Truth on the Market

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The price of closing the Google search antitrust case: questionable precedent on patents

Posted by Geoffrey Manne on January 4, 2013

The Federal Trade Commission yesterday closed its investigation of Google’s search business (see my comment here) without taking action. The FTC did, however, enter into a settlement with Google over the licensing of Motorola Mobility’s standards-essential patents (SEPs). The FTC intends that agreement to impose some limits on an area of great complexity and vigorous debate among industry, patent experts and global standards bodies: The allowable process for enforcing FRAND (fair, reasonable and non-discriminatory) licensing of SEPs, particularly the use of injunctions by patent holders to do so. According to Chairman Leibowitz, “[t]oday’s landmark enforcement action will set a template for resolution of SEP licensing disputes across many industries.” That effort may or may not be successful. It also may be misguided.

In general, a FRAND commitment incentivizes innovation by allowing a SEP owner to recoup its investments and the value of its technology through licensing, while, at the same, promoting competition and avoiding patent holdup by ensuring that licensing agreements are reasonable. When the process works, and patent holders negotiate licensing rights in good faith, patents are licensed, industries advance and consumers benefit.

FRAND terms are inherently indeterminate and flexible—indeed, they often apply precisely in situations where licensors and licensees need flexibility because each licensing circumstance is nuanced and a one-size-fits-all approach isn’t workable. Superimposing process restraints from above isn’t necessarily the best thing in dealing with what amounts to a contract dispute. But few can doubt the benefits of greater clarity in this process; the question is whether the FTC’s particular approach to the problem sacrifices too much in exchange for such clarity.

The crux of the issue in the Google consent decree—and the most controversial aspect of SEP licensing negotiations—is the role of injunctions. The consent decree requires that, before Google sues to enjoin a manufacturer from using its SEPs without a license, the company must follow a prescribed path in licensing negotiations. In particular:

Under this Order, before seeking an injunction on FRAND-encumbered SEPs, Google must: (1) provide a potential licensee with a written offer containing all of the material license terms necessary to license its SEPs, and (2) provide a potential licensee with an offer of binding arbitration to determine the terms of a license that are not agreed upon. Furthermore, if a potential licensee seeks judicial relief for a FRAND determination, Google must not seek an injunction during the pendency of the proceeding, including appeals.

There are a few exceptions, summarized by Commissioner Ohlhausen:

These limitations include when the potential licensee (a) is outside the jurisdiction of the United States; (b) has stated in writing or sworn testimony that it will not license the SEP on any terms [in other words, is not a “willing licensee”]; (c) refuses to enter a license agreement on terms set in a final ruling of a court – which includes any appeals – or binding arbitration; or (d) fails to provide written confirmation to a SEP owner after receipt of a terms letter in the form specified by the Commission. They also include certain instances when a potential licensee has brought its own action seeking injunctive relief on its FRAND-encumbered SEPs.

To the extent that the settlement reinforces what Google (and other licensors) would do anyway, and even to the extent that it imposes nothing more than an obligation to inject a neutral third party into FRAND negotiations to assist the parties in resolving rate disputes, there is little to complain about. Indeed, this is the core of the agreement, and, importantly, it seems to preserve Google’s right to seek injunctions to enforce its patents, subject to the agreement’s process requirements.

Industry participants and standard-setting organizations have supported injunctions, and the seeking and obtaining of injunctions against infringers is not in conflict with SEP patentees’ obligations. Even the FTC, in its public comments, has stated that patent owners should be able to obtain injunctions on SEPs when an infringer has rejected a reasonable license offer. Thus, the long-anticipated announcement by the FTC in the Google case may help to provide some clarity to the future negotiation of SEP licenses, the possible use of binding arbitration, and the conditions under which seeking injunctive relief will be permissible (as an antitrust matter).

Nevertheless, U.S. regulators, including the FTC, have sometimes opined that seeking injunctions on products that infringe SEPs is not in the spirit of FRAND. Everyone seems to agree that more certainty is preferable; the real issue is whether and when injunctions further that aim or not (and whether and when they are anticompetitive).

In October, Renata Hesse, then Acting Assistant Attorney General for the Department of Justice’s Antitrust Division, remarked during a patent roundtable that

[I]t would seem appropriate to limit a patent holder’s right to seek an injunction to situations where the standards implementer is unwilling to have a neutral third-party determine the appropriate F/RAND terms or is unwilling to accept the F/RAND terms approved by such a third-party.

In its own 2011 Report on the “IP Marketplace,” the FTC acknowledged the fluidity and ambiguity surrounding the meaning of “reasonable” licensing terms and the problems of patent enforcement. While noting that injunctions may confer a costly “hold-up” power on licensors that wield them, the FTC nevertheless acknowledged the important role of injunctions in preserving the value of patents and in encouraging efficient private negotiation:

Three characteristics of injunctions that affect innovation support generally granting an injunction. The first and most fundamental is an injunction’s ability to preserve the exclusivity that provides the foundation of the patent system’s incentives to innovate. Second, the credible threat of an injunction deters infringement in the first place. This results from the serious consequences of an injunction for an infringer, including the loss of sunk investment. Third, a predictable injunction threat will promote licensing by the parties. Private contracting is generally preferable to a compulsory licensing regime because the parties will have better information about the appropriate terms of a license than would a court, and more flexibility in fashioning efficient agreements.

* * *

But denying an injunction every time an infringer’s switching costs exceed the economic value of the invention would dramatically undermine the ability of a patent to deter infringement and encourage innovation. For this reason, courts should grant injunctions in the majority of cases.…

Consistent with this view, the European Commission’s Deputy Director-General for Antitrust, Cecilio Madero Villarejo, recently expressed concern that some technology companies that complain of being denied a license on FRAND terms never truly intend to acquire licenses, but rather “want[] to create conditions for a competition case to be brought.”

But with the Google case, the Commission appears to back away from its seeming support for injunctions, claiming that:

Seeking and threatening injunctions against willing licensees of FRAND-encumbered SEPs undermines the integrity and efficiency of the standard-setting process and decreases the incentives to participate in the process and implement published standards. Such conduct reduces the value of standard setting, as firms will be less likely to rely on the standard-setting process.

Reconciling the FTC’s seemingly disparate views turns on the question of what a “willing licensee” is. And while the Google settlement itself may not magnify the problems surrounding the definition of that term, it doesn’t provide any additional clarity, either.

The problem is that, even in its 2011 Report, in which FTC noted the importance of injunctions, it defines a willing licensee as one who would license at a hypothetical, ex ante rate absent the threat of an injunction and with a different risk profile than an after-the-fact infringer. In other words, the FTC’s definition of willing licensee assumes a willingness to license only at a rate determined when an injunction is not available, and under the unrealistic assumption that the true value of a SEP can be known ex ante. Not surprisingly, then, the Commission finds it easy to declare an injunction invalid when a patentee demands a (higher) royalty rate in an actual negotiation, with actual knowledge of a patent’s value and under threat of an injunction.

As Richard Epstein, Scott Kieff and Dan Spulber discuss in critiquing the FTC’s 2011 Report:

In short, there is no economic basis to equate a manufacturer that is willing to commit to license terms before the adoption and launch of a standard, with one that instead expropriates patent rights at a later time through infringement. The two bear different risks and the late infringer should not pay the same low royalty as a party that sat down at the bargaining table and may actually have contributed to the value of the patent through its early activities. There is no economically meaningful sense in which any royalty set higher than that which a “willing licensee would have paid” at the pre-standardization moment somehow “overcompensates patentees by awarding more than the economic value of the patent.”

* * *

Even with a RAND commitment, the patent owner retains the valuable right to exclude (not merely receive later compensation from) manufacturers who are unwilling to accept reasonable license terms. Indeed, the right to exclude influences how those terms should be calculated, because it is quite likely that prior licensees in at least some areas will pay less if larger numbers of parties are allowed to use the same technology. Those interactive effects are ignored in the FTC calculations.

With this circular logic, all efforts by patentees to negotiate royalty rates after infringement has occurred can be effectively rendered anticompetitive if the patentee uses an injunction or the threat of an injunction against the infringer to secure its reasonable royalty.

