A common theme throughout the day has been the declining number of seed companies–increasing concentration–and its effect. Except no one has talked about the effect.  Other than pointing to the structural change itself, no one seems to have any evidence relating to the effect of the change.  One farmer at the open mic session (coincidentally one who had been sued by Monsanto) asserted that the move from 70 seed companies to 4 represented a relevant decline in competition.  But he didn’t talk about any relevant effect; he had nothing to offer on declining return on investment–no evidence that the change actually affected his bottom line.

Unfortunately, Diana Moss is the lone antitrust expert on the seed industry concentration panel (also known as the “is Monsanto an antitrust problem?” panel), and it falls to her to put meat on these bones.  But she fails in the effort, and really just repeats the same mantra as the farmer, with exactly the same amount of evidence (zero, in case I wasn’t clear on this point).  (Moss’s AAI paper on biotech seeds is available here; our ICLE paper partially addressing Moss’s is here).

(more…)

Readers may recall we highlighted the Vizio v. Funai complaint about a year ago, in large part because it involved antitrust and standard setting issues.  The case involves allegations that Funai breached a FRAND commitment, and thus, is an important decision in the debate over the appropriate scope of Section 2 in cases involving alleged breach of obligations made in the standard setting context (a subject I’ve written on with Bruce Kobayashi here and here, with former student Aubrey Stuempfle here, and on my own in partial defense of the D.C. Circuit’s Rambus decision here ).

Thanks to a TOTM reader, we’ve got some new information on the latest developments in Judge Matz’s opinion granting Funai’s motion to dismiss the Sherman Act Section 2 claims.  I think the opinion is an interesting addition to the growing body of case law on Section 2 and standard setting.  The entire opinion is available here.

For a brief primer for those interested, I’ll lay out some of the basic facts as they appear in the Complaint.  Thomson held a number of patents related to the transmission, receipt and use of specific program information in a digital broadcast signal.  In 1997, the Advanced TV Systems Committee (ATSC), an SSO, adopted a standard for digital TV broadcast signals and Thomson designated several patents as essential to the standard.  Thomson made FRAND commitments to ATSC, and subsequently, the FCC adopted major elements of the ATSC standard.   In September 2007, Thomson assigned the rights to two of the relevant patents to Funai, and retained the rights to another.  Vizio alleges that before selling some of its patents to Funai, Thomson licensed the bundle of relevant patents to licensees who needed only to deal Thomson, whose monopoly power was restrained by the FRAND commitment it made to the ATSC.  Vizio now alleges that its Funai charges prices much higher than those charged by Thomson, and that Funai and Thomson conspired to evade the FRAND commitment and split profits.

Right off the top, readers will recognize hints of both N-Data and Ovation, two FTC cases I’ve criticized for expanding the notion that exclusionary conduct might be defined as any business decision that “evades a pricing constraint.”   As I’ve written:

The implicit answer [adopted by the Commission] is that the antitrust laws condemn evasion of pricing constraints.  This answer is getting more and more familiar at the current Commission.  Let’s follow the pattern.  First, Rambus is based on the concept that evasion of patent disclosure rules in the standard setting context violation Section 2 and Section 5.  Second, N-Data is based on the concept that evasion of a contractual pricing constraint in the form of a RAND commitment is a violation of at least section 5 even when the monopoly power is lawfully acquired.  Third, Ovation now adds to the list the evasion of reputational constraints on pricing as the genesis of actionable antitrust conduct.

This case invokes some of the some basic ideas.  At least one of the underlying theories is that Thomson evaded the pricing constraint by transferring its patents to Funai, i.e. does transferring the patent from Thomson to Funai, who is unconstrained by the FRAND commitment, constitute exclusionary conduct under Section 2?

Here’s an excerpt of Judge Matz’s analysis of the Section 2 allegations:

Nor does the allegation that Funai repudiated Thomson’s FRAND commitments constitute a harm to competition. Vizio cites to the Broadcom and Research in Motion cases for the proposition that deceiving a standard setting organization and then evading FRAND commitments can qualify as anticompetitive conduct and can constitute harm to competition. See Broadcom Corp. v. Qualcomm, Inc., 501 F.3d 297, 313-14 (3d Cir. 2007) (holding that a patent holder’s intentionally false promise to license essential proprietary technology on FRAND terms, coupled with a standard setting organization’s reliance on that promise, and the patent holder’s subsequent breach of that promise, constitutes actionable anticompetitive conduct); Research in Motion Ltd. v. Motorola, Inc., 2008 WL 5191922 at *4-7 (N.D. Tex. Dec. 11, 2008) (holding that a refusal to license on agreed-to FRAND terms constitutes a harm to competition). However, other courts have reached the opposite conclusion. See Rambus v. Federal Trade Commission, 522 F.3d 456, 467 (D.C. Cir. 2008) (holding that deceiving a standard-setting organization, thereby avoiding FRAND (there called “RAND”) limits on licensing fees, did not constitute a harm to competition under the Sherman Act). The court in Rambus explained that, even in the context of FRAND licensing agreements, “an otherwise lawful monopolist’s end-run around price constraints, even when deceptive or fraudulent, does not alone present a harm to competition in the monopolized marked.” Rambus, 522 F.3d at 466. The Rambus court cited NYNEX v. Discon, supra, for that proposition, after observing previously that “to the extent [the Broadcom ruling] may have rested on a supposition that there is a cognizable violation of the Sherman Act when a lawful monopolist’s deceit has the effect of raising prices (without an effect on competitive structure), it conflicts with NYNEX.” Id. (citing NYNEX, 525 U.S. 128). As discussed above, Vizio has not explained how the mere transfer of a valid patent from Thomson to Funai created an unlawful monopoly, and so its alleged conduct does not constitute a harm to competition.

