Distribution, Competition, and Antitrust / IP Law

Archives for March 2012

Potential Patent Licensing “No-No” #5: A Licensor’s Agreement Not to Grant Further Licenses

Yes or No?

This post continues the series of posts regarding patent licensing and competition issues.  The post prior to this one can be found here.

Here, we’re concerned with an exclusive license.  Under an exclusive license, the licensor agrees not to license others, and may agree not to practice the patent itself.

Generally speaking, an exclusive license — exclusive in the sense that no other licensee is granted rights — does not violate the antitrust laws.

However, an exclusive license

may raise antitrust concerns … if the licensees themselves, or the licensor and its licensees, are in a horizontal relationship. Examples of arrangements involving exclusive licensing that may give rise to antitrust concerns include cross-licensing by parties collectively possessing market power (see section 5.5), grantbacks (see section 5.6), and acquisitions of intellectual property rights (see section 5.7).

DOJ/FTC Antitrust IP Guidelines Section 4.1.2.  In short, if the licensor and licensee are actual or potential competitors, and an exclusive license serves to create or enhance the exercise of market power, the license may raise antitrust concerns.

This is a good time to remind everyone about this blog’s obvious general disclaimer: I try to write these posts to be informative and (hopefully) interesting, but they don’t constitute advice.  Every fact pattern is different, and you shouldn’t take action based merely on a blog post.  Of course.

16th Century European Competition Law vs. 21st Century Competition Law in Singapore

Today, it just so happens that we have an awesome (but coincidental) juxtaposition of historical views on competition law.

First, NPR’s “Planet Money” blog presented an episode on 16th Century European law (or quasi-law) on local guild monopolies in the form of an interview with Cambridge Professor Sheilagh Ogilvie.  (As an aside, from little I know, there is some disagreement about whether guilds actually impeded innovation, and if so, to what extent.)

Second (hat tip to the Antitrust & Competition Policy Blog for this one), Singapore’s Competition Commission has released a cartoon video explaining the dangers of price-fixing and how regulators can stop it.

Price Fixing

Singapore Competition Commission

The cartoon is priceless, and is a wonderful counterpoint to the medieval views discussed in the NPR piece.

Competition Law in Novels: David Liss’ The Coffee Trader

The Coffee Trader

Not many novels present competition law and policy as an issue.  There are some, however, and from time-to-time I’ll cover them here.

David Liss’ novel The Coffee Trader is one such novel.  It tells the story of Miguel Lienzo, a Portuguese-Jewish trader living in mid-17th century Amsterdam.  At the time, coffee is just beginning to make its appearance on the European stage.  The novel vividly describes both the initial introduction and impact of coffee (hard to imagine in a world of ubiquitous Starbucks), as well as daily life in Amsterdam and the life of a trader in the then relatively novel financial industry of the Netherlands.

Without giving away too much of the plot, Miguel hatches a sophisticated and complex plan involving the coffee trade.  Much of the novel traces its inception and development.  The story is engrossing, especially, I suspect, for people who are lovers of coffee.  Miguel’s plan involves a sort-of attempt to create a monopoly on coffee distribution in Europe.  One quibble: after having read the book, I’m not certain that a distribution monopoly on a commodity good, as presented in the novel, makes sense or would be economically viable.  But quibbles aside, the book is highly entertaining.

To the right (in the image) I’ve linked to the author’s webpage.

N.D. Cal. Refuses Separate Direct and Indirect Trials in LCD Cases

In re: TFT-LCD (Flat Panel) Antitrust Litigation, No. M 07-1827 SI (May 21, 2012) (Illston, J.)

In a short order and without expressing her reasoning, Judge Illston refused to conduct separate direct purchaser and indirect purchaser trials in the LCD price-fixing class actions.  The cases will instead be tried together in May.  The direct case includes one defendant (Toshiba).  Three defendants (AU Optronics, LG Display, and Toshiba) remain in the indirect class case.

Competition Law, Policy and the Apparent Oversupply of Lawyers in the U.S.

