Missing for a while at the U.S. competition agencies has been an appreciation for how competition works in the real world — in particular, discounting the vital part intellectual property plays in sparking new competition and growing the economic pie.
It can be easy to lock in a static view of the economic world. Or misdefine “competition,” as Robert Bork noted in The Antitrust Paradox. Fortunately, things are looking up.
The Department of Justice’s Antitrust Division is now led by someone steeped both in antitrust and innovation. This breath of fresh air is supplied by U.S. Assistant Attorney General Makan Delrahim.
Mr. Delrahim is the first registered patent attorney to lead the Antitrust Division. Perhaps a patent practitioner background should be mandatory for high officials at this part of DOJ and on the Federal Trade Commission.
In speeches since taking the helm at the Antitrust Division, Mr. Delrahim has described a more balanced, real-world-informed approach. “My priority as Assistant Attorney General,” he told a law school audience at the University of Southern California, “is to help foster debate toward a more symmetric balance between the seemingly dueling policy concerns between intellectual property and antitrust law.” His approach centers upon the desirable, constructive phenomenon of “dynamic competition.”
At the University of Southern California Gould School of Law, Mr. Delrahim counseled, “Antitrust enforcers should . . . enforce the antitrust laws in a manner that best promotes dynamic competition for the benefit of consumers.” That is, antitrust officials need to understand — and act with self-restraint — that patents secure private property rights that lie at the heart of what incentivizes invention and commercialization.
“The goal of antitrust law is to protect free market competition and thereby consumers, but if misapplied, it can cause great harm to innovation, the competitive process, and the consumer,” Mr. Delrahim said at USC.
“Patents are a form of property, and the right to exclude is one of the most fundamental bargaining rights a property owner possesses,” the antitrust AAG said. “Rules that deprive a patent holder from exercising this right — whether imposed by an SSO or by a court — undermine the incentive to innovate . . . ”
The free-market back and forth between innovators seeking to exercise their exclusive patent rights and implementers seeking a better price for using the invention (for a royalty) is where the dynamism of the market comes in — dynamism more likely to introduce big technological strides.
And this dynamic market competition derives from the inventor, property rights in one’s patent, and the way they incentivize innovation. “New inventions do not appear out of the ether,” Mr. Delrahim said in the context of standards-setting organizations, “and excessive use of the antitrust laws . . . can overlook and undermine the magnitude of investment and risk inventors undertake for the chance at being included in a standard. Every incremental shift in bargaining leverage toward implementers of new technologies acting in concert can undermine incentives to innovate. I therefore view policy proposals with a one-sided focus on the hold-up issue with great skepticism because they can pose a serious threat to the innovative process.”
In his “New Madison” speech at the University of Pennsylvania, Mr. Delrahim expanded on the fact private property rights in patents and the free market facilitate adoption of new, better technology, which improves consumer welfare. He noted, “[S]tandard setting decisions are intended to be a recognition that a technology is superior to its alternatives. A favorable SSO decision, like a patent itself, is a reward for an innovator’s meritorious contribution whose wide-ranging benefits can ripple throughout the economy, contributing to dynamic competition.”
He continued, pointing out that myopic antitrust standards undermine both the inventive incentive and the patent right of exclusivity for creating a market for the new technology, particularly in the standards arena: “Arguments that inclusion in a standard confers market power that could harm competition typically rest on the unreasonable assumption that the winning technology is no better than its rivals.”
Taken to its logical extension, antitrust thinking from the perspective of static competition wrongly equates the patent owner’s right to exclude with a monopoly of the 19th century trust variety. The effect of such wrongheadedness threatens dynamic, innovation-spurred change in the competitive marketplace — a primary source of consumer benefit.
The static-competition viewpoint also puts property rights and IP value at risk. “In a worrisome trend, some commentators have suggested that the mere act of seeking an injunction order to prevent infringement raises competition concerns, and, with a degree of hubris, litigants have advanced such theories as a basis for antitrust liability,” Mr. Delrahim told his Penn audience. “Taken together, these trends fundamentally transform the nature of patent rights away from their constitutional underpinnings. They convert a property rule into a liability rule, and amount to a troubling de facto compulsory licensing scheme.”