Moreover, in both Broadcom and Research in Motion the antitrust defendant itself had entered into a FRAND obligation with the standard setting organization. Here, Vizio’s only allegation that suggests that Funai has any obligations to the ATSC is its conclusory statement that “[w]hen Funai acquired Thomson’s rights to the ’074 patent, specific encumbrances attached to that patent, including Thomson’s obligation to license the ’074 patent to implementers of the ATSC standards, such as Vizio, on a FRAND basis.” FAC ¶ 30. However, Thomson—not Funai—participated in the standard-setting process and entered into the FRAND agreement with the ATSC. FAC ¶¶ 14, 16, 18-19, Ex. C. And, as the FAC alleges, the ATSC Patent Policy requires only that participants provide a written agreement to license on FRAND terms. FAC ¶ 16. Although the allegations might suffice to state an antitrust claim against Thomson under the holding in Broadcom, they do not against Funai. Based on this analysis, Vizio’s claims of unlawful monopolization under Section 2 of the Sherman Act—claims three through five—and unlawful acquisition under Section 7 of the Clayton Act—claim one—must fail.

The next to last sentence is pretty interesting when read along with the first paragraph.  On the one hand, the court notes that the allegations might state a valid Section 2 claim against Thomson under the holding in Broadcom, suggesting that the evasion of constraint theory in Broadcom lives so long as the plaintiff has also alleged that Thomson’s promise as intentionally false at the time it was made to the ATSC, that there was reliance on that promise, and it was subsequently breached.  On the other hand, the first paragraph seems to at least weakly suggest that the court is aligning itself with the D.C. Circuit’s Rambus holding under which even an intentionally false promise or deceptive cannot constitute a Section 2 problem unless the plaintiff also can survive muster under NYNEX, i.e. prove that the defendant is not simply exercising its lawfully acquired ex ante monopoly power.  I don’t mean to suggest these two excerpts are contradictory.  The court is correctly pointing out that even under less restrictive standard in Broadcom, the Section 2 claim against Funai must fail.

As I point out here, I do not believe that Broadcom and Rambus create a circuit split because they turn on the court’s assessment of the defendant’s possession of ex ante monopoly power.  In Broadcom, at the pleading stage, the Third Circuit accepted the allegation as true that the defendant acquired monopoly power as the result of its deceptive conduct; in Rambus, the D.C. Circuit correctly held under NYNEX that the plaintiff faced the burden of proving that the price-increasing deception was also exclusionary, i.e. allowed the defendant to acquire or maintain monopoly power, and ruled that the FTC failed to carry that burden on the facts.

Antitrust & Competition Policy Blog is hosting a symposium on Competition in Agriculture.  Mike’s post from yesterday is available here.   So far in the symposium there are also posts by Ron Cass (BU Law), Jeff Harrison (Florida Law), Peter Carstensen (Wisconsin Law), and Kyle Stiegert (Wisconsin Applied Econ).  Additional posts should be forthcoming from Christina Bohannan (Iowa Law), Andrew Novakovic (Cornell Applied Economics), and the great George Priest (Yale Law), who I hope gets the blogging bug.

Josh, Scott Kieff and I have posted a short comment based on our submission to the DOJ/USDA Workshops on Agricultural Competition, co-authored by us and Mike. The comment should be available for download from the DOJ webpage when the public comments are posted (someday . . . ).  A copy is also available here (www.laweconcenter.org), and comments are most welcome at gmanne@laweconcenter.org Please leave comments on this post over at the A&CP Blog.