The state bars and the supply of law students

Recently, there’s been a great deal of discussion about the current and future state of the legal profession and the apparent oversupply of lawyers and would-be lawyers. See here and here, for example.

Because this blog focuses on competition-related issues, I thought it would be interesting to look at this debate through the prism of competition law and policy.

The state bars as monopolies

The market for young lawyers has been notoriously bad in recent years and especially in the wake of the financial crash of 2008. To some extent, the marketplace seems to have begun to correct itself, as this recent article reports (LSAT takers have declined rather dramatically over the last year).

The legal profession, however, is not a free market, and one may legitimately wonder whether traditional self-correcting market mechanisms will completely solve the oversupply problem. That is because the profession – like all regulated professions – is a sort of monopoly. Or rather, there are 51 monopolies in the country (D.C. has its own bar). If you want to practice law, you must be admitted to at least one state bar. That typically means you must attend three years of law school and pass an entrance exam. Although no lawyer, of course, has monopoly power, the state bars (sort of, as we’ll see) control the supply of legal services, and through unauthorized-practice-of-law prosecutions enforce the profession’s entry barrier.

But the bars are a curious form of monopoly: they don’t actually control the quantity or supply of lawyers. The bars can only indirectly (and I suspect ineffectively) calibrate lawyer supply by making the bar entrance exams somewhat harder or somewhat easier. But the real entrance point to the profession — law school – is not under the bars’ direct control. And this seems to be causing some significant problems, as explained below. The bars are a bit like Lucille Ball at the candy factory – the candies (students) keep coming faster and faster, and Lucille (the state bar) can’t really do anything about it.  (See the picture above from a famous episode of “I Love Lucy.”)

Are the bar monopolies good or bad?

Monopolies aren’t evil. Every business wants to build a better mousetrap, beat its competitors, and corner the market. If it succeeds through hard work and effort, the law says “kudos.”

The above analysis, however, applies to organic monopolies – those that develop as a result of their own business acumen or skill. In the case of the state bars, the monopolies are hardly organic. Rather, they are imposed by law. Because they are imposed by law, they are, by definition, lawful monopolies. If you didn’t go to law school and/or you didn’t pass the bar, good luck to you in suing your state bar under the antitrust or unfair competition laws – you are most unlikely to prevail.

Because the bars aren’t organic monopolies, we’re left with a policy question: are the bar monopolies good or bad? And when we ask are they good or bad, about whom are we inquiring?

There are at least two basic views about the question of the value of the bar monopolies. First, as argued in this New York Times op-ed piece by Clifford Winston from last October, law schools and bar exams aren’t necessary, and actually lead to supra-competitive pricing and limited access to legal services (especially by lower-income consumers).

Then we have the opposite view of writers like blogger Nathaniel Burney, who wrote this post entitled “The Legal Profession Needs More Bars to Entry, Not Fewer.”  The title of the piece accurately sums up its position.

Competition law perspective

So who has the better argument from the perspective of competition law?

Competition law typically focuses on harm to consumers, so let’s start there. Are state bars good or bad for consumers? The argument in favor of the bars has always been that consumers need to be protected from inferior or negligently-performed legal services. Because (many? most?) consumers cannot easily evaluate the quality of those services, a government agency is necessary to impose minimum thresholds of competence and to act as the profession’s gatekeeper. Many legal services are not equivalent to the production of widgets, so third-party private rating services are simply insufficient to provide adequate quality information to consumers.

There are, of course, numerous responses to this argument. Here are a few: Some (many?) consumers – particularly businesses – are sophisticated and can judge the quality of services themselves. Some more routine services can be competently performed by practitioners who have not spent three years in law school and/or have not passed the bar. Through bar admission requirements, bars only serve to restrict the supply of such services and raise their prices. The bar admission process has little to do with the actual practice of law, so although it imposes a barrier, it does not impose a meaningful one; bar passage does not correlate well with quality of service. And, as Clifford Winston explains, private rating agencies could evaluate and rate lawyers and provide quality information to consumers, much as the Zagat publications rate restaurants.

