Authors, when you negotiate you book deal, work to make sure the book is affordable.

We’re halfway through the TOTM symposium on Professor Carrier’s Innovation for the 21st Century: Harnessing the Power of Intellectual Property and Antitrust Law.  I’ve provided links to Monday’s posts on the book related to antitrust issues:

• Dan Crane
• Phil Weiser
• Geoff Manne
• Josh Wright

The comments to those posts are still live.  So feel free to get in there and mix it up.

In the meantime, Tuesday morning we’ll start on the IP side of things with posts from: Dennis Crouch (Patently-O/Missouri), Brett Frischmann (Cornell/ Loyola), and F. Scott Kieff (Wash U./ Hoover) and then close up by giving Professor Carrier the floor to respond to both sets of posts, comments, and just about anything else.

This post is from Dan Crane (Cardozo)

Congratulations to Mike on a very fine book, which I must admit I am still in the process of digesting.  I will confine my initial comments to Mike’s chapter on patent settlements (Chapter 15), which I understand will also be coming out as an article in the Michigan Law Review. 

Patent settlements involving “reverse payments” are a huge topic on which I and many others have spilled much ink already.  Representative Bobby Rush (President Obama’s erstwhile nemesis from Chicago’s South Side) has just introduced legislation that would ban reverse payments.  I will not regurgitate my entire spiel on patent settlements here, but instead just try to highlight my essential disagreement with Mike and others who focus reverse payment settlements between branded and generic pharmaceutical companies as a special antitrust problem. 

Mike would make reverse payments—where the branded drug company pays the generic to leave the market—presumptively illegal.  The settling parties would have a rebuttal right to demonstrate the reasonableness of the settlement in light of litigation costs, the generic’s cash-strapped financial position, the parties’ information asymmetries, and a catch-all reasonableness category.  Mike contemplates, however, that courts might eventually find that these kinds of justifications were too weak, insubstantial, or infrequent to justify allowing a rebuttal case and simply make reverse payments per se illegal.

My basic problem with Mike’s approach—and others that focus on reverse payment settlements as a unique species of antitrust problem—is that the social costs of anticompetitive patent settlements are only loosely correlated with the direction in which payment flows in the settlement.  To repeat a claim that I’ve made on many occasions, the social cost of allowing patent settlements that involve a cessation of competition between the branded and generic firm equals the social cost of the continuing branded monopoly (at least the deadweight loss, but include the wealth transfers if you like) times the probability that, but for the settlement, the generic would have won the patent infringement action and entered the market in competition with the branded firm.  There are also social costs to disallowing patent settlements, but let’s put those aside for now.

What is the relationship between the social cost of cessation of competition between the branded and generic and the fact that the settlement payment flows from the branded to the generic?  Nothing, unless the fact that the payment flows “abnormally” from the patentee-plaintiff to the infringer-defendant necessarily evidences that the plaintiff’s claim is weak, which in turn means that the branded’s probability of success in the infringement action is low and the social cost of the settlement is therefore high.  However, as I’ve explained at length elsewhere, there are good reasons—particularly given the structure of the Hatch-Waxman Act—why the payment flows in an “abnormal” direction even in a case in which there is a high probability that the patentee would have won the infringement action (and, consequently, the social cost of the settlement is relatively low).  In other words, the mere fact that a branded-generic settlement involves a “reverse payment” only weakly evidences the social cost of the settlement. 

So antitrust rules that focus on “reverse payment” settlements as a category run the risk of creating false positives, but they also run the risk of creating false negatives to the extent that they focus the inquiry on the direction in which consideration flows—a not terribly helpful spot.  It is often not hard to structure a branded-generic settlement in a way that does not involve reverse payments but still involves the key ingredients of social cost—the cessation of meaningful competition between the two firms and a low probability that a court would have enjoined the generic on patent infringement grounds.  Scott Hemphill’s empirical research on patent settlements following some of the early negative decisions (like the Sixth Circuit’s Cardizem decision holding reverse payments per se illegal) shows that creative lawyers are capable of crafting settlement agreements that have the same effects as the most pernicious reverse payment cases but would pass unscathed under a rule focusing on reverse payments.

