Distribution, Competition, and Antitrust / IP Law

Archives for February 2012

Patent Tying: Does Price Discrimination Promote Innovation? (Part 2)

In the last post on this topic, I summarized arguments in favor of metered patent tying, as developed in a recent article by Christopher Leslie. There are, of course, arguments against the practice. Leslie summarizes them as follows:

1. The patentee is already rewarded for innovation. The patentee already has the power to charge higher prices for the patented product.

2. Metered tying isn’t calibrated to produce the optimal reward. For most of the 20th century, metered tying constituted (per se) patent misuse, yet firms innovated. The evidence that metered tying is necessary to promote innovation is lacking.

3. Overinvestment. Patent grants produce a “winner-takes-all” reward, which may cause an R&D race by a number of firms. This excessive research activity may be inefficient. Metered tying may exacerbate the problem.

4. Metered tying may not foster innovation. There is an absence of empirical evidence on this point. Additionally, the innovation argument, even if true, has no limiting principle. Why couldn’t companies defend a price-fixing charge on the basis that their activity fostered innovation?

5. Metered tying may reduce innovation in the tied product market. Fewer firms may mean less innovation. A smaller available tied product market provides less incentive for competitors to innovate in that market. The patentee may not have robust incentives to innovate in the tied product market, either. Finally, the tie could force rivals to enter two markets concurrently, impeding competition and innovation.

I’ll finish some thoughts on this in a final post.

Personal Jurisdiction Exercised Over Taiwanese Company

In re: TFT-LCD (Flat Panel) Antitrust Litigation, No. C-10-0117 SI (N.D. Cal. Feb. 1, 2012) (Illston, J.)

Judge Illston refused to dismiss on personal jurisdiction grounds an amended complaint brought by Electrogaph Systems, Inc. and Electrograph Technologies Corp. against Mitsui Taiwan.  The Court found that personal jurisdiction was appropriate because plaintiffs had alleged that Mitsui Taiwan “purposefully directed” conspiratorial activities towards the United States.  The Court noted plaintiffs’ evidence puporting to show that Mitsui Taiwan participated in a price-fixing conspiracy which was aimed, at least in part, at an American company.  It also rejected the arguments that Mitsui Taiwan’s actions did not contribute to the effectiveness of the alleged conspiracy in the U.S. and that Mitsui Taiwan’s communications were merely “inter-affiliate” price discussions that could not support personal jurisdiction.

 

New Feature . . . Antitrust/Competition Case Tracking

Going forward, I intend on a realtime basis to try to track Northern District of California competition law decisions, and provide brief and timely updates.  If all goes well, I may expand this feature to cover state courts in Northern California as well, and perhaps later on even expand further.

Hopefully, these posts will be a useful resource.  The Northern District of California has been an important court for the development of antitrust law, especially in connection with the many high-tech companies and industries found within its jurisdiction.  So providing ongoing coverage of its opinions seems worthwhile.

Although some other publications cover antitrust decisions nationwide, I have not yet seen one focused geographically in this manner.  Also, I plan on covering decisions relating to antitrust cases that do not raise purely antitrust issues — e.g., personal jurisdiction decisions or evidence decisions.  Additionally, I plan to update within a day or two of each decision, which I believe is faster than some other publications’ schedules.

I will omit coverage of cases with which I have some connection.

Patent Tying: Does Price Discrimination Promote Innovation?

Christopher Leslie has a thoughtful article in this month’s issue of the Antitrust Law Journal entitled “Patent Tying, Price Discrimination, and Innovation.”  I thought I would take a post or two to riff on a few of the ideas presented.

Patents, of course, give their owners certain exclusive rights.  These are thought to foster innovation by allowing firms to recoup their R&D costs.  Absent patents, other firms would free ride on innovators’ efforts, which would reduce the incentive to innovate in the first place.