Regarding firm size and integration, it must be kept in mind that the agriculture industry in the U.S. has, for good reasons, moved beyond the historic, pastoral image of small family farms operating in quiet isolation, devoid of big business and modern technologies. The genetic traits that give modern seeds their value—traits that confer resistance to herbicide and high yields, for example—are often developed through processes that are technologically-advanced, time- and money-intensive, risky investments, and subject to various layers of regulation. It doesn’t take expertise in industrial organization to imagine why at least for some participants in this market these processes are likely to be more efficiently and effectively conducted within large agribusiness companies having enormous research and development budgets and significant expertise in managing complex business and legal operations, than they are by the somber couple depicted in the famous 1930 Grant Wood painting, “American Gothic.” Nor is such expertise required to imagine why complex contracting across firms, of any size, is likely to be of significant help in supporting the specialization and division of labor that is useful in allowing some businesses (even a small family farm is a business) to be good at planting and harvesting while others are good at inventing, investing, managing, developing, testing, manufacturing, marketing, and distributing the next wave of innovative crop technologies. This requires on the one hand that the government give reliable enforcement to contracts and property rights whether tangible or intangible (extremely important in this industry are patents, trade secrets, and even trademarks), while on the other hand it allows firms wide flexibility to decide for themselves which of these contracts and property rights they would like to enter into or obtain pursuant to the applicable bodies of contract and property law.

When courts and regulatory agencies like the DOJ Antitrust Division adopt special approaches to the body of antitrust law to address concerns that may arise from these property rights and contracts, they run the risk of crafting doctrines that inappropriately override well-established bodies of law that are informed by longstanding judicial and scholarly thought and consideration of each area, and creating the potential to reduce innovation and economic growth. A central countervailing concern is that the putative antitrust injuries that might arise are rooted in stylized economic models that are heavily dependent on a narrow set of assumptions, leaving significant room for erroneous antitrust enforcement. A modest but fundamental safeguard to protect against this concern of “false positives,” is an approach to antitrust that requires a strong demonstration of actual anticompetitive effect as a precondition for a monopolization violation.

Not only are patents not presumptive proof of market power in any static sense, but patents can also meaningfully improve both competition and access to patented technologies over time, in the dynamic sense. From the public record it appears that the driver of much of today’s antitrust enforcement in the agricultural industry boils down to intervention into business disputes between large and sophisticated parties. The inherent uncertainty regarding the economic consequences of specific conduct, coupled with competitors’ poor incentives and the huge costs of error, counsel strongly against antitrust intervention without strong empirical evidence that the conduct has reduced competition and harmed consumers in the form of higher prices, lower quality, or reduced innovation.

As regular readers know, we’ve been following with (critical) interest the antitrust issues surrounding the seed industry in general and Monsanto in particular.  See, for example posts by me or Mike here, here and here.

As you may not know, Monsanto and Pioneer (a DuPont subsidiary) have been engaged in a heated contract and patent dispute rooted in Monsanto’s claim that Pioneer breached a patent license it obtained from Monsanto by stacking (that is, combining in one seed product) Monsanto’s Roundup Ready trait (which makes plants resistant to glyphosate herbicides like Monsanto’s Roundup) with its own glyphosate-tolerant trait in some of its genetically-modified soybean and corn seeds.  Pioneer has counterclaimed, including with a number of antitrust claims.  Arguably the major impetus for the antitrust accusations swirling around Monsanto in this area is Pioneer’s fomenting of such claims, and Pioneer seems to have been “cooperating with” the DOJ in its ongoing investigation.

Although we have been most interested in the antitrust aspects of the case, Monsanto won an important victory in the underlying licensing case last week.  Article here; the court’s (Eastern District of Missouri) decision is available in pdf here.

The basic summary of the case is this (from the decision):

This matter comes before the Court on Plaintiffs’ Motion for Partial Judgment on the Pleadings and Defendants’ Motion to Dismiss Count II of Plaintiffs’ Complaint.

* * *

Monsanto brought the present action for breach of contract, patent infringement, inducement to infringe, and unjust enrichment, alleging that Pioneer violated Monsanto’s contractual and patent rights by producing [] stacked seed products.  Pioneer counterclaims for a declaratory judgment that the license agreements permit it to stack [].  Pioneer also asserts a number of antitrust counterclaims, alleging that Monsanto has abused its patent monopolies, has inserted anticompetitive restrictions into its license agreements with seed producers, and is attempting to employ an anticompetitive “switching strategy” by using new licensing agreements to shift independent seed companies from the current RR trait seed lines to Roundup Ready 2 Yield®, in order to prevent generic entry into the market and extend Monsanto’ patent protection through 2020.

* * *

Monsanto moves for partial judgment on the pleadings that: (1) the license agreements do not permit stacking of any non-RR glyphosate-tolerant traits with Monsanto’s [RR] traits; (2) Pioneer breached those agreements by [so] stacking; and (3) it is entitled to judgment in its favor on Pioneer’s counterclaim for a declaratory judgment that the license agreements permit this type of stacking. . . . Pioneer argues that the license agreements do permit [such] stacking.

We can dispense with Pioneer’s last counterclaim off the bat:  Monsanto announced toward the end of last year that it would not force (and, it claims, never planned to force) seed companies to switch to its new Roundup Ready seeds in anticipation of the expiration of the current Roundup Ready patent in 2014:

But in its letters this week, Monsanto said it would now extend all contracts for Roundup Ready 1 until the patent’s expiration date. It also said it would not enforce language in some contracts that would have required seed companies to destroy or return Roundup Ready seed when the patent expired.

Last week’s ruling explicitly did not reach Pioneer’s antitrust claims which are still alive.