The idea behind FRAND is rather simple (reward inventors; protect competition), but the practice of SEP licensing is much more complicated. Circumstances differ from case to case, and, more importantly, so do the parties’ views on what may constitute an appropriate licensing rate under FRAND. As I have written elsewhere, a single company may have very different views on the meaning of FRAND depending on whether it is the licensor or licensee in a given negotiation—and depending on whether it has already implemented a standard or not. As one court looking at the very SEPs at issue in the Google case has pointed out:

[T]he court is mindful that at the time of an initial offer, it is difficult for the offeror to know what would in fact constitute RAND terms for the offeree. Thus, what may appear to be RAND terms from the offeror’s perspective may be rejected out-of-pocket as non-RAND terms by the offeree. Indeed, it would appear that at any point in the negotiation process, the parties may have a genuine disagreement as to what terms and conditions of a license constitute RAND under the parties’ unique circumstances.

The fact that many firms engaged in SEP negotiations are simultaneously and repeatedly both licensors and licensees of patents governed by multiple SSOs further complicates the process—but also helps to ensure that it will reach a conclusion that promotes innovation and ensures that consumers reap the rewards.

In fact, an important issue in assessing the propriety of injunctions is the recognition that, in most cases, firms would rather license their patents and receive royalties than exclude access to their IP and receive no compensation (and incur the costs of protracted litigation, to boot). Importantly, for firms that both license out their own patents and license in those held by other firms (the majority of IT firms and certainly the norm for firms participating in SSOs), continued interactions on both sides of such deals help to ensure that licensing—not withholding—is the norm.

Companies are waging the smartphone patent wars with very different track records on SSO participation. Apple, for example, is relatively new to the mobile communications space and has relatively few SEPs, while other firms, like Samsung, are long-time players in the space with histories of extensive licensing (in both directions). But, current posturing aside, both firms have an incentive to license their patents, as Mark Summerfield notes:

Apple’s best course of action will most likely be to enter into licensing agreements with its competitors, which will not only result in significant revenues, but also push up the prices (or reduce the margins) on competitive products.

While some commentators make it sound as if injunctions threaten to cripple smartphone makers by preventing them from licensing essential technology on viable terms, companies in this space have been perfectly capable of orchestrating large-scale patent licensing campaigns. That these may increase costs to competitors is a feature—not a bug—of the system, representing the return on innovation that patents are intended to secure. Microsoft has wielded its sizeable patent portfolio to drive up the licensing fees paid by Android device manufacturers, and some commentators have even speculated that Microsoft makes more revenue from Android than Google does. But while Microsoft might prefer to kill Android with its patents, given the unlikeliness of this, as MG Siegler notes,

[T]he next best option is to catch a free ride on the Android train. Patent licensing deals already in place with HTC, General Dynamics, and others could mean revenues of over $1 billion by next year, as Forbes reports. And if they’re able to convince Samsung to sign one as well (which could effectively force every Android partner to sign one), we could be talking multiple billions of dollars of revenue each year.

Hand-wringing about patents is the norm, but so is licensing, and your smartphone exists, despite the thousands of patents that read on it, because the firms that hold those patents—some SEPs and some not—have, in fact, agreed to license them.

The inability to seek an injunction against an infringer, however, would ensure instead that patentees operate with reduced incentives to invest in technology and to enter into standards because they are precluded from benefiting from any subsequent increase in the value of their patents once they do so. As Epstein, Kieff and Spulber write:

The simple reality is that before a standard is set, it just is not clear whether a patent might become more or less valuable. Some upward pressure on value may be created later to the extent that the patent is important to a standard that is important to the market. In addition, some downward pressure may be caused by a later RAND commitment or some other factor, such as repeat play. The FTC seems to want to give manufacturers all of the benefits of both of these dynamic effects by in effect giving the manufacturer the free option of picking different focal points for elements of the damages calculations. The patentee is forced to surrender all of the benefit of the upward pressure while the manufacturer is allowed to get all of the benefit of the downward pressure.

Thus the problem with even the limited constraints imposed by the Google settlement: To the extent that the FTC’s settlement amounts to a prohibition on Google seeking injunctions against infringers unless the company accepts the infringer’s definition of “reasonable,” the settlement will harm the industry. It will reinforce a precedent that will likely reduce the incentives for companies and individuals to innovate, to participate in SSOs, and to negotiate in good faith.

Contrary to most assumptions about the patent system, it needs stronger, not weaker, property rules. With a no-injunction rule (whether explicit or de facto (as the Google settlement’s definition of “willing licensee” unfolds)), a potential licensee has little incentive to negotiate with a patent holder and can instead refuse to license, infringe, try its hand in court, avoid royalties entirely until litigation is finished (and sometimes even longer), and, in the end, never be forced to pay a higher royalty than it would have if it had negotiated before the true value of the patents was known.

Flooding the courts and discouraging innovation and peaceful negotiations hardly seem like benefits to the patent system or the market. Unfortunately, the FTC’s approach to SEP licensing exemplified by the Google settlement may do just that. Read the rest of this entry »

Posted in antitrust, contracts, exclusionary conduct, federal trade commission, google, intellectual property, Internet search, law and economics, patent | Tagged: , , , , , , , , | 2 Comments »

FTC Deservedly Closes Google Antitrust Investigation Without Taking Action

Posted by Geoffrey Manne on January 3, 2013

I have been a critic of the Federal Trade Commission’s investigation into Google since it was a gleam in its competitors’ eyes—skeptical that there was any basis for a case, and concerned about the effect on consumers, innovation and investment if a case were brought.

While it took the Commission more than a year and a half to finally come to the same conclusion, ultimately the FTC had no choice but to close the case that was a “square peg, round hole” problem from the start.

Now that the FTC’s investigation has concluded, an examination of the nature of the markets in which Google operates illustrates why this crusade was ill-conceived from the start. In short, the “realities on the ground” strongly challenged the logic and relevance of many of the claims put forth by Google’s critics. Nevertheless, the politics are such that their nonsensical claims continue, in different forums, with competitors continuing to hope that they can wrangle a regulatory solution to their competitive problem.

The case against Google rested on certain assumptions about the functioning of the markets in which Google operates. Because these are tech markets, constantly evolving and complex, most assumptions about the scope of these markets and competitive effects within them are imperfect at best. But there are some attributes of Google’s markets—conveniently left out of the critics’ complaints— that, properly understood, painted a picture for the FTC that undermined the basic, essential elements of an antitrust case against the company.

That case was seriously undermined by the nature and extent of competition in the markets the FTC was investigating. Most importantly, casual references to a “search market” and “search advertising market” aside, Google actually competes in the market for targeted eyeballs: a market aimed to offer up targeted ads to interested users. Search offers a valuable opportunity for targeting an advertiser’s message, but it is by no means alone: there are myriad (and growing) other mechanisms to access consumers online.

Consumers use Google because they are looking for information — but there are lots of ways to do that. There are plenty of apps that circumvent Google, and consumers are increasingly going to specialized sites to find what they are looking for. The search market, if a distinct one ever existed, has evolved into an online information market that includes far more players than those who just operate traditional search engines.

We live in a world where what prevails today won’t prevail tomorrow. The tech industry is constantly changing, and it is the height of folly (and a serious threat to innovation and consumer welfare) to constrain the activities of firms competing in such an environment by pigeonholing the market. In other words, in a proper market, Google looks significantly less dominant. More important, perhaps, as search itself evolves, and as Facebook, Amazon and others get into the search advertising game, Google’s strong position even in the overly narrow “search market” is far from unassailable.

This is progress — creative destruction — not regress, and such changes should not be penalized.

Another common refrain from Google’s critics was that Google’s access to immense amounts of data used to increase the quality of its targeting presented a barrier to competition that no one else could match, thus protecting Google’s unassailable monopoly. But scale comes in lots of ways.

Even if scale doesn’t come cheaply, the fact that challenging firms might have to spend the same (or, in this case, almost certainly less) Google did in order to replicate its success is not a “barrier to entry” that requires an antitrust remedy. Data about consumer interests is widely available (despite efforts to reduce the availability of such data in the name of protecting “privacy”—which might actually create barriers to entry). It’s never been the case that a firm has to generate its own inputs for every product it produces — and there’s no reason to suggest search or advertising is any different.

Additionally, to defend a claim of monopolization, it is generally required to show that the alleged monopolist enjoys protection from competition through barriers to entry. In Google’s case, the barriers alleged were illusory. Bing and other recent entrants in the general search business have enjoyed success precisely because they were able to obtain the inputs (in this case, data) necessary to develop competitive offerings.

