Vertical Mergers and the MFN Thicket in Television

Increasingly, cable and satellite TV services (known as “MVPDs”) seek to acquire upstream programming creators, as illustrated by AT&T’s recent merger with Time-Warner. At the same time, the pay-TV industry is rife with “most-favored nation” (MFN) agreements, which can sharply constrict the competitive process. The most problematic variety, so-called “unconditional” MFNs, raise serious antitrust concerns, as they may forestall effective entry by new streaming-based platforms; penalize pro-competitive deviations from the status quo; and facilitate de facto coordination among integrated MVPDs.While vertical mergers in the industry have received significant antitrust attention, the MFN concerns are interrelated. Problematic MFNs may naturally induce a double marginalization problem, even if the parties are otherwise capable of contracting around it. This creates a strong motivation for integration, but it also raises a question as to whether a merger is the only way to avoid double marginalization. Further, MFNs might compel a problematic form of reciprocal dealing that generates de facto price fixing between integrated rivals. Consequently, the industry’s trend toward integration may trigger other kinds of anti-competitive conduct

Tying, Exclusivity, and Standard-Essential Patents

When a technological standard is adopted, implementers must pay to license all “standard-essential patents” (SEPs)—those patents covering core features of the standard—although the particular price terms usually cannot be negotiated before adoption. To allay implementers’ fear of being “held up,” SEP owners usually make commitments to offer licenses on “fair, reasonable, and nondiscriminatory” (FRAND) terms. Among other things, this acts as a contractual price control for SEP licenses, albeit an imprecise one that is subject to judicial interpretation. Aside from licenses, an SEP holder may further supply an important “collateral input”—one that is not subject to the FRAND pledge, but which implementers nevertheless require in order to market a viable product, such as a physical component. The SEP holder might tie its SEP rights to the collateral input. It might also engage in exclusive dealing or related practices, such as a “loyalty discounting” arrangement that imposes larger royalties on implementers who buy the input from competing providers. Importantly, FRAND pledges create a distinct impetus for tying and exclusive dealing: to circumvent the price control on licenses by diverting the desired markup to the collateral input. The result may be to foreclose competitors’ input sales. Such restraints have received little attention in the FRAND literature, but they are an emerging concern for innovation and competition policy. They have recently been attacked in two high-profile complaints filed against Qualcomm: one by the Federal Trade Commission and the other by Apple. Against this backdrop, this Article provides a legal and economic evaluation of tying and exclusive dealing arrangements in FRAND licensing. Such practices may act to undermine the FRAND price control, potentially violating the SEP holder’s commitment. The case for antitrust intervention is harder to make, but in principle the arrangement could act to exclude actual or potential competition in the collateral input market, bringing it within the scope of antitrust law. Several policy recommendations for how courts and standard setting organizations might address these tying and exclusivity arrangements are offered at the end of this Articl

Demystifying Patent Holdup

Patent holdup can arise when circumstances enable a patent owner to extract a larger royalty ex post than it could have obtained in an arms length transaction ex ante. While the concept of patent holdup is familiar to scholars and practitioners—particularly in the context of standard-essential patent (SEP) disputes—the economic details are frequently misunderstood. For example, the popular assumption that switching costs (those required to switch from the infringing technology to an alternative) necessarily contribute to holdup is false in general, and will tend to overstate the potential for extracting excessive royalties. On the other hand, some commentaries mistakenly presume that large fixed costs are an essential ingredient of patent holdup, which understates the scope of the problem. In this Article, we clarify and distinguish the most basic economic factors that contribute to patent holdup. This casts light on various points of confusion arising in many commentaries on the subject. Path dependence—which can act to inflate the value of a technology simply because it was adopted first—is a useful concept for understanding the problem. In particular, patent holdup can be viewed as opportunistic exploitation of path dependence effects serving to inflate the value of a patented technology (relative to the alternatives) after it is adopted. This clarifies that factors contributing to holdup are not static, but rather consist in changes in economic circumstances over time. By breaking down the problem into its most basic parts, our analysis provides a useful blueprint for applying patent holdup theory in complex cases

Burden of Production in Merger Cases Litigating Divestiture Fixes: Amicus Brief

In this amicus brief to the D.C. District Court judge, Amy Berman Jackson, in the U.S. v Assa Abloy, we explain the legal and policy rationales for courts to place the burden of on the merging parties to produce sufficient evidence that the divestiture will preserve competition to rebut the anticompetitive structural presumption based on the market shares of the unremedied merger that was reported to the agencies in the Hart-Scott-Rodino filing

Post-Grant Adjudication of Drug Patents: Agency and/or Court?

