ANTITRUST ECONOMICS 2013
David S. Evans
University of Chicago, Global Economics Group
TOPIC 15:
RIGHTS
Date
Elisa Mariscal
CIDE, Global Economics Group
ANTITRUST AND INTELLECTUAL PROPERTY
Topic 15| Part 2
9 January 2014
Overview
2
Part 1
Part 2
Overview of IP
Rights
Economics of
Contracting
Economics of
Intellectual
Property
Refusal to Supply
IP Rights
Tension Between
Antitrust and IP
Protection
FRAND, SEPS, and
SSOs
Licensing of IP
Pay for Delay
Current Issues in Antitrust and Intellectual Property
3
Refusal to Supply IP Rights
FRAND Commitments to
SSOs
•IP rights holder refuses to
make IP available at any
price
•Holder of standard
essential patents (SEPs)
requires “high” royalty
•Microsoft “Interoperability”
decision in EU
•Google Motorola Mobility
commitments with FTC on
not seeking injunctions to
enforce SEPs
Pay for Delay Settlements
•Branded and generic
pharma settle patent
litigation by branded
paying generic to delay
entry
•US Supreme Court decision
in Actavis
All of these cases involve a bilateral contract negotiation. Antitrust issues result from problems with
that negotiation. Failure to reach deal in the case of refusal to supply and injunctions for SEPs.
Nature of deal for pharma patent settlements.
4
Bargaining and Contracts
Bilateral Negotiation with Buyers and Seller
5
Common for businesses to enter into contract negotiations with each other. Considerable portion
of B2B exchanges are based on contracts, some simple, some very complex.
Deals Happen Between Threat Points
6
Deal can take place
between these “threat
points”
Most the buyer is willing to pay
Least the seller is willing to take
Bargaining Power
7
For buyer:
• Availability of substitutes.
• Buyer power.
• Lack of sunk costs and
precommitments.
• Repeat purchases.
For seller:
• Alternative customers for excludable
goods.
• Credible threat to withhold product.
• Any lock-ins of customer.
Other Determinants of Bargaining Outcome
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Information asymmetries
• Whether the buyer knows other sales
prices or the seller’s true minimum
• Whether the seller knows the buyer’s
willingness to pay and the demand
faced by buyer
Negotiating ability
• Some buyers or sellers are better at
negotiating deals
Repeated games
• Buyers and sellers have more of an
incentive to reach “fair” outcome if
there are repeated interactions
• Also, know more about threat points
in repeated games
Deals Don’t Necessarily Happen
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Seller won’t take as
little as the buyer is
willing to offer. No deal
possible!
Most the buyer is willing to pay
Least the seller is willing to take
This situation is important for some of the antitrust debates because the
claim is seller is “refusing to supply” in effect or charging an “unfair price”.
Contracts are Multifaceted
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Price
Quality
Service
Length
Some business contracts are very complicated, deal with many dimensions involving
exchange of value, and address contingencies including breach of contract.
Contracts, Bargaining, and the Antitrust of IP
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Refusal to supply: refusal for leverage, or buyer isn’t willing to pay the
seller’s minimum price?
FRAND: Licensor isn’t offering FRAND or buyer would like a better
deal?
Reverse payments: contract to settle litigation in the face of
uncertainty or contract to create and share monopoly profits?
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Refusal to Supply Intellectual
Property
Classic Refusal to Supply Cases
13
Note, following Trinko, refusal to supply essentially per se
lawful in US.
Referral of IMS Health Case to European Court (2004)
European Commission decision on
Microsoft (Interoperability) (2004) and
European General Court judgment
(2008).
European Commission decision on Magill’s access to
television listings of RTE, ITP, and BBC (1988) and European
Court of Justice judgment (1995)
Key Economic Issues
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Does owner of IP have incentive and ability to leverage IP to secure
additional monopoly profit? Raises standard vertical issues including whether
Chicago single monopoly profit theorem holds and whether benefit of
additional profit outweighs cost of lost revenue.
Does refusal result in the exclusion of competition necessary to make refusal
profitable?
Are there efficiency benefits, including dynamic ones, from refusal such as
prevention of free-riding and eliminating double marginalization? How should
incentives to innovate be accounted for?
Questions: (1) Could a dominant firm refuse on grounds that the price buyer is
willing to pay isn’t enough to offset its loss of revenues in downstream market
in which it also competes? (2) How do we account for the incentives that
“monopoly profits” play in inducing innovation in the first place?