Mr. Delrahim’s “New Madison” approach to the IP-antitrust nexus rebalances antitrust enforcement in a manner that respects, rather than robs, patent property rights. Again, its foundation is a dynamic competition model. “[C]ompetition and consumers both benefit when inventors have full incentives to exploit their patent rights. This requires an assurance to inventors that they need not subsidize their competitors’ business models if they prefer not to do so. The Supreme Court clarified as much in Trinko, explaining that a refusal to deal is not an antitrust violation if the parties have never done business with each other, because ‘there is no duty to aid competitors.’ A de facto compulsory licensing scheme turns this policy underlying the Sherman Act on its head.”
Keynoting the LeadershIP Conference, Mr. Delrahim furthered the thought about dynamic competition. “[A]s enforcers, we have an obligation to ensure that antitrust policy remains sound, so that consumers enjoy the benefits of dynamic competition.” He cited former Assistant Attorney General Rick Rule: “Fear that the patentee would exercise market power and harm consumers of the product overwhelmed recognition of the benefits that dynamism spurred by patents could create for all consumers.” Mr. Rule was referring to DOJ’s correcting its static-competition thinking that prevailed in the 1970s. Mr. Delrahim seeks a similar rebalance and to correct the recent tilt against IP rights in the antitrust context.
In a departure from his predecessor competition officials’ meekness regarding patent rights, Mr. Delrahim is taking this sermon about innovation’s contribution to competition and consumer welfare on the road. At the U.S. embassy in China, in remarks titled “Competition, Intellectual Property, and Economic Prosperity,” the AAG for Antitrust told his Chinese audience, “[M]isapplication of antitrust laws can disrupt free-market bargaining, which is the best method for resolving disputes between innovators and implementers. . . . [P]atents are a form of property, and . . . the fundamental right of intellectual property, namely, the right to exclude, [is] one of the most important bargaining rights a property owner possesses. Rules that deprive a patent owner from exercising this right — or processes that dilute the meaning of this right — can undermine the underlying incentives to innovate. It is a perverse result indeed when the misapplication of the competition laws results in less innovation, less competition, and ultimately, fewer consumer choices. This is why . . . competition law enforcers should exercise humility and enforce the competition laws in a manner that best promotes dynamic competition for the benefit of consumers.” (emphasis added)
There are few explications of the interrelation of patent property rights, antitrust, and dynamic competition more potent than Mr. Delrahim’s succinct quotation here from his China speech.
Thankfully, Mr. Delrahim’s reset of DOJ antitrust advocacy and enforcement is underway. He isn’t the only administration official who’s called for promotion of dynamic competition, based on appropriate latitude for the exercise of patent rights and free-market forces. For example, Maureen Ohlhausen, a commissioner at the Federal Trade Commission, has voiced respect for strong IP rights within an antitrust context: “The essential quality of a patent is the right to exclude. And yet the FTC sees a competition problem when owners of standard-essential patents ask a court to enjoin unlicensed infringers. In doing so, the Commission wrongly heeded calls by technology users that want to pay the smallest possible royalties for their inputs.” This statement aligns with Mr. Delrahim’s stance that “enforcement humility” and “symmetry” are necessary so that market negotiations, contracts, etc. can work.
Ms. Ohlhausen, sounding similar themes, described dynamic competition to one audience: “I believe in the power of competition and free-markets to spur innovation, new business models, economic opportunity and growth. The competitive process not only drives our economy, it provides greater access, choice, quality, and other benefits for consumers.”
She told the American Bar Association’s IP Section, “Without IP rights, imitators could exploit investments in R&D without competition and rapid imitation would reduce the commercial value of innovation and erode incentives to invest, ultimately to the detriment of consumers.” That is, the patent owner’s right to exclude — reaping the fruits of one’s labor — means preserving the emerging market for inventor and patent owner — and protecting their exclusivity through patent enforcement. This is how static competition gets disrupted appropriately, by dynamic competition.
In conclusion, you know it’s a new day when leaders at DOJ and the FTC give patent rights their due respect. To their credit, Mr. Delrahim and Ms. Ohlhausen don’t hesitate to elaborate on how patent exclusivity actually promotes competition and benefits consumers, rather than inhibits and harms them. Now, that’s an antitrust policy worth something.