But the ruling did support Monsanto in its basic case which centers around the field-of-use restriction described above.  And on this issue the court found in Monsanto’s favor, holding that the license did indeed contain a valid restriction against stacking of glyphosate-tolerant traits and that Monsanto may seek a remedy for violation of the restriction (if the agreements and patents are deemed enforceable, an issue not reached by the court’s decision) in contract.

The ruling is narrow in scope, but it’s an important victory for Monsanto in what is, at its core, a patent infringement/breach of contract case–not an antitrust case.  It is difficult to escape the conclusion, laid out on Monsanto’s web page here, that Pioneer resorted to stacking in an effort not to improve through synergy the overall glyphosate tolerance of its seeds but rather to patch over the relative  ineffectiveness of its own traits.  Monsanto has licensed its technology widely for use in products where its trait is combined with different traits from other companies (including, notably, competitors like Pioneer).  But for very good reasons (mainly protection of its brand), Monsanto imposes field of use restrictions on the coupling of its Roundup Ready trait with other companies’ traits that purport to perform the same function.  The court’s decision paves the way for Monsanto to thus enforce its property rights.  That this sensible restriction also forms the basis of Pioneer’s and others’ allegations of anticompetitive conduct is regrettable, and I hope the court and the DOJ are mindful of the error cost risks inherent in this kind of claim.

At the same time the ruling makes the underlying case harder for Pioneer and thus makes Pioneer’s antitrust counterlcaims more important to its ability to prevail.  I guess that means more fomenting of antitrust animosity against Monsanto is probably in the cards.

A couple weeks ago, Geoff wrote concerning the DOJ’s misguided antitrust interest in Monsanto. With that in mind, I was very interested to see today’s announcement that Monsanto’s earnings and gross margins are significantly off for its fiscal first quarter.  According to the Wall Street Journal report, Monsanto posted a loss for the quarter due to a 36% drop in sales and lower margins resulting from price decreases.  Leading the drop, sales of the company’s Roundup and other herbicide products tumbled 63%!

Clue #1: Falling prices are not typically associated with (legitimate) cause for antitrust concerns.

In the case of Roundup, the popular herbicide is under intense competition from generic brands since the Roundup patent expired. That’s exactly the way our limited-monopoly intellectual property system is supposed to work: allow the innovator a period of time to recoup their investment in the innovation, then open the door to competition that will drive down prices and spread use of the innovation even further (if the innovation is really of value to begin with).

More importantly to the DOJ’s witch hunt, which is not about herbicide but biotechnology and seed products, the WSJ went on to report that sales of seeds and genomics dropped 6.2%!  Seeds containing genetic traits that provide herbicide and pest resistance command a premium, largely reflecting the cost savings to farmers from using less intensive farming practices.  Seems in an era of lower commodity prices, farmers are less willing to shell out the big bucks for biotech seeds.  Who’d have guessed?  Well, maybe someone who doesn’t make a living sniffing around for anticompetitive behavior under ever rock and stone (or competitors who envy a popular, proprietary technology).

Clue #2: If consumers (in this case farmers) are choosing to substitute away from relatively more expensive products (biotech seeds)  in favor of less expensive, even if lower-tech, products, the high-tech product does not, by definition, enjoy a monopoly.  And don’t forget Clue #1.

All this to say, add another piece of evidence against the need for and wisdom of the DOJ and USDA’s impending traveling circus “investigating” the state of competition in the agriculture sector.

If you live outside the farm belt (or you’re not an antitrust junkie) you might have missed what is shaping up to be one of the biggest antitrust stories of the coming year:  The set of antitrust accusations and actions against Monsanto for its alleged anticompetitive conduct in the biotech seed market.

The AP reports:

Confidential contracts detailing Monsanto Co.’s business practices reveal how the world’s biggest seed developer is squeezing competitors, controlling smaller seed companies and protecting its dominance over the multibillion-dollar market for genetically altered crops, an Associated Press investigation has found.

With Monsanto’s patented genes being inserted into roughly 95 percent of all soybeans and 80 percent of all corn grown in the U.S., the company also is using its wide reach to control the ability of new biotech firms to get wide distribution for their products, according to a review of several Monsanto licensing agreements and dozens of interviews with seed industry participants, agriculture and legal experts.

Sounds pretty awful.  Until you read a bit more and if you, you know, know anything about antitrust law and economics.

Let me say at the outset that I don’t know everything one would want to know about Monsanto’s contracts in order to draw a strong conclusion.  But neither does the AP reporter, not that it stopped him from drawing the firm conclusion that Monsanto’s practices are anticompetitive.  The only thing lacking from his story is the usually-obligatory quote from the AAI, although the complete absence of any contrary point of view from any source other than Monsanto itself makes up for this omission.

So let’s see.  The article frets that:

The company has used the agreements to spread its technology — giving some 200 smaller companies the right to insert Monsanto’s genes in their separate strains of corn and soybean plants. But, the AP found, access to Monsanto’s genes comes at a cost, and with plenty of strings attached.