Economics of Refusal to Supply Pre-Microsoft
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Refusal per se lawful, but for “exceptional circumstances”
Property indispensable to compete
Refusal excludes all competition in secondary market
Prevents the emergence of a new product
Not objectively justified
Microsoft European General Court judgment adopted easier test for Commission to meet. Must show
“risk of elimination of competition” and impedes technological development which is short of
prevention of new product. Court considers balancing incentives to innovate from providing access
versus reduced incentives from forced sharing.
Economics of “New Products”:
16
P
Reflects policy judgment not to
interfere with property rights and
incentives of firms to invest and
innovate except in extreme cases
including—in particular—creation of
new product. Limits interventions to
ones where dynamic benefits of
compulsory licensing outweigh
dynamic costs of compulsory
licensing.
Demand
Value of New Product
(increases from zero to this
value (minus perhaps value
of products it has displaced)
MC
Q
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FRANDS, SSOs, and SEPs
A Guide to the Alphabet Soup of Patents
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SSO: Standard Setting Organization is usually a non-profit association
of companies and other entities that devise technical standards.
SEP: Standard Essential Patent is a patent that claims an invention
that must be used to comply with a technical standard generally
enunciated by an SSO. There could be hundreds, maybe thousands,
of these for a standard.
FRAND: SSOs often require that members agree to disclose patents
on technologies to be included in a standard and agree to license
those patents on “fair, reasonable, and non-discriminatory terms”.
Some SSOs do not include the word “fair” in which case there are
RAND obligations. Note that FRAND agreement requires that
members license patent and therefore forbid an outright refusal to
supply.
Standard Setting Organizations in Action
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“ETSI's purpose is to produce and perform the
maintenance of the technical standards and other
deliverables which are required by its members (Article 2
of the ETSI Statutes - see ETSI Directives). Like most
standards organizations, much of this work is carried out
in committees and working groups composed of
technical experts from the Institute's member companies
and organizations. These committees are often referred
to as 'Technical Bodies' (TB), and typically meet
between two and six times a year, in the ETSI premises or
elsewhere. They also rely heavily on electronic
communications to help progress the work, especially inbetween meetings.”
“When an ESSENTIAL IPR relating to a particular STANDARD
or TECHNICAL SPECIFICATION is brought to the attention of
ETSI, the Director-General of ETSI shall immediately request
the owner to give within three months an irrevocable
undertaking in writing that it is prepared to grant irrevocable
licences on fair, reasonable and non-discriminatory
(“FRAND”) terms and conditions under such IPR…”
“With some 33,000 granted
patents, Ericsson
is the largest holder of
standard-essential patents
for mobile
communication.
Our unrivalled patent
portfolio covers 2G, 3G
and 4G technologies, and
we are a net
receiver of licensing
royalties with more than
100 patent-licensing
agreements in place.”
FRAND Disputes
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Potential licensee approaches FRAND holder to secure license which
it needs to rely on for standard technology.
What if the two parties can’t reach an agreement on the FRAND
royalty rate?
The potential licensee may choose to go without a license and let
the patent holder sue. In a patent dispute the court may find the
patent isn’t valid or set a royalty less than what the patent holder
wanted.
The patent holder may seek an injunction which if provided would
prevent the licensee from using the technology unless it can find a
work around.
Patent Hold Up
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Patent “hold up”: having gotten its patent incorporated into the
technology the patent holder (remember this might be one of hundreds
of patents) can prevent firms from participating in the technology and
therefore various markets by refusing to license except on very high
terms. Could do this for “exploitative” reasons or for “exclusionary”
reasons.
Reverse patent hold up: patent holder can’t prevent potential licensee
from using the patent except by hiring lawyers and pursuing a court
challenge which can be expensive and with uncertain outcomes. And
then the potential licensee could also try to pursue antitrust action
which raises further risks.
Question: Technologies involve hundreds of SEPs and industries can
involve multiple standards. Yet there are only a small number of patent
disputes relative to the total possible and, while one could argue that
innovation could be faster, many SEP-heavy industries seem to be
growing quickly. But maybe the handful of disputes are very serious.
Incremental Value Proposition
22
Does the SEP holder get to charge more because the patent has
been included in a standard? No, that would give every SEP holder
the ability to gain up to full return from the standard by blocking
anyone from using it.
“Incremental value” of a given SEP is the difference in royalty rate
that SEP could command over the next best alternative technology
for a standard. That is how much SSO would have agreed to in a
hypothetical negotiation.
Broad consensus among economists and courts on incremental
value being the right approach conceptually.
FRAND Disputes—Breach of Contract Approach
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SEP holder often has a contract with SEO that requires commitment
to license at FRAND.
Patent dispute with licensee is essentially a contract dispute where
the parties can’t reach agreement on terms required under the
contract.