Meanwhile unanticipated competitors like Facebook, Amazon, Twitter and others continue to knock at Google’s metaphorical door, all of them entering into competition with Google using data sourced from creative sources, and all of them potentially besting Google in the process. Consider, for example, Amazon’s recent move into the targeted advertising market, competing with Google to place ads on websites across the Internet, but with the considerable advantage of being able to target ads based on searches, or purchases, a user has made on Amazon—the world’s largest product search engine.

Now that the investigation has concluded, we come away with two major findings. First, the online information market is dynamic, and it is a fool’s errand to identify the power or significance of any player in these markets based on data available today — data that is already out of date between the time it is collected and the time it is analyzed.

Second, each development in the market – whether offered by Google or its competitors and whether facilitated by technological change or shifting consumer preferences – has presented different, novel and shifting opportunities and challenges for companies interested in attracting eyeballs, selling ad space and data, earning revenue and obtaining market share. To say that Google dominates “search” or “online advertising” missed the mark precisely because there was simply nothing especially antitrust-relevant about either search or online advertising. Because of their own unique products, innovations, data sources, business models, entrepreneurship and organizations, all of these companies have challenged and will continue to challenge the dominant company — and the dominant paradigm — in a shifting and evolving range of markets.

It would be churlish not to give credit where credit is due—and credit is due the FTC. I continue to think the investigation should have ended before it began, of course, but the FTC is to be commended for reaching this result amidst an overwhelming barrage of pressure to “do something.”

But there are others in this sadly politicized mess for whom neither the facts nor the FTC’s extensive investigation process (nor the finer points of antitrust law) are enough. Like my four-year-old daughter, they just “want what they want,” and they will stamp their feet until they get it.

While competitors will be competitors—using the regulatory system to accomplish what they can’t in the market—they do a great disservice to the very customers they purport to be protecting in doing so. As Milton Friedman famously said, in decrying “The Business Community’s Suicidal Impulse“:

As a believer in the pursuit of self-interest in a competitive capitalist system, I can’t blame a businessman who goes to Washington and tries to get special privileges for his company.… Blame the rest of us for being so foolish as to let him get away with it.

I do blame businessmen when, in their political activities, individual businessmen and their organizations take positions that are not in their own self-interest and that have the effect of undermining support for free private enterprise. In that respect, businessmen tend to be schizophrenic. When it comes to their own businesses, they look a long time ahead, thinking of what the business is going to be like 5 to 10 years from now. But when they get into the public sphere and start going into the problems of politics, they tend to be very shortsighted.

Ironically, Friedman was writing about the antitrust persecution of Microsoft by its rivals back in 1999:

Is it really in the self-interest of Silicon Valley to set the government on Microsoft? Your industry, the computer industry, moves so much more rapidly than the legal process, that by the time this suit is over, who knows what the shape of the industry will be.… [Y]ou will rue the day when you called in the government.

Among Microsoft’s chief tormentors was Gary Reback. He’s spent the last few years beating the drum against Google—but singing from the same song book. Reback recently told the Washington Post, “if a settlement were to be proposed that didn’t include search, the institutional integrity of the FTC would be at issue.” Actually, no it wouldn’t. As a matter of fact, the opposite is true. It’s hard to imagine an agency under more pressure, from more quarters (including the Hill), to bring a case around search. Doing so would at least raise the possibility that it were doing so because of pressure and not the merits of the case. But not doing so in the face of such pressure? That can almost only be a function of institutional integrity.

As another of Google’s most-outspoken critics, Tom Barnett, noted:

[The FTC has] really put [itself] in the position where they are better positioned now than any other agency in the U.S. is likely to be in the immediate future to address these issues. I would encourage them to take the issues as seriously as they can. To the extent that they concur that Google has violated the law, there are very good reasons to try to address the concerns as quickly as possible.

As Barnett acknowledges, there is no question that the FTC investigated these issues more fully than anyone. The agency’s institutional culture and its committed personnel, together with political pressure, media publicity and endless competitor entreaties, virtually ensured that the FTC took the issues “as seriously as they [could]” – in fact, as seriously as anyone else in the world. There is simply no reasonable way to criticize the FTC for being insufficiently thorough in its investigation and conclusions.

Nor is there a basis for claiming that the FTC is “standing in the way” of the courts’ ability to review the issue, as Scott Cleland contends in an op-ed in the Hill. Frankly, this is absurd. Google’s competitors have spent millions pressuring the FTC to bring a case. But the FTC isn’t remotely the only path to the courts. As Commissioner Rosch admonished,

They can darn well bring [a case] as a private antitrust action if they think their ox is being gored instead of free-riding on the government to achieve the same result.

Competitors have already beaten a path to the DOJ’s door, and investigations are still pending in the EU, Argentina, several US states, and elsewhere. That the agency that has leveled the fullest and best-informed investigation has concluded that there is no “there” there should give these authorities pause, but, sadly for consumers who would benefit from an end to competitors’ rent seeking, nothing the FTC has done actually prevents courts or other regulators from having a crack at Google.

The case against Google has received more attention from the FTC than the merits of the case ever warranted. It is time for Google’s critics and competitors to move on.

[Crossposted at Forbes.com]

Posted in antitrust, federal trade commission, google, Internet search, settlements, technology | Tagged: , , , , , , , | Leave a Comment »

Off to the FTC and a Blogging Hiatus from TOTM

Posted by Josh Wright on January 2, 2013

As Geoff mentioned, I was fortunate enough to be confirmed by the Senate yesterday as Commissioner of the Federal Trade Commission.  I’m excited about the opportunity and very much looking forward to getting started in the new job.   Unfortunately, this means I will be taking a hiatus from blogging here at TOTM for awhile.  I’ve greatly enjoyed blogging here and exchanging ideas with co-bloggers and our commenters and will looking forward to coming back when I return to the academy.

Happy New Year!

Posted in federal trade commission | 4 Comments »

Federalist Society and AALS talks this week

Posted by Geoffrey Manne on January 2, 2013

I’ll be headed to New Orleans tomorrow to participate in the Federalist Society Faculty Conference and the AALS Annual Meeting.

For those attending and interested, I’ll be speaking at the Fed Soc on privacy and antitrust, and at AALS on Google and antitrust.  Details below.  I hope to see you there!

Federalist Society:

Seven-Minute Presentations of Works in Progress – Part I
Friday, January 4, 5:00 p.m. – 6:00 p.m.
Location: Bacchus Room, Wyndham Riverfront Hotel

  • Prof. Geoffrey Manne, Lewis & Clark School of Law, “Is There a Place for Privacy in Antitrust?”
  • Prof. Zvi Rosen, New York University School of Law, “Discharging Fiduciary Debts in Bankruptcy”
  • Prof. Erin Sheley, George Washington University School of Law, “The Body, the Self, and the Legal Account of Harm”
  • Prof. Scott Shepard, John Marshall Law School, “A Negative Externality by Any Other Name: Using Emissions Caps as Models for Constraining Dead-Weight Costs of Regulation”
  • Moderator: Prof. David Olson, Boston College Law School

AALS:

Google and Antitrust
Saturday, January 5, 10:30 a.m. – 12:15 p.m.
Location: Newberry, Third Floor, Hilton New Orleans Riverside

  • Moderator: Michael A. Carrier, Rutgers School of Law – Camden
  • Marina L. Lao, Seton Hall University School of Law
  • Geoffrey A. Manne, Lewis & Clark Law School
  • Frank A. Pasquale, Seton Hall University School of Law
  • Mark R. Patterson, Fordham University School of Law
  • Pamela Samuelson, University of California, Berkeley, School of Law

Posted in administrative, announcements, antitrust, google, privacy | Tagged: , | Leave a Comment »

Congratulations to FTC Commissioner Josh Wright

Posted by Geoffrey Manne on January 2, 2013

All of us here at TOTM are thrilled to announce that the Senate yesterday confirmed Josh Wright to be the next Commissioner of the Federal Trade Commission.

As I wrote upon Josh’s nomination:

Josh is widely regarded as the top antitrust scholar of his generation. He is the author of more than 50 scholarly articles and book chapters, including several that were released as ICLE White Papers. He is a co-author of the most widely-used antitrust casebook, and co-editor of three books on topics ranging from Competition Policy and Intellectual Property Law to the Intellectual History of Law and Economics. And he is the most prolific blogger on the preeminent antitrust and corporate law and economics blog, Truth on the Market.

The FTC will benefit enormously from Josh’s expertise and his error cost approach to antitrust and consumer protection law will be a tremendous asset to the Commission — particularly as it delves further into the regulation of data and privacy . His work is rigorous, empirically grounded, and ever-mindful of the complexities of both business and regulation.