I should hope so.  If Monsanto is giving away its technology and failing to protect its IP it is in serious trouble with its shareholders, among others.  And never mind (and the AP reporter doesn’t) that Monsanto apparently licenses its technology broadly (I assume that 200 companies is broad in this market) rather than keeping it locked up for itself (the usual complaint about firms exercising their IP rights).  Isn’t this how technology markets are supposed to work?

The article goes on to quote an economist complaining that big is bad (”This level [90%] of control is almost unbelievable”), note that the DOJ is investigating, and note that a suit against Monsanto was “settled with an agreement” (I think with the implication that only the guilty settle cases, but I could just be reading that in . . .).

Moreover, the stakes are huge:

At issue is how much power one company can have over seeds, the foundation of the world’s food supply. Without stiff competition, Monsanto could raise its seed prices at will, which in turn could raise the cost of everything from animal feed to wheat bread and cookies.

Never mind that even without Monsanto’s seed traits we’d still have soybeans and corn.  Even this article goes on to explain that “the benefit of Monsanto’s technology for farmers has been undeniable (followed by a “but . . .”)–and that these robust seeds wouldn’t exist at all were it not for Monsanto’s investment in the R&D that created them–a massive investment and effective licensing effort that, according to the article, propelled Monsanto from being a non-entity to being a giant player in the industry in only a few years:

First came the science, when Monsanto in 1996 introduced the world’s first commercial strain of genetically engineered soybeans. The Roundup Ready plants were resistant to the herbicide, allowing farmers to spray Roundup whenever they wanted rather than wait until the soybeans had grown enough to withstand the chemical.

The company soon released other genetically altered crops, such as corn plants that produced a natural pesticide to ward off bugs. While Monsanto had blockbuster products, it didn’t yet have a big foothold in a seed industry made up of hundreds of companies that supplied farmers.

That’s where the legal innovations came in, as Monsanto became among the first to widely patent its genes and gain the right to strictly control how they were used. That control let it spread its technology through licensing agreements, while shaping the marketplace around them.

It’s a perfect example of Scott Kieff’s “commercializing innovation” story.  Yes, intellectual property is helpful for providing the incentives to innovate.  But IP is at least as important in facilitating the commercialization–and the spread–of technology even after it’s been created.

Meanwhile, other companies (most notably DuPont, the company most active in complaining about Monsanto’s competition) continue to increase biotech seed investment, and continue to gain market share.  Here’s a November 23, 2009 Wall Street Journal report on DuPont’s seed business:

DuPont Co.’s (DD) seed business expects “continued strong growth” in 2010 and anticipates higher market share in soybeans and corn, based on on-farm yield comparisons that suggest a strong crop.

* * *

The company said it expects to extend its soybean market-share leadership and increase its market share of global seed corn by 1 to 2 points in 2010.

In North America, the yield comparisons show that Pioneer Hi-Bred soybeans have a 1.3 bushel-per-acre yield advantage on average against “all competitive varieties.” Pioneer soybeans with the Roundup Ready gene have a 2.7 bushel-per-acre yield advantage against competitors.

* * *Shares of DuPont were up 1.9% to $35.18 in recent trading amid a broad market decline. Seed rival Monsanto Co. (MON) was off 0.6% at $79.58.

And it appears that buyers have some power, too:

Thomas Terral, chief executive officer of Terral Seed in Louisiana, said he recently rejected a Monsanto contract because it put too many restrictions on his business.

Such facts make it difficult to see evidence of foreclosure in the genetically-modified seed market  Nevertheless, the article cites to some specific contract terms that it suggests are anticompetitive:

One of the numerous provisions in the licensing agreements is a ban on mixing genes — or “stacking” in industry lingo — that enhance Monsanto’s power.

Another provision from contracts earlier this decade— regarding rebates — also help explain Monsanto’s rapid growth as it rolled out new products.  One contract gave an independent seed company deep discounts if the company ensured that Monsanto’s products would make up 70 percent of its total corn seed inventory.

I look forward to learning more about these contracts and discussing their competitive implications.  As has been well-explored on this blog, loyalty rebates are hardly necessarily anticompetitive, and, as in other industries, rebates are common in this industry.  On the stacking term, there are  pro-competitive technological and business reasons to “tie-out” competitors from licensee’s products, particularly when the licensor expects to develop and attempt to market subsequent technologies that might substitute for the combined product and when it may be hard to tell which company’s technology is having what effect in a combined product.  Not since the (now repudiated) “Nine No-Nos” from the DOJ in the 1970s, has anyone operated on a presumption that licensing restrictions were anticompetitive.

There is much more to this story, and much more to the article.  As Mike noted recently, the DOJ and USDA will be holding hearings throughout next year on agriculture industry antitrust, and these biotech seed issues will be at the forefront.  I only hope the enforcers think about the error costs, and avoid an antitrust disaster.

