Licensing Complementary Patents: “Patent Trolls”, Market Structure, and “Excessive” Royalties

The infamous Blackberry case brought new attention to so-called “patent trolls” and began the general association of trolls with “non-practicing” patent holders. This has had important legal consequences: Namely, patent holders have been denied injunctive relief because they did not practice the patents themselves. In this paper we analyze how patent holders –– both non-practicing and vertically integrated –– choose their royalties depending on the structure of the upstream and downstream markets and the types of licensing agreements available. We show that a vertically integrated firm has an incentive to raise its rivals’ costs and to restrict entry on the downstream market; incentives that do not hold for non-integrated patent holders. An automatic presumption that a non-integrated patent holder will charge higher royalties than a vertically integrated company is therefore unfounded. Whether a company charges “excessive” royalties depends on whether there is scope for hold-up, either because of sunk investments on the part of potential licensees or because of “weak” patents held by the licensor. These factors are orthogonal to whether patent holders are practicing or no

The Benefits and Costs of Online Privacy Legislation

Many people are concerned that information about their private life is more readily available and more easily captured on the Internet as compared to offline technologies. Specific concerns include unwanted email, credit card fraud, identity theft, and harassment. This paper analyzes key issues surrounding the protection of online privacy. It makes three important contributions: First, it provides the most comprehensive assessment to date of the estimated benefits and costs of regulating online privacy. Second, it provides the most comprehensive evaluation of legislation and legislative proposals in the U.S. aimed at protecting online privacy. Finally, it offers some policy prescriptions for the regulation of online privacy and suggests areas for future research. After analyzing the current debate on online privacy and assessing the potential costs and benefits of proposed regulations, our specific recommendations concerning the government's involvement in protecting online privacy include the following: The government should fund research that evaluates the effectiveness of existing privacy legislation before considering new regulations. The government should not generally regulate matters of privacy differently based on whether an issue arises online or offline. The government should not require a Web site to provide notification of its privacy policy because the vast majority of commercial U.S.-based Web sites already do so. The government should distinguish between how it regulates the use and dissemination of highly sensitive information, such as certain health records or Social Security numbers, versus more general information, such as consumer name and purchasing habits. The government should not require companies to provide consumers broad access to the personal information that is collected online for marketing purposes because the benefits do not appear to be significant and the costs could be quite high. The government should make it easier for the public to obtain information on online privacy and the tools available for consumers to protect their own privacy. The message of this paper is not that online privacy should be unregulated, but rather that policy makers should think through their options carefully, weighing the likely costs and benefits of each proposal.

Federalism in Antitrust

Several scholars have suggested that states should play a much more limited role in antitrust enforcement, especially in matters that are national or global in scope. In this paper, we analyze the states' part in the Microsoft case. A case that illustrates the costs of state intervention in antitrust matters that extend beyond state borders. Here, the states' involvement lengthened the lawsuit, complicated the settlement process, and increased both legal uncertainty and litigation costs. These results followed from the states' focus on parochial interests rather than broader concerns for efficiency and equity. We conclude that a state's antitrust enforcement authority should be restricted in matters that extend beyond its borders. After analyzing the motivations for state behavior in federal antitrust, we consider whether restrictions should apply to federal antitrust authorities in cases with international implications. Though a global competition authority could, in principle, be designed to maximize economic well-being, practical and political obstacles appear to rule this option out, at least in the short term. (Revised for the Harvard Journal of Law & Public Policy ,Summer 2003)

Is More Government Regulation Needed to Promote E-commerce?

E-commerce has experienced tremendous growth over the past few years. Nonetheless, senators, privacy watchdog groups, and the Federal Trade Commission have argued that e-commerce is being held back by consumer worries about online privacy and security. Some privacy advocates are calling for additional regulations, specifically new online privacy rules aimed at providing consumers with more information and customer choice. And Congress has tried to answer that call, most recently with a bill introduced by Senator Ernest Hollings. This essay examines the case for more government regulation and argues that the advocates have overstated their case. While some consumers, particularly older Americans and those new to the Internet, are clearly concerned about online privacy and security, these issues do not appear any more urgent for online shopping than offline shopping. Nor do these issues emerge as significant deterrents to e-commerce. Indeed, it is not even clear that any e-commerce has been deterred. Absent evidence of a significant market failure, the case for further government intervention is weak at best.Technology and Industry

Licensing Complementary Patents: “Patent Trollsâ€, Market Structure, and “Excessive†Royalties

The infamous Blackberry case brought new attention to so-called “patent trolls†and began the general association of trolls with “non-practicing†patent holders. This has had important legal consequences: Namely, patent holders have been denied injunctive relief because they did not practice the patents themselves. In this paper we analyze how patent holders –– both non-practicing and vertically integrated –– choose their royalties depending on the structure of the upstream and downstream markets and the types of licensing agreements available. We show that a vertically integrated firm has an incentive to raise its rivals’ costs and to restrict entry on the downstream market; incentives that do not hold for non-integrated patent holders. An automatic presumption that a non-integrated patent holder will charge higher royalties than a vertically integrated company is therefore unfounded. Whether a company charges “excessive†royalties depends on whether there is scope for hold-up, either because of sunk investments on the part of potential licensees or because of “weak†patents held by the licensor. These factors are orthogonal to whether patent holders are practicing or not