I am honored to have co-authored several articles with Josh, and I have learned an incredible amount about antitrust law and economics from him. The Commissioners and staff at the FTC will surely similarly profit from his time there.

We’ll miss him around these parts, but presumably he’ll provide us with plenty of good fodder for the blog.

Posted in administrative, announcements, antitrust, federal trade commission | Tagged: , , | 2 Comments »

Encouragement vs. Incentive: Some Food for Thought in the Copyright Debates

Posted by Adam Mossoff on December 27, 2012

Given the kerfuffle among libertarians and conservatives in the past month over what is basic copyright policy, my colleague and copyright law expert, Chris Newman, sent me this interesting Google Ngram graph on the use of “encouragement” vs. “incentive.” 

I won’t commit the fallacy of hasty generalization by inferring any conclusions from this single comparison, but it does provide interesting food for thought, especially for anyone claiming that historical uses of “encouragement” mean the exact same thing as “incentive.” 

Encouragement vs. Incentive 

I’ll leave it to full-time copyright scholars like Chris to determine if this data point fits into a bigger explanatory framework on historical copyright policy. As the Coffee Talk lady would say: I’m feeling a little verklempt, and so talk amongst yourselves.

Posted in truth on the market | 1 Comment »

Meese on Bork (and the AALS)

Posted by Thom Lambert on December 22, 2012

William & Mary’s Alan Meese has posted a terrific tribute to Robert Bork, who passed away this week.  Most of the major obituaries, Alan observes, have largely ignored the key role
Bork played in rationalizing antitrust, a body of law that veered sharply off course in the middle of the last century.  Indeed, Bork began his 1978 book, The Antitrust Paradox, by comparing the then-prevailing antitrust regime to the sheriff of a frontier town:  “He did not sift the evidence, distinguish between suspects, and solve crimes, but merely walked the main street and every so often pistol-whipped a few people.”  Bork went on to explain how antitrust, if focused on consumer welfare (which equated with allocative efficiency), could be reconceived in a coherent fashion.

It is difficult to overstate the significance of Bork’s book and his earlier writings on which it was based.  Chastened by Bork’s observations, the Supreme Court began correcting its antitrust mistakes in the mid-1970s.  The trend began with the 1977 Sylvania decision, which overruled a precedent making it per se illegal for manufacturers to restrict the territories in which their dealers could operate.  (Manufacturers seeking to enhance sales of their brand may wish to give dealers exclusive sales territories to protect them against “free-riding” on their demand-enhancing customer services; pre-Sylvania precedent made it hard for manufacturers to do this.)  Sylvania was followed by:

  • Professional Engineers (1978), which helpfully clarified that antitrust’s theretofore unwieldy ”Rule of Reason” must be focused exclusively on competition;
  • Broadcast Music, Inc. (1979), which held that competitors’ price-tampering arrangements that reduce costs and enhance output may be legal;
  • NCAA (1984), which recognized that trade restraints among competitors may be necessary to create new products and services and thereby made it easier for competitors to enter into output-enhancing joint ventures;
  • Khan (1997), which abolished the ludicrous per se rule against maximum resale price maintenance;
  • Trinko (2004), which recognized that some monopoly pricing may aid consumers in the long run (by enhancing the incentive to innovate) and narrowly circumscribed the situations in which a firm has a duty to assist its rivals; and
  • Leegin (2007), which overruled a 96 year-old precedent declaring minimum resale price maintenance–a practice with numerous potential procompetitive benefits–to be per se illegal.

Bork’s fingerprints are all over these decisions.  Alan’s terrific post discusses several of them and provides further detail on Bork’s influence.

And while you’re checking out Alan’s Bork tribute, take a look at his recent post discussing my musings on the AALS hiring cartel.  Alan observes that AALS’s collusive tendencies reach beyond the lateral hiring context.  Who’d have guessed?

Posted in antitrust, cartels, law and economics, legal scholarship, markets, monopolization, regulation, resale price maintenance, Supreme Court | Leave a Comment »

Tears for Tiers: Wyden’s “Data Cap” Restrictions Would Hurt, not Help, Internet Users

Posted by Geoffrey Manne on December 20, 2012

By Geoffrey Manne & Berin Szoka

As Democrats insist that income taxes on the 1% must go up in the name of fairness, one Democratic Senator wants to make sure that the 1% of heaviest Internet users pay the same price as the rest of us. It’s ironic how confused social justice gets when the Internet’s involved.

Senator Ron Wyden is beloved by defenders of Internet freedom, most notably for blocking the Protect IP bill—sister to the more infamous SOPA—in the Senate. He’s widely celebrated as one of the most tech-savvy members of Congress. But his latest bill, the “Data Cap Integrity Act,” is a bizarre, reverse-Robin Hood form of price control for broadband. It should offend those who defend Internet freedom just as much as SOPA did.

Wyden worries that “data caps” will discourage Internet use and allow “Internet providers to extract monopoly rents,” quoting a New York Times editorial from July that stirred up a tempest in a teapot. But his fears are straw men, based on four false premises.

First, US ISPs aren’t “capping” anyone’s broadband; they’re experimenting with usage-based pricing—service tiers. If you want more than the basic tier, your usage isn’t capped: you can always pay more for more bandwidth. But few users will actually exceed that basic tier. For example, Comcast’s basic tier, 300 GB/month, is so generous that 98.5% of users will not exceed it. That’s enough for 130 hours of HD video each month (two full-length movies a day) or between 300 and 1000 hours of standard (compressed) video streaming. Read the rest of this entry »

Posted in antitrust, business, federal communications commission, net neutrality, regulation, technology, telecommunications, television | Tagged: , , , , , , , , | 2 Comments »

Podcast of Debate Between Judges Posner and Michel on the Patent System

Posted by Adam Mossoff on December 20, 2012

You can listen here: http://www.fed-soc.org/publications/detail/is-the-patent-system-working-or-broken-a-discussion-with-judges-posner-and-michel-podcast

Is the Patent System Working or Broken?

A Discussion with Judges Posner and Michel

 Today, people read almost daily reports about the “broken patent system” in newspaper articles, blogs and at social media websites.  Is this true?  On the one hand, the high-tech and biotech industries seem awash in patent litigation, and Congress, regulatory agencies, and courts are considering adopting a variety of reform measures.  On the other hand, patents are securing property rights in technological innovation once imagined only as science fiction — tablet computers, smart phones, genetic testing for cancer, personalized medical treatments for debilitating diseases, and many others — and these technological marvels are now a commonplace feature of our lives.

To discuss these two conflicting stories about whether the patent system promotes or hampers innovation, we will host two distinguished jurists: Paul Michel, former Chief Judge of the Court of Appeals for the Federal Circuit, and Judge Richard Posner of the Court of Appeals for the Seventh Circuit.  Both judges have unparalleled depth in knowledge about patent policy and the working details of the patent system.  This Teleforum brings them together for the first time to discuss their respective views on whether the patent system today is properly securing property rights in new innovation.

Featuring: 

Hon. Paul R. Michel, United States Court of Appeals, Federal Circuit (ret.)

Hon. Richard A. Posner,United States Court of Appeals, Seventh Circuit

Professor Adam Mossoff, George Mason University Law School (Moderator)

Posted in intellectual property, patent, truth on the market | Leave a Comment »

Time for Congress to Cancel the FTC’s Section 5 Antitrust Blank Check

Posted by Geoffrey Manne on December 20, 2012

By Geoffrey Manne and Berin Szoka

A debate is brewing in Congress over whether to allow the Federal Trade Commission to sidestep decades of antitrust case law and economic theory to define, on its own, when competition becomes “unfair.” Unless Congress cancels the FTC’s blank check, uncertainty about the breadth of the agency’s power will chill innovation, especially in the tech sector. And sadly, there’s no reason to believe that such expansive power will serve consumers.

Last month, Senators and Congressmen of both parties sent a flurry of letters to the FTC warning against overstepping the authority Congress granted the agency in 1914 when it enacted Section 5 of the FTC Act. FTC Chairman Jon Leibowitz has long expressed a desire to stake out new antitrust authority under Section 5 over unfair methods of competition that would otherwise be legal under the Sherman and Clayton antitrust acts. He seems to have had Google in mind as a test case.