[Cross-posted at TalkStandards.com, a blog devoted on standards and related issues]

One of the most significant challenges facing competition policy today is defining the appropriate role of antitrust law within the context of intellectual property right licensing by standard-setting organizations (“SSOs”).  Many commentators believe it is necessary to apply the full force of the antitrust laws, and sometimes special rules that would increase the scope of antitrust, to the standard-setting process in order to adequately oversee what they perceive as a unique opportunity for anticompetitive behavior.  Indeed, antitrust agencies both in the United States and around the world have expressed agreement with the notion that the standard setting process requires strong enforcement of antitrust liability rules in order to ensure efficient outcomes that benefit consumers.  However, this view largely fails to consider the costs of antitrust.  In particular, it fails to recognize the limits of antitrust when the marginal benefit of antitrust enforcement is slight and the potential for erroneous enforcement (“false positives”) and thus, the likelihood that procompetitive behavior will be deterred, is high.  The Supreme Court itself has emphasized repeatedly that the scope of the antitrust laws should be responsive to such a cost-benefit analysis.

The limits of antitrust are particularly discernable in the context of patent holdup.  The basic patent holdup problem is well known.  In one scenario, a SSO adopts a specific patented technology as part of a standard in exchange for a promise by the patent holder to license the technology at a reasonable and non-discriminatory price (“RAND”).  In other scenarios the patent holder may fail to notify the SSO that it owns the patent under consideration, or intentionally engage in deceptive conduct to avoid disclosure, until after the patent has been adopted into a standard.  In either case, a patent “holdup” occurs if the patent holder later demands supra-competitive prices from parties using the patented technology that has been adopted in the standard after specific investments have been made.  The first line of case includes only breach of the RAND commitment (or other terms) but does not involve deceptive conduct.  The second includes allegations of actual deception on the part of the patent holder.  Patent holders are able to extract supra-competitive prices under such circumstances because SSOs are often unable to easily switch to another standard after spending significant time and capital to develop the current standard.

Traditional antitrust principles are capable of dealing with the “deception” line of patent holdup cases.  As the D.C. Circuit correctly observed in overturning the Commission’s finding of liability against Rambus in such a case, plaintiffs must bear the burden of establishing the traditional elements of a monopolization case: that the defendant had ex ante monopoly power, that its deceptive conduct was “exclusionary,” and that it caused the maintenance or acquisition of greater monopoly power resulting in consumer harm.  The “breach” line of patent holdup cases is more problematic, in large part because antitrust agencies and some commentators wish to deviate from traditional antitrust principles in order to reach conduct that they view as problematic.  Again, the problem with this view is that it ignores or minimizes the costs of expanding the scope of antitrust rules to the standard setting process in this way without considering how such a scheme may obstruct innovation an economic growth.

Consider the Federal Trade Commission’s (“FTC”) recent decision to prosecute patent holdup without finding actual deception is a particularly egregious example.  In N-Data, the IEEE, an SSO, adopted a patent owned by National as part of a standard in exchange for National’s agreement to a licensing fee of $1,000.  National later assigned its right to Vertical.  Vertical attempted to amend the $1,000 licensing term to permit fair, reasonable, and nondiscriminatory (“FRAND”) pricing.  The SSO approved the change and posted the new agreement, along with the original, for all users to view.  Vertical then assigned its rights to N-Data.  The FTC found that N-Data had engaged in “oppressive” and “coercive” actions that “harmed consumers” and “undermine competition.”   In doing so, the FTC paved the way for finding antitrust liability whenever a patent holder breaches any licensing commitment that has the effect of increasing royalties—even when done in good faith.

I’ve criticized this decision at greater length in articles here and here, but there are three primary problems with the N-Data approach which makes such a breach a sufficient condition for access to antitrust remedies.  The first is that the approach deviates from the conventional role of antitrust has a set of rules governing the competitive process rather than particular outcomes.  Here, antitrust liability attaches not because of any deceptive conduct by the firm, but because the antitrust agencies’ ex post evaluation of the terms renegotiated in good faith seven years after the original contract deems them “oppressive.”  This approach invites expansion of antitrust doctrine to mundane contract disputes and disagreement that have price effects but no impact on the competitive process.  The second problem is that the FTC’s willingness to employ Section 5 to this end indicates a desire to circumvent these traditional principles as expressed under conventional monopolization law, to avoid problems of proof and take advantage of a vague standard with less rigorous requirements in regard to demonstrating actual consumer harm.  The third is, as I’ve argued here with Bruce Kobayashi, that existing contract and patent doctrine contain superior substantive provisions to deal with the patent holdup problem without imposing the heavy hammer of antitrust law which does not give the flexibility to distinguish between the paradigmatic hypothetical case of pure deception in the standard setting process with cases like N-Data which involve mundane contractual disputes and renegotiation.