But patents also create inefficiencies.  Patent owners will likely price their patented products at higher price points.  Some consumers, who would have purchased a product at the competitive price (because they value the product more than it costs at the competitive price), will not buy the higher-priced patented product.  Rivals cannot meet this demand because of the patent.  And so the overall economic system suffers a deadweight loss or inefficiency.

Some commentators have proposed that price discrimination in a tied, metered product is appropriate, efficiency-enhancing, and an antitrust defense to a patented product tie.  Here’s the argument: suppose a manufacturer receives a patent on a sophisticated new type of color copier – one that performs functions no other copiers can perform.  The manufacturer could price its product at a premium, but then some customers who would otherwise buy it will be priced out of the market.  So the manufacturer engages in “metered tying” – it will sell the copier at a lower price point, but only to those customers who buy special, non-patented paper from the manufacturer.  The manufacturer charges for the paper by the page, so that customers who use more paper pay more.  This type of metered tying accomplishes price discrimination – those customers who want the patented product more will pay more for it through the metering.  If the metering is perfectly calibrated, the manufacturer may be able to capture – and thereby eliminate – the entire deadweight loss.

This sort of patent tying may (and often does) violate the patent laws and constitute patent misuse.  But the question is, should there be a special rule for antitrust purposes – should price discrimination through metered tying be allowable under the Sherman and Clayton Acts?

Leslie outlines the arguments that have been advanced in favor of such a defense.  Metered tying rewards past innovation and promotes future innovation.  Also, in the view of some, patentees can price discriminate as to patented products themselves, and so should be able to discriminate as to tied products.  In other words, price discrimination as to tied products is an exercise of the power inherent in the patent grant, not an extension of that power.

There are, of course, responses to these arguments.  I’ll summarize those in the next post.

American Express Can’t Enforce Arbitration Agreement Antitrust Class Action Waiver

The Supreme Court’s recent arbitration decisions have not yet killed the antitrust class action.

Yesterday, in a purported class action brought by merchants against American Express, the Second Circuit ruled that American Express could not enforce an arbitration agreement containing a class action waiver provision.  The Second Circuit distinguished the Supreme Court’s recent decisions in Concepcion and Stolt-Nielsen.  (Concepcion, in particular, had bolstered the enforceability of  arbitration provisions, ruling that the Federal Arbitration Act preempts certain state laws.)  The Second Circuit found that those cases did not address the issue of whether a class-action arbitration waiver clause is enforceable even if the plaintiffs are able to demonstrate that the practical effect of enforcement would be to preclude their ability to vindicate their federal statutory rights.

In so ruling, the Second Circuit relied upon evidence that showed that the cost of individually arbitrating the merchants’ claims would be prohibitive.  (The merchants had alleged that when American Express entered the commodity credit card business, American Express forced merchants to pay “excessive” rates equal to American Express’ more attractive business and personal charge cards by tying the credit and charge cards together.)

The decision is In re American Express Merchants’ Litigation, 2d Circuit Feb. 1, 2012.  A petition for certiorari is likely.

Trade Associations and Selling to the Government

I’ll have more to say about trade associations in future posts.  For now, keep in mind that trade associations are collections of competitors that frequently meet together.  Although they often take pro-competitive actions (by improving efficiency, setting industry standards, and communicating with the public about key issues), they also can take actions that prompt antitrust claims (either the conspiracy type, monpolization type, or both).

Trade associations (and everyone else, for that matter) do enjoy an antitrust immunity for government petitioning under the so-called Noerr-Pennington doctrine, which is derived from the First Amendment.  However, what happens when an association’s members sell to the government?

In that case, associations must be extra careful when they lobby.  Some courts have held that Noerr-Pennington doesn’t apply, because selling, not petitioning, is occurring.  To avoid such a result, associations should remind all members that they must act independently in the market when setting prices.  Associations should also focus on broad policy arguments, not pricing, and lobby only relatively senior officials, while staying away from procurement-level personnel and organizations.

 

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