Let’s also consider the perspective of law students and lawyers (potential entrants and competitors in the legal services marketplace) – even though antitrust law typically doesn’t focus on harm to particular competitors. Everything else being equal, lawyers already admitted to the bar would probably like the entry barrier to be raised (putting aside their desire to find and hire reasonably-priced lawyer-assistants). Higher entry barriers mean tighter supply which should mean (again, everything else being equal) higher prices. Law students, or students applying to law school, have mixed incentives. In the short run, they benefit from lower entry barriers. In the long run, they don’t.

The law school disconnect

Now let’s consider the other marketplace actor we haven’t discussed yet: the law schools. After all, if the bars primarily serve as gatekeepers, one would think that they should actively help or eliminate the oversupply problem (especially if they are controlled by legal service providers, which is almost always the case). Although the bars can toughen or relax admissions requirements, they typically don’t impose numeric admission caps, and they can only indirectly affect the supply of new attorneys. (“Supply adjustments” by the bars through alterations to the entrance exams are also likely not very effective, at least in the short run, because there is a long queue of law students and law school applicants behind every new class of bar exam takers who are unlikely to exit law school or the profession because of a harder bar exam test.)

There are quite a lot of law schools in the U.S. – over 200 accredited ones, and a number of non-accredited ones – and the total number has grown dramatically in the last 30 years. Law schools are relatively cheap to run and administer (no expensive laboratory or scientific equipment is required), and one could cynically view them as profit centers for their universities.

Law schools generally have an economic incentive to keep the supply lines open and the entry barriers relatively low (if the bar exams are too difficult and too many law students don’t pass them, law school recruiting will presumably become more difficult over some length of time). Law schools may have been aided, if not abetted, in their apparent business plan to expand the number of law students by the existence of federally-subsidized student loans, which arguably have helped create an “education bubble” and explain the way-above-average-inflation annual increases in higher education tuition.

(I’m not saying that each and every law school has a plan to expand the number of students – almost certainly, not every school does — but collectively the schools have an incentive to increase the number of students, because each additional law student is “marginally” — as the economists say — profitable (which means in this context that additional law students are very profitable).)

Moreover, until recently at least, there may have been a sort of “lock in” problem familiar to competition law: at least some law students didn’t realize the nature or difficulties of the job market, because the information is relatively difficult to discover. (Some law students claim that the law schools actively misrepresented information about the state of the marketplace. I do not know whether that claim is true or not.)  The students then signed up for expensive three-year legal educations, often incurring large amounts of debt, and became locked-in to their educational and career path after their other options evaporated.

The American Bar Association (ABA) accredits law schools, and presumably exercises some amount of quality control. However, the ABA is not a bar in the traditional sense (it administers no entrance exam), and it is not directly affiliated with the state bars which do administer bar exams. Many states require bar applicants to attend an ABA-accredited school, and thus outsource whatever authority they might otherwise exercise over the schools. (Not all do, and some states, I believe, still let students “clerk” their way into the bar.) For whatever reason, the ABA has continued to accredit more and more law schools.

More schools, plus relatively easy access to student loans, have created an excess supply of attorneys — excess in the sense that not every attorney can find meaningful employment after law school within a reasonable period of time. True, greater supply in theory should mean lower prices for consumers – which is traditionally regarded as a pro-competitive outcome. However, greater supply also likely means that many lawyers are offering services they aren’t qualified to offer, resulting in at best sub-optimal results and higher attorney search costs associated with finding the right attorney, not to mention the societal costs caused by too many people entering the profession when they could be engaged in other productive activity.

The end result appears to be that economic actors who do not participate directly in the marketplace for legal services have a strong incentive to continue to stuff the would-be lawyer pipeline with an ever-larger number of lawyers, and the state bars can do little, if anything about the situation.  It’s not an entirely ridiculous stretch to compare the market dynamics to those in the housing market a few years ago. Mortgage companies (law schools) had access to large amounts of money via distant investors (government loans) and could use that money to drive up demand for housing (legal education) resulting in increased housing prices (increased tuition and an increase in the number of lawyers).  The mortgage companies (law schools) bore little if any risk because it was absorbed by downstream economic actors.  Meanwhile, the regulators such as the Fed, the FDIC, etc. (the state bars) couldn’t or wouldn’t much about it.