The immediate effect of employing the antitrust laws to patent holdup problems that present as merely ex post contractual opportunism is that businesses will forgo procompetitive negotiations for free of antitrust enforcement that carries severe penalties.  A more reasonable solution would have been to allow the contracting parties to settle any dispute under an already existing alternative regulatory scheme, such as contract or patent law, with a comparative advantage in enforcement.  As the prevalence of intellectual property in standards grows, it is important to remember that SSOs are sophisticated organizations with a host of state and federal remedies at their disposal that do not involve the heavy hammer of antitrust law, which ultimately may deter procompetitive innovation.

[REPOSTED BECAUSE SSRN LINK INACTIVE EARLIER, CHAPTER IS NOW AVAILABLE FOR DOWNLOAD]

Bruce Kobayashi and I have posted our forthcoming chapter, Intellectual Property and Standard Setting,  in the forthcoming ABA Antitrust Section Handbook on the Antitrust Aspects of Standard Setting.  It offers an analytical overview of the antitrust issues involving intellectual property and standard setting including, but not limited to, patent holdup, royalty stacking, refusals to license, and patent pools.

Kobayashi and Wright (2010) offers largely positive analysis of the antitrust issues in this area.  For readers interested in a more normative perspective making the case for an implied preemption of antitrust in the area of patent holdup in favor of state contract law and federal patent law remedies, see Kobayashi and Wright (2009).

Later this year Josh and I have an edited volume with the above title coming out with Cambridge University Press.  The list of contributors is phenomenal, including:

• Bob Cooter
• Vincenzo Denicolo
• Richard Epstein
• Luigi Franzoni
• Damien Geradin
• Keith Hylton
• Marco Iansiti
• Scott Kieff
• Bruce Kobayashi
• Haizhen Lee
• Stan Leibowitz
• Mark Lemley
• Doug Lichtman
• Steve Margolis
• Mike Meurer
• Adam Mossoff
• Greg Richards
• Greg Sidak
• Henry Smith
• Dan Spulber
• David Teece
• Josh Wright

Our introductory essay, available here, discusses the papers and lays out some of our thoughts about what we know (or don’t know) about how to encourage innovation through competition and patent laws. As they say, get it while it’s hot!

The abstract for the introduction:

This essay is the introduction to a forthcoming volume entitled, Regulating Innovation: Competition Policy and Patent Law Under Uncertainty (Cambridge U. Press 2009 forthcoming).

In addition to introducing all of the papers in the volume, this essay introduces the organizing themes of the volume. Innovation is critical to economic growth. While it is well understood that legal institutions play an important role in fostering an environment conducive to innovation and its commercialization, much less is known about the optimal design of specific institutions. Regulatory design decisions, and in particular competition policy and intellectual property regimes, can have profoundly positive or negative consequences for economic growth and welfare. However, the ratio of what is known to unknown with respect to the relationship between innovation, competition, and regulatory policy is staggeringly low. In addition to this uncertainty concerning the relationships between regulation, innovation, and economic growth, the process of innovation itself is not well understood.

The regulation of innovation and the optimal design of legal institutions in this environment of uncertainty are two of the most important policy challenges of the 21st century. Any legal regime must attempt to assess the tradeoffs associated with rules that will affect incentives to innovate, allocative efficiency, competition, and freedom of economic actors to commercialize the fruits of their innovative labors and foster economic growth. Unfortunately, as this essay describes, our tools for assessing these tradeoffs are limited.

Any coherent regulatory framework must take account of the low level of empirical knowledge surrounding the complex relationship between regulation – both through competition policy and patent law – and innovation, and the corresponding uncertainty caused by this absence of knowledge. The relationship between regulation and innovation has posed a significant challenge to antitrust economists at least since Schumpeter’s suggestion that dynamic competition would result in “creative destruction,” leading to a competitive process where one monopolist would replace another sequentially as new entrants developed a superior product.

Interfering in this dynamic process for the sake of static efficiency gains is perilous, but, of course, not impossible. But regulators and policy makers must take (more) seriously the condition of fundamental uncertainty in which they act, and the significant costs of their inevitable errors before justifying interventions on grounds of promoting competition or facilitating innovation.

This essay and the chapters in this book, approach this critical set of problems from an economic perspective, relying on the tools of microeconomics, quantitative analysis, and comparative institutional analysis to explore and begin to provide answers to the myriad challenges facing policymakers. The strength of this analysis—often described as the New Institutional Economic approach—is in its recognition that understanding economic performance requires not only economic modeling of narrow behavior, but also an understanding of that behavior in its legal, economic, social, and political institutional context.

The essay includes a table of contents for the book.

Bruce Kobayashi and I have posted our forthcoming chapter, Intellectual Property and Standard Setting,  in the forthcoming ABA Antitrust Section Handbook on the Antitrust Aspects of Standard Setting.  It offers an analytical overview of the antitrust issues involving intellectual property and standard setting including, but not limited to, patent holdup, royalty stacking, refusals to license, and patent pools.

Kobayashi and Wright (2010) offers largely positive analysis of the antitrust issues in this area.  For readers interested in a more normative perspective making the case for an implied preemption of antitrust in the area of patent holdup in favor of state contract law and federal patent law remedies, see Kobayashi and Wright (2009).