Indeed, I have little doubt that if the Rush bill passes, antitrust lawyers will make a bundle of money restructuring patent settlement agreements to comply with the law.  Here are some suggested reverse payment ban avoidance schemes:

·         Branded retains Generic to become its exclusive manufacturing and distribution agent for the branded’s authorized generic.  Utilizing its newfound freedom under Leegin, Branded sets the resale price of the generic at an appropriate price-discriminatory discount off the branded price but nonetheless a monopoly price.  Branded continues to collect monopoly rents by making generic pay an exorbitant royalty or annual lump-sum fee.  If Generic can’t afford the payments up front, Branded provides financing.

·         Branded grants Generic an exclusive license to manufacture and distribute under the patent in Canada.  Generic charges a monopoly price in Canada (so no one bothers re-importing), Branded charges a monopoly price in the U.S.  There doesn’t need to be any explicit agreement that Generic won’t enter the U.S.—they get the point.

·         The Schering scheme—Generic licenses or sells Branded some worthless other drug for which Branded pays Generic some huge price.  Investment bankers are paid to say the drug was worth it.  Good luck litigating this as a reverse payment case–something like this worked in Schering.

I could go on but the basic point is that the creativity of high-paid New York lawyers exceeds the foresight of anyone drafting legislation in this area.  As much as I agree with Mike that patent settlements involving the cessation of competition between branded and generic firms are a big problem, the focus on reverse payments is off the mark.

Welcome to the first TOTM Blog Symposium.  This is a format we hope to make more use of on TOTM in the future and we’ve got an ideal project to start with.  For the next two days (and maybe three) we’ll be discussing Professor Michael Carrier’s (Rutgers) forthcoming book: Innovation for the 21st Century: Harnessing the Power of Intellectual Property and Antitrust Law.  We’ve invited a number of leading commentators in both intellectual property and antitrust law to contribute to the symposium.  I’m thrilled that each has agreed to participate.  The lineup includes: Dan Crane (University of Chicago/ Cardozo), Geoff Manne (TOTM/LECG), Phil Weiser (Colorado), Dennis Crouch (Patently-O/Missouri), Brett Frischmann (Cornell/ Loyola), F. Scott Kieff (Wash U./ Hoover/ and on his way to GW), Mike Carrier, and me.

The format will be as follows.  Today we’ll have posts from Crane, Manne, Weiser, and Wright on aspects of Innovation for the 21^st Century which focus on competition policy.  Tomorrow, Professors Frischmann, Kieff, and Crouch will focus on the intellectual property related proposals.  Professor Carrier will have the opportunity to respond to the posts Tuesday evening or Wednesday.  And of course, we hope that both participants and our normal group of high quality commentators will find some time to mix it up in the comments.  The participants have been given broad leeway to discuss general themes in Carrier’s work or hone in on specific policy proposals.

With the formalities out of the way, you can expect the first of Monday’s posts to start in the early morning and then we’ll add throughout the day with posts from Crane, Manne, and Wright.

See you soon.

On March 30th and 31st, TOTM will hold its first blog symposium.  The topic will be Michael Carrier’s (Rutgers) forthcoming book: Innovation for the 21st Century: Harnessing the Power of Intellectual Property and Antitrust Law (from Oxford University Press).

We’ve invited a number of leading scholars from the fields of antitrust and intellectual property to comment on Professor Carrier’s book.  Here is a description of the book’s contents from Professor Carrier:

Innovation for the 21st Century offers ten proposals, from pharmaceuticals to peer-to-peer software, that will help foster innovation.  Of the ten proposals, three target antitrust topics that may be of interest to your readers: (1) settlement agreements between brand and generic firms in the pharmaceutical industry, (2) an innovation-markets framework to be applied to pharmaceutical mergers in which the “products” are in preclinical or clinical trials, and (3) standard-setting.  The book also offers a primer on patent, copyright, and antitrust law, as well as the IP-antitrust intersection.

On Monday, March 30th, we will focus primarily on the antitrust aspects of Carrier’s proposals.  The four discussants will be: Dan Crane (University of Chicago/ Cardozo), Geoff Manne (TOTM/LECG), Phil Weiser (Colorado), and yours truly.

On Tuesday, March 31st, we will focus primarily on the intellectual property aspects of Carrier’s work.  The three discussants will be:  Dennis Crouch (Patently-O/Missouri), Brett Frischmann (Cornell/ Loyola), and F. Scott Kieff (Wash U./ Hoover/ and on his way to GW).

On Tuesday afternoon or Wednesday morning (depending on the length of the posts), Carrier will post a response.  In the meantime, I do hope that the participants, Professor Carrier, our normal cadre of excellent commenters will mix it up in the comments throughout (mix it up, of course, in the civil and respectful tone that we usually see here).