On Monday, Congressmen John Conyers and Mel Watt, the top two Democrats on the House Judiciary Committee, issued their own letter telling us not to worry about the larger principle at stake. The two insist that “concerns about the use of Section 5 are unfounded” because “[w]ell established legal principles set forth by the Supreme Court provide ample authority for the FTC to address potential competitive concerns in the relevant market, including search.” The second half of that sentence is certainly true: the FTC doesn’t need a “standalone” Section 5 case to protect consumers from real harms to competition. But that doesn’t mean the FTC won’t claim such authority—and, unfortunately, there’s little by way of “established legal principles” stop the agency from overreaching. Read the rest of this entry »

Posted in antitrust, consumer protection, federal trade commission | Tagged: , , | 1 Comment »

Policy Debates On Patents Should Focus On Facts, Not Rhetoric (Forbes.com Op-Ed)

Posted by Adam Mossoff on December 18, 2012

A heavily revised and expanded verison of one of my earlier blog postings was just posted as an op-ed on Forbes.com.  This op-ed addresses how the FTC and DOJ have let themselves become swept up in anti-patent rhetoric, as evidenced by the FTC-DOJ workshop on December 10 that I participated in. Here’s a small taste of the op-ed:

Although the public hears the mantra almost daily that “the patent system is broken,” what we really need is a thorough evaluation of the historic impact the patent system has had on innovation without the negative hype and misinformation that is perpetuated in news headlines or blogs. On December 10, the Federal Trade Commission (FTC) and the Department of Justice (DOJ) held the first of a series of workshops on the patent system and innovation. This first workshop dived into the workings of what some people call “patent assertion entities” (PAE), which are firms that acquire and license patents. The FTC and DOJ, as well as most of the invited participants at the workshop, adopted the “PAE” label as the subject of their critical scrutiny.

 Of course, identifying these firms by their business model of patent licensing denies the patent system naysayers the pejorative rhetorical force of their “PAE” label.  In fact, patent licensing firms have come under attack in newspaper reports, in blogs, and in academic commentary, prompting the FTC and DOJ to consider whether to sanction patent licensing firms for allegedly undermining the innovation made possible by the patent system through some nebulous notion that patent licensing is somehow “anti-competitive.” If anything, this reveals the power of rhetoric.

The truth is that these patent licensing firms maximize value in patented innovation, proving once again Adam Smith’s classic economic insight that specialization and division of labor is key to the success of a commercial economy. There has always existed since the early nineteenth century a secondary market in the sale and purchase of patents, but these firms make use of modern developments in corporate law, finance, and technology to reap new value for inventors or other firms who lack either the knowledge or resources to monetize their innovation assets. In short, patent licensing firms reflect the exact same value-maximizing aggregation and specialization that other firms have long employed in our successful invention economy, such as when 3M or Thomas Edison’s Menlo Park Laboratory aggregated inventors for research and development itself. Patent licensing firms, by better enabling inventors to sell and exchange their ideas, bring the same efficiencies to our invention economy as did the invention of R&D departments over one hundred years ago.

As the blogging master (Instapundit) likes to say: Read the whole thing!

Posted in antitrust, doj, federal trade commission, intellectual property, licensing, patent | Leave a Comment »

Ending Transaction ‘Mission Creep’ at the FCC

Posted by Geoffrey Manne on December 17, 2012

by Larry Downes and Geoffrey A. Manne

Now that the election is over, the Federal Communications Commission is returning to the important but painfully slow business of updating its spectrum management policies for the 21st century. That includes a process the agency started in September to formalize its dangerously unstructured role in reviewing mergers and other large transactions in the communications industry.

This followed growing concern about “mission creep” at the FCC, which, in deals such as those between Comcast and NBCUniversal, AT&T and T-Mobile USA, and Verizon Wireless and SpectrumCo, has repeatedly been caught with its thumb on the scales of what is supposed to be a balance between private markets and what the Communications Act refers to as the “public interest.” Read the rest of this entry »

Posted in federal communications commission, mergers & acquisitions | Tagged: , , , , , , , | Leave a Comment »

Judge Michel and Judge Posner to Discuss the Patent System on Dec. 19 Teleforum

Posted by Adam Mossoff on December 13, 2012

Next Wednesday, I’m moderating a teleforum discussion between Judge Michel and Judge Posner on the patent system.  This teleforum is open to the public, and so anyone can call in.  Here’s the information:

The Federalist Society’s Intellectual Property Practice Group and The George Mason University Law School Center for the Protection of Intellectual Property
Present a Teleforum Call 

Is the Patent System Working or Broken?

A Discussion with Judges Posner and Michel

 Today, people read almost daily reports about the “broken patent system” in newspaper articles, blogs and at social media websites.  Is this true?  On the one hand, the high-tech and biotech industries seem awash in patent litigation, and Congress, regulatory agencies, and courts are considering adopting a variety of reform measures.  On the other hand, patents are securing property rights in technological innovation once imagined only as science fiction — tablet computers, smart phones, genetic testing for cancer, personalized medical treatments for debilitating diseases, and many others — and these technological marvels are now a commonplace feature of our lives.

To discuss these two conflicting stories about whether the patent system promotes or hampers innovation, we will host two distinguished jurists: Paul Michel, former Chief Judge of the Court of Appeals for the Federal Circuit, and Judge Richard Posner of the Court of Appeals for the Seventh Circuit.  Both judges have unparalleled depth in knowledge about patent policy and the working details of the patent system.  This Teleforum brings them together for the first time to discuss their respective views on whether the patent system today is properly securing property rights in new innovation.

Featuring: 

Hon. Paul R. Michel, United States Court of Appeals, Federal Circuit (ret.)

Hon. Richard A. Posner,United States Court of Appeals, Seventh Circuit

Professor Adam Mossoff, George Mason University Law School (Moderator)

Wednesday, Decemeber 19th, 2012

at 2:00 p.m. (ET)

 

Posted in truth on the market | Leave a Comment »

“Google and Antitrust” roundtable at AALS

Posted by Geoffrey Manne on December 13, 2012

I will be participating in a wide-ranging discussion of Google and antitrust issues at the upcoming AALS meeting in New Orleans in January. The Antitrust and Economic Regulation Section of the AALS is hosting the roundtable, organized by Mike Carrier. Mike and I will be joined by Marina Lao, Frank Pasquale, Pam Samuelson, and Mark Patterson, and the discussion will cover Google Book Search as well as the FTC investigations/possible cases against Google based on search and SEPs.

The session will be on Saturday, January 5, from 10:30 to 12:15 in the Hilton New Orleans Riverside (Newberry, Third Floor).

 Google and Antitrust

(Papers to be published in Harvard Journal of Law & Technology Digest)

Moderator:

Michael A. Carrier, Rutgers School of Law – Camden

Speakers:

Marina L. Lao, Seton Hall University School of Law

Geoffrey A. Manne, Lewis & Clark Law School

Frank A. Pasquale, Seton Hall University School of Law

Mark R. Patterson, Fordham University School of Law

Pamela Samuelson, University of California, Berkeley, School of Law

How should the antitrust laws apply to Google? Though the question is simple, the answer implicates an array of far-reaching issues related to how we access information and how we interact with others. This program will feature a distinguished panel engaging in a fastpaced discussion (no PowerPoints!) about these topics.

The panel will explore the Federal Trade Commission’s potential case against Google. It will discuss Google’s position in the search market and potential effects of its conduct on rivals. The panel also will explore the nuances of the Google Book Search settlement. What would – and should – antitrust law do about the project? How should the procompetitive justifications of the increased availability of books be weighed against the effects of the project on rivals?

Antitrust’s role in a 21st-century economy is frequently debated. Google provides a fruitful setting in which to discuss these important issues.

Posted in announcements, antitrust, google | Tagged: , , , , , | Leave a Comment »

The “Common Law Property” Myth in the Libertarian Critique of IP Rights (Part 2)

Posted by Adam Mossoff on December 12, 2012

In Part One, I addressed the argument by some libertarians that so-called “traditional property rights in land” are based in inductive, ground-up “common law court decisions,” but that intellectual property (IP) rights are top-down, artificial statutory entitlements.  Thus, for instance, libertarian law professor, Tom Bell, has written in the University of Illinois Journal of Law, Technology & Policy: “With regard to our tangible rights to person and property, they’re customary and based in common law. Where do the copyrights and patents come from? From the legislative process.” 2006 Univ.Ill. J. L. Tech. & Pol’y 92, 110 (sorry, no link). 