Expanding on the themes in this post from the TOTM symposium book review of Professor Carrier’s new book on “Harnessing the Power of Intellectual Property and Antitrust Law” to encourage innovation, I’ve posted an essay co-authored with a very talented former student and research assistant, Aubrey Stuempfle. The essay expands on some of the themes we touched upon in reviewing Carrier’s analysis of standard setting issues, including the potential threat to innovation posed by invoking antitrust remedies to govern the SSO contracting process (whether under Section 2 of the Sherman Act of Section 5 of the FTC Act) in patent holdup cases. The review (along with the others from the symposium on Carrier’s book) will be published in the Alabama Law Review.

Here’s the abstract:

This essay reviews Michael Carrier’s analysis of antitrust and standard setting in his new book: Innovation for the 21st Century: Harnessing the Power of Intellectual Property and Antitrust Law. While Innovation for the 21st Century offers a balanced and informative summary on patent holdup, we find that Carrier’s treatment of antitrust and standard setting avoids too many of the critical policy questions. One critical and emerging issue in this area, and one Professor Carrier largely ignores, is the use of Section 5 of the FTC Act to govern the standard setting process, as in In re N-Data. We explore and highlight some of the critical legal and economic issues associated the use of Section 5 in the patent holdup context, the standard courts should apply to this conduct under Section 2 of the Sherman Act, and the fundamental issue of whether innovation and economic growth would be better served by relying on contract and patent law rather than antitrust. We conclude that it is highly unlikely that optimal regulation of standard setting activity includes the creation of perpetual contractual commitments backed by the threat of antitrust and state consumer protection remedies, without rigorous economic proof of substantial consumer injury that cannot be reasonably avoided. In our view, the current state of affairs described herein presents a critical threat to standard setting activity and innovation.

The essay can be downloaded here.

Herbert Hovenkamp is Professor of Law at The University of Iowa College of Law.

One interesting aspect of the DOJ Report on Section 2 is the scant, episodic treatment of IP issues. The Report rejects the presumption of market power for patent ties (p. 81); has a very brief discussion of refusal to license patented parts in which it properly rejects the reasoning of the Ninth Circuit’s Kodak decision and aligns itself with the Federal Circuit’s Xerox decision (p. 121-122). The Walker Process case, which held that an infringement action based on an improperly acquired and unenforceable patent could violate §2, is cited in a footnote, and only for the proposition that market power is required in a §2 case (p. 25 n. 53). Finally, the Report contains a brief discussion of the presence of intellectual property in measuring incremental cost for purposes of analyzing predatory pricing (p. 63).

I suggest that the Antitrust Division and the case law develop a theory about the unreasonably exclusionary use of patents that generally divides the territory between pre-issuance and post-issuance conduct. This division has much less to do with the exclusionary power of patents than with the presence or absence of a relevant regulatory agency. The patenting process is characterized by very intensive agency regulation up to the time that a patent issues, but almost no regulation thereafter. This suggests a rather sharp line between pre-issuance and post-issuance conduct. The one exception is for pre-issuance conduct that the agency did not supervise adequately, mainly because it was never presented to the agency in the first place. This is consistent with the general theory of “implied immunity,” under which regulated conduct is immune from the antitrust laws only to the extent that it is within the jurisdiction of a federal agency, was actually made known to the agency, and assessed under criteria that took competitive conseqeunces into account. (more…)

My colleague Adam Mossoff is blogging over at the Volokh Conspiracy on his fascinating paper, A Stitch in Time: The Rise and Fall of the Sewing Machine Patent Thicket. Here’s an excerpt from the first post:

The debate centers on whether patent thicket theory accurately explains or predicts such problems in practice, and the empirical studies produced thus far are arguably in equipoise. In speaking about anticommons theory, Professor Heller acknowledges that “the empirical studies that prove — or disprove — our theory remain inconclusive.” Nonetheless, in the patent literature and in the popular press, vivid anecdotes abound about patent thickets obstructing development of new drugs or preventing the distribution of life-enhancing genetically engineered foods to the developing world.

Given the heightened interest today amongst scholars and lawyers concerning the existence and policy significance of patent thickets, a historical analysis of the sewing machine patent thicket in the 1850s — called the “Sewing Machine War” at the time — and the denouement of this patent thicket in the Sewing Machine Combination of 1856 is important.

On one hand, it is an empirical case study of a patent thicket that (temporarily) prevented the commercial development of an important product of the Industrial Revolution. The sewing machine was the result of numerous incremental and complementary inventive contributions, which led to a morass of patent infringement litigation given overlapping patent claims to the final commercial product. The Sewing Machine War thus confirms that patent thickets exist, and that they can lead to what Professor Heller has identified as the tragedy of the anticommons.  On the other hand, the story of the sewing machine challenges some underlying assumptions in the current discourse about patent thickets.

The posts and the paper are highly recommended material for TOTM readers interested in issues involving IP and antitrust.

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