The America Invents Act of 2011 (AIA) created a robust administrative system-the Patent Trial and Appeal Board (PTAB)-that provides a route for challenging the validity of granted patents outside of district courts. Congress determined that administrative adjudication of the validity of initial patent grants could be cheaper and more scientifically accurate than district court adjudication of such validity. For private economic value per patent, few areas of technology can match the biopharmaceutical industry. This is particularly true for small-molecule drugs. A billion-dollar drug monopoly may be protected from competition by a relatively small number of patents. Accordingly, the social cost of invalid patents-and, by extension, the potential benefit of PTAB review-is particularly acute for small molecule drugs. Conversely, if the PTAB is overly assertive and improperly targets high-quality patents, we may observe problematic reductions in innovation incentives. Thus, empirical research on how PTAB review is functioning in the area of drug patents is important. To investigate PTAB review of drug patents empirically, this Article uses several novel datasets, which are made publicly available, to study the respective roles of the PTAB and the district courts. Our empirical findings indicate that the PTAB\u27s role in adjudicating small molecule patents has been substantially more modest than for other types of patents. Moreover, there is little evidence that the PTAB targets categories of small-molecule patents that are generally considered high quality. There is also no evidence that the PTAB targets small-molecule patents held by small entities. However, PTAB challenges may not differentiate as finely among different categories of patents as district court challenges. The Article concludes by discussing legal reforms policymakers could implement if they were interested in encouraging a more active role for the PTAB in policing the validity of small-molecule drug patents. The case for these reforms is bolstered by data showing that the PTAB is used more frequently for biologics patents, where litigation currently operates differently than for small molecule drugs. The Article also discusses how ex post determination of drug patent validity at the PTAB could be structured in comparison to more rigorous ex ante patent application examination

Post-Grant Adjudication of Drug Patents: Agency and/or Court?

The America Invents Act of 2011 (AIA) created a robust administrative system—the Patent Trial and Appeal Board (PTAB)—that provides a route for challenging the validity of granted patents outside of district courts. Congress determined that administrative adjudication of the validity of initial patent grants could be cheaper and more scientifically accurate than district court adjudication of such validity. For private economic value per patent, few areas of technology can match the biopharmaceutical industry. This is particularly true for small-molecule drugs. A billion-dollar drug monopoly may be protected from competition by a relatively small number of patents. Accordingly, the social cost of invalid patents—and, by extension, the potential benefit of PTAB review—is particularly acute for small molecule drugs. Conversely, if the PTAB is overly assertive and improperly targets high-quality patents, we may observe problematic reductions in innovation incentives. Thus, empirical research on how PTAB review is functioning in the area of drug patents is important. To investigate PTAB review of drug patents empirically, this Article uses several novel datasets, which are made publicly available, to study the respective roles of the PTAB and the district courts. Our empirical findings indicate that the PTAB’s role in adjudicating small-molecule patents has been substantially more modest than for other types of patents. Moreover, there is little evidence that the PTAB targets categories of small-molecule patents hat are generally considered high quality. There is also no evidence that the PTAB targets small-molecule patents held by small entities. However, PTAB challenges may not differentiate as finely among different categories of patents as district court challenges. The Article concludes by discussing legal reforms policymakers could implement if they were interested in encouraging a more active role for the PTAB in policing the validity of small-molecule drug patents. The case for these reforms is bolstered by data showing that the PTAB is used more frequently for biologics patents, where litigation currently operates differently than for small molecule drugs. The Article also discusses how ex post determination of drug patent validity at the PTAB could be structured in comparison to more rigorous ex ante patent application examination

Preserving the Royalty-Free Standards Ecosystem

It has long been recognized in Europe and elsewhere that standards-development organizations (SDOs) may adopt policies that require their participants to license patents essential to the SDO’s standards (standards-essential patents or SEPs) to manufacturers of standardized products (“implementers”) on a royalty-free (RF) basis.1 This requirement contrasts with SDO policies that permit SEP holders to charge implementers monetary patent royalties, sometimes on terms that are specified as “fair, reasonable and nondiscriminatory” (FRAND). As demonstrated by two decades of intensive litigation around the world, FRAND royalties have given rise to intractable disputes regarding the manner in which such royalties should be calculated and adjudicated. In contrast, standards distributed on an RF basis are comparatively free from litigation and the attendant transaction costs.2 Accordingly, numerous SDOs around the world have adopted RF licensing policies and many widely adopted standards, including Bluetooth, USB, IPv6, HTTP, HTML and XML, are distributed on an RF basis. This note briefly discusses the commercial considerations surrounding RF standards, the relationship between RF standards and open source software (OSS) and the SDO policy mechanisms – including “universal reciprocity” -- that enable RF licensing to succeed in the marketplace

Ernst Freund as Precursor of the Rational Study of Corporate Law

Gindis, David, Ernst Freund as Precursor of the Rational Study of Corporate Law (October 27, 2017). Journal of Institutional Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2905547, doi: https://dx.doi.org/10.2139/ssrn.2905547The rise of large business corporations in the late 19th century compelled many American observers to admit that the nature of the corporation had yet to be understood. Published in this context, Ernst Freund's little-known The Legal Nature of Corporations (1897) was an original attempt to come to terms with a new legal and economic reality. But it can also be described, to paraphrase Oliver Wendell Holmes, as the earliest example of the rational study of corporate law. The paper shows that Freund had the intuitions of an institutional economist, and engaged in what today would be called comparative institutional analysis. Remarkably, his argument that the corporate form secures property against insider defection and against outsiders anticipated recent work on entity shielding and capital lock-in, and can be read as an early contribution to what today would be called the theory of the firm.Peer reviewe