I like Tom, but, as I detailed in Part One, he’s just wrong in his contrast here between the “customary” “common law” court decisions creating property versus the  “legislative process” creating IP rights. This is myth masquerading as history. As all first-year property students learn each year, the foundation of Anglo-American property law is based in a statute, and many property rights in land were created by statutes enacted by Parliament or early American state legislatures.  In fact, the first statute — the Statute Quai Empotores of 1290 — was enacted by Parliament to overrule feudal “custom” enforced by the “common law” decisions at that time, creating by statutory fiat the basic foundational rule of the Anglo-American property right that property rights are alieanable.

As an aside, Geoff Manne asked an excellent question in the comments to Part One: Who cares? My response is that in part it’s important to call out the use of a descriptive historical claim to bootstrap a normative argument. The question is not who cares, but rather the question is why does Tom, Jerry Brito and other libertarians care so much about creating this historical myth, and repeatedly asserting it in their writings and in their presentations? The reason is because this triggers a normative context for many libertarians steeped in Hayek’s theories about the virtues of disaggregated decision-making given dispersed or localized knowledge, as contrasted with the vices of centralized, top-down planning. Thus, by expressly contrasting as an alleged historical fact that property arises from “customary” “common law” court decisions versus the top-down “legislative processes” creating IP, this provides normative traction against IP rights without having to do the heavy lifting of actually proving this as a normative conclusion. Such is the rhetorical value of historical myths generally — they provide normative framings in the guise of a neutral, objective statement of historical fact — and this is why they are a common feature of policy debates, especially in patent law.

What’s even more interesting is that this is not just a historical myth about the source of property rights in land, which were created by both statutes and court decisions, but it’s also an historical myth about IP rights, which are also created by both statutes and court decisions. The institutional and doctrinal interplay between Parliament’s statutes and the application and extension of these statutes by English courts in creating and enforcing property rights in land was repeated in the creation and extension of the modern Anglo-American IP system.  Who would have thunk?

Although there are lots of historical nuances to the actual legal developments, a blog posting is ideal to point out the general institutional and systemic development that occurred with IP rights. It’s often remarked, for instance, that the birth of Anglo-American patent law is in Parliament’s Statute of Monopolies (1624).  Although it’s true (at least in a generalized sense), the actual development of modern patent law — the legal regime that secures a property right in a novel and useful invention — occurred entirely at the hands of the English common law courts in the eighteenth century, who (re)interpreted this statute and extended it far beyond its original text.  (I have extensively detailed this historical development here.)  Albeit with some differences, a similar institutional pattern occurred with Parliament enacting the first modern copyright statute in 1709, the Statute of Anne, which was then interpreted, applied and extended by the English common law courts.

This institutional and doctrinal pattern repeated in America. From the very first enactment of copyright and patent statutes by the states under the Articles of Confederation, and then by Congress enacting the first federal patent and copyright statutes in 1790, courts then interpreted, applied and extended these statutes in common law fashion.  In fact, it is a cliché in patent law that many patent doctrines today were created, not by Congress, but by two judges – Justice Joseph Story and Judge Learned Hand.  Famous patent law historian, Frank Prager, writes that it is “often said that Story was one of the architects of American patent law.”  There’s an entire book published of Judge Learned Hand’s decisions in patent law. That’s how important these two judges have been in creating patent law doctrines.

So, the pattern has been that Congress passes broadly framed statutes, and the federal courts then create doctrines within these statutory frameworks.  In patent law, for instance, courts created the exhaustion doctrine, secondary liability, the experimental use defense, the infringement doctrine of equivalents, and many others.  Beyond this “common law” creation of patent doctrines, courts have further created and defined the actual requirements set forth in the patent statutes for utility, written description, enablement, etc., creating legal phrases and tests that one would search in vain for in the text of the actual patent statutes. Interestingly, Congress sometimes has subsequently codified these judicially created doctrines and sometimes it has left them alone.  Sometimes, Congress even repeals the judicially created tests, as it did in expressly abrogating the judicially created “flash of genius” test in § 103 of the 1952 Patent Act.  All of this goes to show that, just as it’s wrong to say that property rights in land are based solely in custom and common law court decision, it’s equally wrong to say that IP rights are based solely in legislation.

Admittedly, the modern copyright statutes are far more specific and complex than the patent statutes, at least before Congress passed the American Invents Act of 2011 (AIA).  In comparison to the pre-AIA patent statutes, the copyright statutes appear to be excessively complicated with industry and work-specific regimes, such as licensing for cable (§ 111), licensing for satellite transmissions (§ 119), exemptions from liability for libraries (§ 108), and licensing of “phonorecords” (§ 109), among others.  These and other provisions have been cobbled together by repeated amendments and other statutory enactments over the past century or so.  This stands in stark contrast to the invention- and industry-neutral provisions that comprised much of the pre-AIA patent statutes.

So, this is a valid point of differentiation between patents and copyrights, at least as these respective IP rights have developed in the twentieth century.  And there’s certainly a valid argument that complexity in the copyright statutes arising from such attempts to legislate for very specific works and industries increases uncertainties, which in turn unnecessarily increases administration and other transaction costs in the operation of the legal system.

Yet, it bears emphasizing again that, before there arose heavy emphasis on legislation in copyright law, many primary copyright doctrines were in fact first created by courts.  This includes, for instance, fair use and exhaustion doctrines, which were later codified by Congress. Moreover, some very important copyright doctrines remain entirely in the domain of the courts, such as secondary liability. 

The judicially created doctrine of secondary liability in copyright is perhaps the most ironic, if only because it is the use of this doctrine on the Internet against P2P services, like Napster, Aimster, Grokster, and BitTorrent operators, that sends many libertarian IP skeptics and copyleft advocates into paroxysms of outrage about how rent-seeking owners of statutory entitlements are “forcing” companies out of business, shutting down technology and violating the right to liberty on the Internet. But secondary liability is a “customary” “common law” doctrine that developed out of similarly traditional “customary” doctrines in tort law, as further extended by courts to patent and copyright!

As with the historical myth about the origins of property rights in land, the actual facts about the source and nature of IP rights belies the claims by some libertarians that IP rights are congressional “welfare grants” or congressional subsidies for crony corporations. IP rights have developed in the same way as property rights in land with both legislatures and courts creating, repealing, and extending doctrines in an important institutional and doctrinal evolution of these property rights securing technological innovation and creative works.

As I said in Part One, I enjoy a good policy argument about the value of securing property rights in patented innovation or copyrighted works.  I often discuss on panels and in debates how IP rights make possible the private-ordering mechanisms necessary to convert inventions and creative works into real-world innovation and creative products sold to consumers in the marketplace. Economically speaking, as Henry Manne pointed out in a comment to Part One, defining a property right in an asset is what makes possible value-maximizing transactions, and, I would add, morally speaking, it is what secures to the creator of that asset the right to the fruits of his or her productive labors. Thus, I would be happy to debate Tom Bell, Jerry Brito or any other similarly-minded libertarian on these issues in innovation policy, but before we can do so, we must first agree to abandon historical myths and base our normative arguments on actual facts.

Posted in copyright, Hayek, intellectual property, Knowledge Problem, patent, truth on the market | 2 Comments »

Debates on Patent System Should Focus on Facts, Not Rhetoric

Posted by Adam Mossoff on December 10, 2012

The following is an op-ed I wrote last week on behalf of the Innovation Alliance, which represents innovators, patent owners and stakeholders from a diverse range of industries that believe in the critical importance of maintaining a strong patent system that supports innovative enterprises of all sizes.  Unfortunately, the op-ed not find a home in a media outlet.  So, I’m reproducing it here in Truth on the Market so that it at least has some life in the policy debates, if only on the Internet.

Debates on Patent System Should Focus on Facts, Not Rhetoric

When the Coca-Cola Company decided to release New Coke in 1985, it failed to heed the classic adage, “if it ain’t broke, don’t fix it.” Coke abandoned a product that had produced exceptional results for it, and much happiness for consumers, only to revert back after the mistake was made and millions of dollars were needlessly wasted.  The venerable patent system in the United   States is in danger of succumbing to the same fate.

Our patent system has long ensured that inventors are rewarded for their productive labors, and that investors and firms are rewarded for their labors in taking inventions from the laboratory or garage and converting them into innovative products and services used by consumers. The patent system has thus provided the basic framework for a culture of scientific advancement and commercial innovation that cuts across all industries, making our “invention economy” the most formidable in the world. We led the world in the industrial revolution in the nineteenth century, and we lead the world again in computer and biotech revolutions. Today, we all use patented products and services imagined as only science fiction just twenty years ago.