An Economic Assessment of UCITA

The Uniform Computer Information Transactions Act (UCITA) is a model contract law developed by the National Conference of Commissioners on Uniform State Laws (NCCUSL). Once adopted by a state, it would provide a distinct uniform contract law for 'computer information' products including computer software, multimedia products, computer databases, and online information. This paper reviews the potential economic benefits and costs of adopting UCITA, and in particular, its implications for consumer transactions. The likely benefits include lower transaction costs and improved contract interpretation. We consider several sources of benefits linked to the coordination of state laws: reduced costs due to reduced inconsistency in statutes, reduced costs of information collection and analysis, reduced costs associated with contract negotiation under uniform law, and reduced costs associated with litigation. By contrast, the potential burdens associated with adopting UCITA appear to be minimal. While some critics argue that state-level statutes allow for more innovation in lawmaking, on close examination, independent action apparently holds little promise. States have had two decades to develop specialized law for software licensed at retail, but have not done so. And in any event, individual states adopting UCITA do retain some flexibility to modify the statute's provisions. Thus, while there is no practical way to quantify the potential benefits and costs of UCITA, we conclude that economic well-being would almost surely be enhanced by its adoption since the costs are likely to be small. The argument for adoption is also buttressed by the lack of compelling alternatives. If states do nothing, both producers and consumers will be forced to cope with the uncertainties associated with ongoing inconsistencies in state-level commercial contract law. If the states develop their own regulations for computer information contracts, the lack of uniformity will create burdens. Moreover, there is no good reason to expect their design to be superior to UCITA.Health and Safety, Technology and Industry, Regulatory Reform

Defining Software Patents: A Research Field Guide

What distinguishes a patent on a software innovation from patents on other kinds of innovations? While the question may appear esoteric at first glance, it is the crucial first step in any empirical study of software patents. The policy debate over software patents, whether they should be allowed at all, what should qualify, and whether they are used to block or encourage innovation, has been raging for quite some time on both sides of the Atlantic. Patent reform has important policy implications because changes to the intellectual property protection system could affect the rate of innovation, especially in rapidly evolving fields such as software. Meaningful contributions to this debate should be rooted in firm empirical analysis, as opposed to individual anecdotes. In this paper, I examine the definitional choices made thus far by the emerging empirical literature on software patenting and explore the implications of those choices. The emphasis here is on how the definition selected can affect the conclusions made. I find that different definitions do lead to datasets with distinct characteristics. While no one definition emerges as clearly "right", some methods appear better than others. Much more empirical research on software patenting is needed to inform intellectual property policy decisions, and that research should begin by justifying the definition chosen.

Regulating the Raters: The Law and Economics of Ratings Firms

Consumers and producers frequently rely on product ratings, such as college rankings, restaurant reviews and bond ratings. While much has been written about the structure of ratings in particular industries, little has been written on the general structure of different ratings industries and whether government intervention is typically needed. This paper begins that inquiry by examining the market structure of different ratings industries, and considering the circumstances under which firms that provide ratings should be regulated. The issue is particularly timely in light of recent calls to rethink the regulation of media ratings and credit ratings. We find that ratings firms in different industries share several common features. For example, most ratings firms operate in highly concentrated markets. Some factors that could make ratings markets more concentrated include economies of scale, benefits from having a single standard, and general agreement on what should be measured. We also find that most ratings firms determine their own testing standards and methods, although some industries have self-governing oversight bodies that offer their own accreditation standards. While the government regulates firm entry for a few ratings industries, this is relatively rare. The vast majority of ratings firms are unregulated. We analyze the question of regulation using an economic framework that focuses on the viability and effectiveness of a proposed policy. Despite the finding that many ratings industries are concentrated, our analysis suggests that market forces generally appear to be an effective mechanism for providing consumers and producers with useful ratings. In most cases, such markets do not require government intervention. Moreover, in industries characterized by rapid technological change the government is likely to do more harm than good by intervening. As an alternative to government regulation, voluntary industry oversight bodies may be effective in improving communication between the parties and in improving transparency in rating procedures.

Incentive Effects from Different Approaches to Holdup Mitigation Surrounding Patent Remedies and Standard-Setting Organizations

Debates about patent policy often focus on the potential for the threat of a court-imposed remedy for patent infringement to cause manufacturing entities and others to suffer patent holdup, especially when standardized industries are involved. This article uses lessons from the broader economics and political science literatures on holdup to explore various approaches to setting remedies for patent infringement—namely injunctions and money damages in the form of lost profits or reasonable royalties—with an eye towards the nature and extent of various forms of holdup they each might generate. In so doing, the article contrasts various narrower sub-categories of the broad holdup problem, including patent holdup, reverse patent holdup, and government holdup. The article elucidates a number of existing legal institutions and organizations that significantly mitigate the threat of patent holdup, including particular doctrines in the law of patent remedies and particular private ordering arrangements such as Standard Setting Organizations (SSOs). It also highlights some of the unfortunate unintended consequences of currently popular suggestions for mitigating patent holdup. It then explores the economic incentives driving the actions by both patent holder and licensee to show different categories of holdup risk they create. It closes by introducing a suggested framework for courts and administrative agencies to use to directly target the identified categories of holdup risk, and thereby limit harmful side effects