(There may be a separate market for legal education. I’m going to set aside concerns about the health of that market. If it is a separate market, it is much, much smaller than the total market for legal services, and seems less relevant (and certainly less important) for that reason. Instead, throughout this post my focus is competition in the marketplace for legal services, and the effects on consumers of those services.)

Suggested principles

Given the dynamics above, what should be done?  Here are a few principles that I suggest should inform the analysis of the attorney supply issue:

  1. Politically, complete deregulation of the legal industry seems implausible if not impossible.  Additionally, I disagree with Clifford Winston that private, third-party attorney ratings services would be sufficient, or always sufficient, to inform consumers about lawyer quality were there no entry barriers (no law school requirement and no bar admission requirement).  Private rating services are not always particularly effective — the rating of financial derivatives during the financial crisis is probably Exhibit A.  Also, would Mr. Winston advocate against entry barriers in any other profession? Say, for example, in medicine? There were few if any barriers prior to the late 19th century, and the quality of medical services was accordingly uneven and low. No, law is not medicine, nor is it rocket science, but it can and does involve important issues and large amounts-in-controversy. Eliminating all entry barriers might lower the costs of at least some legal services, but it will also cause serious and significant quality problems and raise the transaction costs of finding appropriate and competent counsel.
  2. That said, many more routine legal services need not be delivered by attorneys at all. Instead, they could be delivered by para-professionals, perhaps certified by a national authority after around a year-and-a-half of standardized training. Reasonable minds can differ about which services could be delivered adequately by para-professionals; I might start with residential real estate closings, title searches, wills and trusts for personal estates of less than $X, etc. Physicians’ assistants and nurse practitioners seem to be working very well for the medical field, and I don’t see any reason why a similar approach couldn’t be taken in the legal profession. Doing so would increase the supply of such services and lower their costs, and go a long way to solving Mr. Winston’s concerns.
  3. There should be one, national bar in the U.S. Having 51 separate bars is wasteful and expensive and often increases transaction costs. It’s not always clear when local bar membership is required in interstate or international transactions, and this uncertainty can cause expense, delay, and require the otherwise unnecessary services of additional lawyers. I think nothing puzzles non-Americans more about our system than the fact that it has 51 separate bars. When Americans seek counsel in England, they expect an English lawyer, not a London lawyer, and when they seek counsel in France, they don’t expect that counsel to be licensed in only one Department.  51 bars cannot adequately coordinate their activities to address quality and supply issues.
  4. There is a disconnect between entrance into the legal profession at the law school level and admission to the profession through the bars. The circuit should be closed. Having one national bar would help facilitate its closure.

A modest proposal

I suggest that there is a middle path between the Winston and Burney proposals, informed by the principles above. Here it is:

  1. Have one national bar.
  2. Grant that bar the power to accredit law schools throughout the country. Only students at accredited schools would be able to take the bar.  Grant the bar an antitrust exemption to allow it to exercise its accreditation power freely.
  3. Over a decade or so, reduce the number of accredited law schools by approximately one-third to one-half. Ensure that schools cannot evade the intent of the reduction by dramatically expanding class sizes.
  4. Design and administer a national bar exam that is somewhat, though not dramatically, more difficult than today’s average state bar exam.  Perhaps more importantly, make it at least somewhat more relevant to the actual practice of law, so that success on the bar correlates better with the actual practice of law.
  5. Develop a national program for paralegals, with a formalized curriculum of about 1.5 years and a national exam administered by the national bar entity.
  6. Allow paralegals to perform enumerated services independently, and other services under the indirect supervision of attorneys.