Yet some people are calling for substantial changes to the U.S. patent system. That would be a grave mistake.

Although the public hears the mantra almost daily that “the patent system is broken,” what we really need is a thorough evaluation of the historic impact the patent system has had on innovation without the negative hype and misinformation that is perpetuated in news headlines or blogs. On December 10, the Federal Trade Commission (FTC) and the Department of Justice (DOJ) will host a workshop that will dive into the workings of what some are calling “patent assertion entities” (PAE), which are firms that acquire and license patents. The FTC and DOJ, as well as most of the invited participants at the workshop, have adopted the “PAE” label as the subject of their critical scrutiny.

The truth is that these firms maximize value in patented innovation, proving again Adam Smith’s classic economic insight that the division of labor is key to the success of a commercial economy. The firms that acquire patents from inventors and license these patents in the market reflect the exact same value-maximizing specialization and aggregation that other firms have long employed in our successful invention economy, such as when firms like 3M or Thomas Edison’s Menlo Park Laboratory aggregated inventors for research and development itself. Patent licensing firms, by better enabling inventors to sell and exchange their ideas, bring the same efficiencies to innovation as the division of labor has done in all areas of a flourishing free market.

Of course, identifying these firms by their business model of patent licensing denies the patent system naysayers the pejorative rhetorical force of their “PAE” label. In fact, patent licensing firms have come under attack in newspaper reports, in blogs, and in academic commentary, prompting the FTC and DOJ to consider whether these patent licensing firms are allegedly undermining the innovation made possible by the patent system. If anything, this reveals the power of rhetoric.

It is important not to rush to judgment based on emotionally-charged headlines about patent lawsuits or misleading articles and blog postings that get wrong even basic facts about the patent system. The prudent approach is to research the issues fully. For instance, few people realize that “patent wars” have been occurring since the invention and patenting of the sewing machine in early nineteenth century, and occurred again with the invention of the telephone, the automobile, the radio, the airplane, medical stents, and even disposable diapers. Many of these patent wars were accompanied by the same end-of-days proclamations that we now hear about the “smart phone wars.” Yet, through it all, the patent system has produced innovation, and we all live incredible lives as a result of today’s patented high-tech and medical marvels.

Weakening intellectual property laws due to negative policy rhetoric, hyperbolic internet commentary, and even extensive lobbying by firms who choose to infringe patents because they don’t want to pay the licenses offered to them by patent licensing firms is irresponsible. The FTC/DOJ workshop on December 10 should be an opportunity to reflect on and evaluate the patent system in better understanding how it produces dynamic innovation, not just in products and services, but also in the many innovative business models that arise from patented innovation itself.

Posted in truth on the market | 1 Comment »

The “Common Law Property” Myth in the Libertarian Critique of IP Rights (Part 1)

Posted by Adam Mossoff on December 7, 2012

In libertarian critiques of intellectual property (IP) rights, such as copyrights and patents, it’s common to the hear the claim that “traditional property rights in land” is based in inductive, ground-up “common law court decisions,” but that IP rights are top-down, artificial statutory entitlements.  Thus, the argument goes, property rights in land are rooted solely in court decisions arising from facts of the world, but IP rights are state-created monopolies that mostly serve the interests of rent-seeking special interests exploiting access to unbounded legislatures.

 For those who may think that this is an improper characterization of this widespread claim about IP rights need only have attended the “Copyright Unbalanced” event at the Cato Institute on December 6, in which copyright was attacked in precisely these terms.

This oft-made contrast by libertarians between so-called “common law property in land” versus “statutory IP” is a myth that has no basis in the reality of how common law property rights in land evolved in England and then in the United States of America. 

This is important, because history is very informative and provides importance evidence for inducing principles in both ethical and political theory, but when myth is passed off as history, these ersatz “historical” claims undermine clear thinking and perpetuate falsehoods.  This is especially important when these mythical claims are advanced in the policy debates, as this misleads commentators and decision-makers about the true nature of our property rights and the true foundations of our political and legal institutions. 

With respect to IP rights as property rights, I and others have been explaining in our academic law journal articles for years that these “historical” claims are a myth, but we have focused only on the IP side of the myth.  For instance, I have shown with my substantial research into primary historical documents how the history of patents evolved under the guiding hand of natural rights philosophy, both in America and in England.  I have also explained, contrary to claims by Tom Bell, Jerry Brito and other libertarians, how John Locke expressly endorsed copyright in his writings and positively referred to “inventions and arts” in his natural rights justification of property in the Second Treatise (you can read my article here). Professor Justin Hughes has uncovered similar historical evidence on the side of copyright law (you can read his article here).

But I have never addressed why the libertarian argument advanced by Tom Bell, Jerry Brito and others is entirely a myth even in its claims about the historical legal development of common-law property rights in land (at least not in public, as I have done this in private email exchanges.)

First and foremost, I know it’s a myth because I teach the Anglo-American evolution of property rights in land every year in my Property class (what we call the 1L year in law school).  But I’m not unusual, as this information is in all of the Property textbooks used by property professors in every law school.  As all law students learn each year in their Property classes, the foundation of the “fee simple” in land is not court decisions, but rather a statute passed by Parliament: the Statute Quai Emptores of 1290.  This statute is explicitly identified in all Property textbooks as the foundation of the entire Anglo-American property system in land; as the most famous and widely used property textbook states, “By the end of the thirteenth century, Quia Emptores settled that the fee was freely alieneable,” and thus it explains that it was this statute that first established that “the [originally feudal] relationship between tenant and lord was basically an economic one.”

What followed in the ensuing decades and centuries were more and more statutes enacted by Parliament, further defining the scope and boundaries of many of the rights that constitute property rights in land. Here are just a few of the prominent statutes (there are far too many to effectively list all of them in a blog posting):

 Statute of Gloucester (1278) (creating rights against life estate owners by the owner of the follow-on future interest or broader estate)

 Statute of Uses (1535) (creating many future interests in land)

 Statute of Wills (1540) (securing and creating conveyance rights in land in wills)

 Tenures Abolition Act (1660) (eliminating feudal services associated with property rights in land)

Of course, the common law courts extended and applied these statutes, and developed in classic common-law fashion more legal doctrines that defined and further secured property rights in land, but it is simply an historical myth that common law property rights in land were entirely fashioned by courts, contrary to the legislatively created IP rights in patents and copyrights.  (In fact, the English common law system was heavily influenced by the Roman Law and the natural law philosophers working within the Roman Law, and of course all property rights in Roman Law were based in statutes as well.)

This same pattern in the creation and enforcement of property rights in land continued in the early American Republic. For example, early American state legislatures enacted statutes defining and securing the rights of adverse possessors, creating title recordation requirements, defining and securing property conveyance rights, defining and securing wills and the creation of future interests in land, as well as adopting statutes eliminating English common law property rights, such as the fee tail, among many others.  This pattern has continued today; for instance, most states have adopted statutes eliminating the famous property doctrine of the Rule Against Perpetuities (creating much happiness among property lawyers and law students alike), replacing it with a doctrine that goes by the acronym of USRAP (Uniform Statutory Rule Against Perpetuities). Of course, these statutes have all been interpreted, applied and extended in common law fashion by American state courts in the same way that the English common law courts did so with Parliament’s statutes. 

In short, the libertarians advancing the false distinction between “common law property in land” versus “statutory IP rights” are misstating what it means when we all say that the Anglo-American property system is rooted in the “common law.”  In the technical sense of this term, the Anglo-American property system is a common law system insofar as courts have developed the law and the rationale for their decisions without having to validate these decisions by reference to a particular statute.  This is in contrast to the “civil law” system in Europe, in which all judicial decisions must ultimately refer back to a statute as the validating source of the judicial decision itself. But to say that the Anglo-American property system is a “common law system” does not mean, of course, that there weren’t statutes that were interpreted, applied and extended by courts, and as a straightforward historical fact there were many statutes enacted by Parliament that defined the foundational rights in Anglo-American property law.  The fact that statutes weren’t mandated by the Anglo-American legal system as an institutional requirement for valid court decisions does not mean that statutes did not play a substantial historical role in the creation and enforcement of property rights in land.