Microsoft v. Motorola Mobility (Judge Robart) analyzed FRAND as a
hypothetical negotiation. Follows US “Georgia Pacific Factors” which
is used in patent infringement cases to determine reasonable royalty
rate. Consistent with economic bargaining model.
Sometimes Parties Just Don’t Agree
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FRAND Determination Under Contract Theory
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Finder of fact tries to determine
royalty rate that willing buyer
and seller would negotiate
Most the buyer is willing to pay
Least the seller is willing to take
Key factors include (1) comparable patent
negotiations (same patent, other parties); different but
similar patents; (2) (incremental) value of patent; (3)
bargaining power.
Antitrust Theories Concerning FRAND and SEPs
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“Unfair/Excessive” Pricing (“Exploitative Abuse”): for jurisdictions that
have unfair pricing as part of antitrust law. Theory is that SEP confers
dominant position and patent holder is trying to charge excessive
price (see Huawei v. InterDigital, China)
Refusal to supply: patent holder is asking for such a high price that it
is in effect a refusal to supply. Standard essential facility argument.
Exclusionary abuse (1): patent holder is charging high price to
exclude potential licensee from a downstream market (margin
squeeze argument).
Exclusionary abuse (2): by filing for injunction patent holder is
engaging in unfair competition that results in high prices.
Tests Under Antitrust or Contract Theories
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Assessment under antitrust theories require assessment of “FRAND”
price to determine whether the patent holder is exceeding FRAND.
Shapiro et al. recommend using “incremental value”. But requires
finder of fact to assess incremental value relative to other
alternatives.
Schmalensee et al. recommend using “hypothetical negotiation”
since this fills into contract and is operational under traditional patent
approaches.
Robarts decision in Microsoft v. Motorola rejects incremental value
approach in favor of hypothetical negotiation largely for reasons of it
being a practical approach.
28
Pay for Delay
Reverse Payment Settle aka Pay-for-Delay
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Company A (patent holder) sues Company B (potential infringer) for
patent infringement.
“Typical settlement”: B agrees to pay A and/or B agrees to pay
royalty.
“Reverse payment settlement”: A agrees to pay B and B agrees to
“pay for delay” of competitive entry.
Cases so far have involved A being branded pharmaceutical suing
generic pharmaceutical B. But in principle could be other industries.
US Hatch-Waxman law allows generic to challenge branded
pharmaceutical and in return get 6 months of generic monopoly if
successful. First generic that sues gets first entry slot.
In US pay for delay therefore results in not only B being delayed but
all generics being delayed since B is first in line.
Settlement Economics Factors (Simple Model)
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P= probability of winning patent litigation for
A
T=remaining patent lifetime in years
M=monopoly profits in years for A
D=duopoly profits in years for A
C=A’s cost of litigating patent
R=reverse payment
E=Entry date for B
Reverse payment settlement involves
choosing R and E
EM+(T-E)D>(PM+(1-P)D)T-C
Patentee settles with R
payment and E entry date if
certain monopoly profits during
delayed entry minus reverse
payments exceed expected
value of monopoly profits
minus litigation costs.
Settlement Terms and Consumer Welfare
31
Simple Shapiro (2003) Model
Patentee settles with R payment and E entry date if certain monopoly profits
during delayed entry minus reverse payments exceed expected value of
monopoly profits minus litigation costs.
EM+(T-E)D>(PM+(1-P)D)T-C
Consumers are worse off if they get on average more monopoly under
settlement than they would under litigation which happens if the expected
duration of the patent (PT) from litigation (assuming instantaneous result in
litigation) is less than the delay (E) negotiated under the settlement.
Shapiro rule is that the reverse payment settlement is anticompetitive if
reverse payment (R) is greater than the avoided cost of litigation. Otherwise
patentee is paying for delay that harms consumers.
In complex settlements R is based on net value received by potential entrant
for delay after deducing any value conveyed to patentee.
Supreme Court Actavis Decision
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Solvay agreed to pay generic companies between $10 million and over $100
million not to enter until a future date (but before patent expiration). FTC
challenged. Lower courts affirmed that reverse patent settlements were
within patent scope.
FTC sought to rule finding reverse payment settlements “presumptively illegal”
(parties could rebut presumption).
Supreme Court decided rule of reason finding that there may be legitimate
justifications for settlement but might also be method to secure and divide
monopoly profits.
Likely validity of patent is one issue in assessing whether reverse payment is
anticompetitive or not.
How should rule of reason be structured? How does risk of antitrust liability
affect decision to enter into procompetitive reverse payment settlements?.
Next Class Topic 16
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Part 1
Part 2
Antitrust Economics
Antitrust Economics
of Telecommunications
of Payments