The above program, if implemented over a decade, would (i) increase the supply of routine but high-quality legal (or para-legal) services (especially to moderate income consumers) and lower their cost, (ii) enhance the quality of more complex legal services and enhance the ability of consumers to find appropriate counsel for such services, and (iii) eliminate the lawyer over-supply problem.  It may not be a panacea, but I think it would promote the good intentions of the deregulationists while safeguarding consumers and eliminating many of the externalities caused by the current dysfunctional system.

Neither of the alternatives seems palatable.  Complete deregulation won’t happen and will cause its own set of serious problems.  Maintaining the status quo but making bar admissions more difficult also won’t solve any fundamental problems and won’t address the disconnect between the current gatekeepers and the law schools that have an incentive to keep the supply spigot wide open.

 

Minimalist Economics Posters

The NPR Planet Money blog has produced a series of minimalist posters — think of some of the recent movie posters you may have seen on the Internet — that focuses on economics issues.  The posters are pretty cool — for economics, at least.

You can check them out here.

Why Do Jewelry Stores Have Fancy Interiors? (Advertising Theory)

The law governing distribution is interesting because product distribution itself is fascinating. How do the tens of thousands of products in the modern economy get produced and distributed throughout the world?

Advertising is an essential element of most products’ distribution. But there are lots of interesting questions and puzzles about the exact role and purpose of advertising.

In thinking about this issue, I remembered hearing a recent program on the radio about the purpose of certain luxury goods advertising. I can’t remember if the program was an episode of NPR’s “Planet Money” or was an episode of “Marketplace” (another public radio show). No matter; the Intertubes provide lots of other sources.

For example, the issue is discussed in this article. Here’s a specific example: if you walk through any retail mall, you’ll notice some very different approaches taken by stores. Certain luxury good stores (think jewelry) have very expensive, tasteful, and upscale interiors, furniture and decor, and are usually staffed by attractive salespeople. Compare and contrast with the average mall food court restaurant, or the average mall Radio Shack.

What’s the purpose of the jewelry’s store investment in all of its various forms of advertising? Is it to provide product information to consumers? That seems unlikely; the upscale nature of the store and its personnel doesn’t really convey such information. Anyway, how much information do consumers need about earrings and necklaces? Perhaps the purpose is to facilitate connections in consumers’ minds (our products are often found in pleasant, upscale environments; if you buy them, you’ll likely find yourself in such environments, too). But fancy stores seem an expensive way to achieve this end.

In the case of the jewelry store, the advertising may instead constitute a signal — again, as explained in the article linked above:

[C]onsider the case when sellers of an experience good cannot make credible claims about high quality; a low-quality seller loses little by claiming its quality is high. A seller of high-quality experience goods can, however, signal its quality by spending a sufficient amount on advertising. Suppose consumers become repeat customers only if they enjoy high quality upon the first trial. Due to repeat sales, the high-quality seller has more potential profit than a low-quality imitator. In order to credibly convince the consumer it is high quality, the seller can publicly spend off or “burn” some of these future profits by advertising to such an extent that a low-quality producer would find it unprofitable to imitate. The rational consumer observes this seller spending lots of money on advertising and concludes that it is offering a high-quality product. It is worthwhile to note that the advertising message itself is irrelevant beyond the cost to provide it. As long as consumers know how much money was burned.

This explanation seems plausible.  The average consumer can’t evaluate claims about whether a jewelry store’s jewelry is high quality.  For all the consumer knows, it could be fake.  So to assure the consumer of quality, the store signals that it is prosperous and successful, and does so by investing in store interiors, furniture, fixtures, etc.  The advertising becomes an end to itself — a public display of money to burn.

How, then, to explain Internet-only jewelry stores, like Blue Nile, or like Plukka?  That’s an interesting question, and I’m not sure I know the answer.

Potential Patent Licensing “No-No” #4: Restricting the Licensee’s Ability to Deal in Products Outside the Scope of the Patent

Yes or No?

This post continues the series of posts regarding patent licensing and competition issues. The post prior to this one can be found here.

Patentees can, of course, offer either exclusive or non-exclusive licenses. In an exclusive license, the licensee receives the sole right to practice the patent in a field or fields. Under a non-exclusive license, the patentee retains the right to license others.