In sum, it’s a complete myth for libertarians to argue that IP rights are “different” from property rights in land because property rights in land developed in “common law” as opposed to “statutory” IP rights.  But it’s even worse than a myth, because this is not a false claim made in the ivory tower in a dispute between academic historians. Rather, this false historical claim is asserted in the policy debates today to advance an anti-IP agenda. Thus, it’s important to call out this misleading historical myth, as it’s being used to leverage misleading attacks on copyright and patents.  I don’t mind engaging in bracing public policy debates about whether IP rights are right or wrong — I love these debates, especially with people who share my own commitment to free market principles — but let’s at least get the basic historical facts correct in these debates.  These are facts that are not in dispute and are well known, including even to the libertarians who survived their 1L Property classes in law school and are now speaking on these issues in the academy and in think tanks.

(In my next blog posting on this topic, I’ll address how there was the exact same interplay between statutes and common law decision-making in the courts in the development of patent and copyright law.)

UPDATE: For Part 2, see here.

UPDATE: I made a few, minor copy-edits to this posting.

Posted in truth on the market | 10 Comments »

Prominent Professors, Deans and Former Government Officials Support Josh Wright’s Nomination to FTC

Posted by Adam Mossoff on December 3, 2012

Today, thirty-one prominent deans, professors, and former government officials who specialize in law and economics and antitrust submitted a letter to the Senate Commerce Committee supporting Josh Wright‘s nomination to be a Commissioner at the Federal Trade Commission.

The letter, which is addressed to Chairman John D. Rockefeller IV and Ranking Member Kay Bailey Hutchison of the United States Senate Committee on Commerce, Science and Transportation, strongly urges confirmation of Josh, praising him for his knoweldge and his many accomplishments.  Here’s just a small snippet:

As a young professor, Josh has a well-deserved reputation for producing rigorous, high-quality scholarship that explores important issues in competition and consumer protection policy.  His scholarly work reflects that rare professor who possesses impeccable academic and intellectual integrity in combination with thoroughgoing knowledge in economic theory, econometric and empirical skill, and knowledge of relevant legal institutions. The rigor of his scholarly work is second to none, because it is truly bottom-up, data-driven in its conclusions. As a result, his scholarly output at this early stage in his academic career, in terms of its quantity, quality, and impact, is unsurpassed within his field.

. . . .

As a result of his rigorous and scrupulous analysis of data according to well-established empirical and economic methodologies, Professor Wright is widely regarded as a top antitrust law scholar of his generation, and his scholarly efforts have had a significant impact in the academic and public policy debates.  Top antitrust and law and economics scholars, moreover, consistently cite his scholarship, and Professor Herbert Hovenkamp, the author of the leading antitrust treatise, has described Josh as a “top scholar of competition policy and intellectual property.”

I can attest that this is all well-deserved praise, as I have learned much from Josh in the years that we have been colleagues at George Mason.  I will be very sorry to lose him as a colleague, but I can think of no other better person for this position.  I wish him all the luck in his confirmation hearing tomorrow, but he doesn’t need it, because as the letter rightly concludes, his is “an easy case for the Senate’s approval of his nomination.”

Read the whole letter here.

Posted in federal trade commission, george mason university school of law | Comments Off

The Broken Reporting Causing the “Broken Patent System” Hokum

Posted by Adam Mossoff on December 3, 2012

It’s almost impossible to read an article or blog posting today about patents that doesn’t complain that “the patent system is broken.”  It’s especially prevalent in reports on high-tech patents, software patents, or the “smart phone wars.”  (I’m not hyperlinking here, because there’s just too many examples to choose between.)  In fact, the din on the increasingly clichéd statement that “the patent system is broken” is really reaching histrionic proportions.  It’s even prompted Patent Commissioner David Kappos to appeal to “those reporting and commenting on the smartphone system patent wars” to “move beyond the flippant rhetoric and instead engage in thoughtful discussion.”

Although it’s tempting to think that Commissioner Kappos is engaging in his own bombastic exclamations in his criticism of “flippant rhetoric,” it’s unfortunately true.  Here’s just one relatively recent example from the venerable New York Times, called “Apple Now Owns the Page Turn,” by Nick Bilton.

In this brief article, Mr. Bilton decries that Apple “now owns the page turn” in ebook readers with its recently issued design patent (D670,713).  Proclaiming that this is proof of “how broken the patent system is,” Mr. Bilton informs his readers that this design patent “gives Apple the exclusive rights to the page turn in an e-reader application.”

No, Mr. Bilton, it does not, and the NY Times should be embarrassed that such ignorant proclamations continue to be published under its masthead, including the blatantly biased and equally ill-informed hit piece on software patents published by the Old Gray Lady last October.

When most people talk about patents, they usually are speaking about a utility patent, which do secure exclusive property rights in new technology and discoveries.  But there is an entirely different type of patent, called a design patent.  Despite legal requirements that superficially sound similar, such as requirements of novelty and nonobviousness, design patents are entirely different from utility patents.

If Mr. Bilton had bothered to do even the minimal amount of research that most college undergraduates do today, say by checking Wikipedia’s entry on design patents, he would have discovered that it is certainly not true that Apple has “exclusive rights to the page turn in an e-reader application.” Despite Wikipedia’s well-deserved reputation for ill-informed entries, it actually has a good, succinct summary of design patents, describing briefly the differences between design patents and utility patents, and it even cites some classic examples from 150 years ago, such as design patents on famous fonts, the design patent on the statue of liberty, etc.

So, if Mr. Bilton had bothered to take five minutes to check Wikipedia before writing his NY Times posting, he would have learned that design patents are not patents on functional technology, but rather secure only non-functional, ornamental designs. For the sake of this vaunted NY Times writer and the many people he has mislead, I’ll repeat the most important word here in the definition: non-functional. Thus, Apple does not own e-book page-turning technology nor does it own the function of turning pages in an e-book reader. What this design patent secures is the novel ornamental design Apple has developed for its particular e-book reader, and it’s limited to exactly this particular ornamental design — no more, no less. For anyone even semi-aware of Steve Jobs and Apple Computer — an innovative person and his company who recognized the fundamental role and value of artistic design in computer technology since 1984’s release of the famous Macintosh computer – it should hardly be surprising that it is protecting its IP rights in these innovative design features.

Instead, Mr. Bilton negligently suggests that Apple could sue other e-book readers for their page turning technology because it now has “exclusive rights to the page turn in an e-reader application,” but this is patently false (pun intended).  And Mr. Bilton is clearly negligent here and his mistake is entirely his fault, because in the second paragraph of his NY Times report, he explicitly identifies Apple’s patent as a “design patent.”  This is significant, because everything he writes in his report after saying “design patent” is 100% wrong by mere dint of this term, because everything he writes after this wrongly assumes that Apple’s patent is a “utility patent.”

(As an aside, this design patent might be invalid, but Mr. Bilton provides no information or facts to make this judgment, because all of his high-handed rhetoric is based on the assumption that it is a utility patent.  Of course, if this was a utility patent, it would be invalid, as ebook readers that change pages have been around for many years, but what of the particular ornamental design of this ebook reader? One will search in vain in Mr. Bilton’s report for any information on this all-important question.)

Admittedly, there is much confusion today about the patent system, and much of this confusion is caused by misleading reports like those written by Mr. Bilton.  Of course, there are some good reporters and bloggers, who are commenting sensibly on the “smart phone wars” and other issues in the public policy debates over patents today.  But, unfortunately, Mr. Bilton represents a far larger cadre of reporters and bloggers who spread confusion and misinformation about the patent system and about the “smart phone war” in particular.

The real problem with this “broken reporting” by Mr. Bilton and his ilk is that it is feeding a growing anti-patent frenzy among commentators, academics, and the public, who seem to think that your smart phones, tablets and other technological marvels just don’t exist because of a so-called “broken patent system” that has stymied software and other high-tech innovation at every turn. I’m glad to see that some people, like Commissioner Kappos, the Honorable Paul Michel, and the Honorable Randall Rader, are starting to push back against this “broken reporting” on the patent system.

Posted in intellectual property, journalism, patent, truth on the market | 3 Comments »

Standard Essential Patents and Antitrust

Posted by Adam Mossoff on December 3, 2012

Last week, I participated in a panel discussion on standard essential patents and antitrust at the Washington Legal Foundation.  The panel was entitled, “Standard Essential Patents: Where do IP Protections End and Antitrust Concerns Begin?”  It was a great panel, and I think everyone did a really good job at avoiding any unnecessary technical jargon in discussing what is a very complex issue.

You can read about the panel in this blog posting by WLF’s Chief Counsel of its Legal Studies Division, Glenn Lammi (who also moderated the panel discussion).

Even better, you can watch the video of the panel here.

Posted in antitrust, federal trade commission, intellectual property, patent, truth on the market | Comments Off

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