I want to thank this great lineup of antitrust and IP scholars for agreeing to participate.  It should be a lot of fun.

The symposium will be a joint production, thanks to Dennis Crouch, with posts going up both here and Patently-O.

More details to be announced soon. For now, buy the book!  See you on March 30th and 31st.

Over at Doug Lichtman’s IP Colloquium, there is a new (and what looks to be very interesting) program up on the Tenenbaum file-sharing litigation. Here’s the description:

Joel Tenenbaum looks a lot like every other defendant who has been accused by the music industry of illegally sharing copyrighted work online, but with one key difference: his defense attorney is Harvard Law School Professor Charlie Nesson, and Nesson is out to turn his case into a public referendum not only on the music industry’s efforts to enforce copyright through these direct-infringer suits, but also on the copyright rules that make the industry litigation possible.

In this program, we engage Nesson’s key arguments, focusing especially on Nesson’s claim that copyright law’s statutory damages regime runs afoul of constitutional protections against excessive and/or arbitrary civil damages awards.

Guests include Professor Nesson himself; Steven Marks, General Counsel for the Recording Industry Association of America; and three of the leading academic experts on punitive damages: New York University Professor Catherine Sharkey, Florida State Professor Dan Markel, and George Washington University Professor Thomas Colby. UCLA Law Professor Doug Lichtman moderates.

Check it out, and maybe earn a few CLE credits in the process.

[See Update Below]  

Stan Liebowitz has posted a reply to Oberholzer-Gee/Strumpf’s (O/S) referee report/ reply to Liebowitz’s original comment submitted and rejected by the JPE for publication (got all that?) (HT: Newmark and Peter). Stan includes email exchanges between himself and OS concerning access to the data (O/S did not allow access), copies of the rejection letter from Steve Levitt, and responds to the O/S reply on the merits. Whatever one thinks about the underlying merits of the econometric debate or the appropriateness of using authors of the primary paper as referees for a comment (this doesn’t bother at all, actually), it does strike me as quite odd — to say the least — that Liebowitz’s comment was apparently rejected from a journal with a data policy which generally requires that underlying data be will be made “readily available to any researcher for purposes of replication” primarily because Liebowitz did not respond to data he asked for but did not receive from O/S.

Here is the abstract:

Through a stroke of luck, a referee report in the review process at the JPE has been positively identified as the Oberholzer-Gee/Strumpf (O/S) response to my earlier comment. Regardless of the response’s provenance, what counts is whether it solidly refuted my comment. This ’sequel’ analyzes the O/S response. The O/S response only deals with four of the nine points discussed in my comment, leaving the five remaining critiques unchallenged. The conclusion of my review is that the O/S response fails as a defense of these four points and contains many of the same types of errors that marred their original paper. This sequel also discusses the history of this dispute including O/S’ various reasons for not making their data available. Finally, this sequel provides full documentation on the JPE’s decision not to publish the comment.

UPDATE:   Stan emailed me the following making the case that the use of original authors as anonymous referees for comments should bother me more than it does.

I realize that asking the authors to respond to a comment in the guise of a referee report is apparently not that unusual, but I do not think it is a good practice. I have two reasons for this view.  

First, the reason for anonymity for a referee is to allow the referee to feel free say what he wants without a fear of retribution that might otherwise limit what he says. I agree with this logic for actual referees. I don’t think it should apply to responses for comments however. The author of the comment is known to the authors of the paper being commented upon and vice-versa. The original authors already have every incentive to defend their work as strongly as possible and thus don’t seem to need to be cloaked behind anonymity. If anything, I think that keeping their identity clear forces them to make statements which they are willing to stand behind. Allowing them anonymity, in this case, allows them to say things that they otherwise might not want attributed to them—i.e., to overstate their case. 

Second, the author of the comment will also take what is said in a response differently than he would if it were a report from a neutral third party. If a neutral party claims you have made a major error and that the original authors are correct, you will take it more seriously than if the original authors say it. It is important to know that a report is biased so you can properly parse what it is saying. Given that the original authors are likely to overstate their case, particularly if their identity is cloaked, reading such a report as if it were from a neutral third party might leave some authors too distraught to properly continue with their comment. 

Authors of the original paper are supposed to write a response, in their own name. That has been the norm, even if it is not always followed. And in my opinion it should be the norm.