But there is another type of exclusivity: exclusive dealing in connection with a patent license may exist where express terms or incentives created by the license prevent or restrain the licensee from licensing, selling, distributing, or using competing technologies. Under the approach of the DOJ and the FTC, such exclusive dealing arrangements are evaluated under the Rule of Reason, meaning that in evaluating their legality, the Agencies will take into account the extent to which the arrangement (1) promotes the exploitation and development of the licensor’s technology and (2) anti-competitively forecloses the exploitation and development of, or otherwise constrains competition among, competing technologies.

According to the Agencies, “[t]he likelihood that exclusive dealing may have anticompetitive effects is related, inter alia, to the degree of foreclosure in the relevant market, the duration of the exclusive dealing arrangement, and other characteristics of the input and output markets, such as concentration, difficulty of entry, and the responsiveness of supply and demand to changes in price in the relevant markets.”

Note that some old cases talk about exclusivity requirements as per se patent misuse. However, this is not the approach of the Agencies, is generally inconsistent with modern economic theory, and is arguably at odds with the Patent Misuse Reform Act.

Bottom line: exclusive dealing in connection with a patent license is probably no longer per se unlawful. But that does not make exclusive dealing per se lawful, either. If exclusive dealing potentially causes significant market foreclosure in a technology or innovation market, then it could be subject to challenge.  In other words, the law on exclusive dealing in connection with patent licenses resembles the law on exclusive dealing more generally.

Supreme Court Denies Review of Case Involving Foreign Antitrust Claims

In Animal Science Products Inc. v. China Minmetals Co., 654 F.3d 462 (3d Cir. 2011), the Third Circuit held that the Foreign Trade Antitrust Improvements Act (“FTAIA”) does not impose a subject matter jurisdiction bar on antitrust claims in federal court, but rather specifies elements of a Sherman Act claim.

Why does this matter?  It matters because Congress and the courts care whether U.S. courts are open to foreign entities’ foreign antitrust claims.  There are strong policy reasons for not wanting U.S. courts to be open to all such claims, especially those with a tenuous connection to U.S. commerce.

The precise issue in Animal Science Products is technical and a bit complicated, but whether the FTAIA bars jurisdiction over certain foreign claims, or whether it “merely” specifies elements of a claim, might, in some cases, determine whether a case asserting foreign claims is tossed on a motion to dismiss or survives until after possibly expensive fact discovery.  (As I’ve suggested previously, the implications of the distinction may be overblown — under either approach, some cases are clearly outside the reach of the Sherman Act.  See, e.g., Minn-Chem Inc. et al. v. Agrium Inc., 657 F.3d 650, 653 (7th Cir. 2011) (dismissal appropriate under either standard).)

On Monday, the Supreme Court refused to grant certiorari to hear the Animal Science Products case.  So for now, the decision stands in the Third Circuit.  In 2003, the Seventh Circuit in the United Phosphorus case reached the opposite conclusion (that the FTAIA does impose a subject matter jurisdiction bar).  However, this fall, in Minn-Chem Inc. et al. v. Agrium Inc., 657 F.3d 650, 653 (7th Cir. 2011), the Seventh Circuit suggested that United Phosphorus might be “ripe for reconsideration,” but reserved the issue for possible later resolution.  We are likely to see more case law in this area in the future.

Sunday Miscellany

California Antitrust and Unfair Competition Treatise

The California State Antitrust and Unfair Competition Law Treatise update is working its way towards publication.  Full disclosure: I am co-editing one chapter.

The kickstarter website is a fantastic resource to lower costs of entry and stimulate new product development.  The cosmonaut stylus for touch screens, a kickstarter “graduate,” is a really nice tool.

Regarding my recent post on industry disruption, here’s a link to a Minimal Mac article on using an iPhone as a personal computer.  Something like this wasn’t possible a mere five years ago.

Shameless self-plug: I’ll be speaking at a CLE webinar on “Tying Arrangements: Avoiding Antitrust Liability: Leveraging Market Power Arguments and Seller Defenses” on May 1.  More details to follow.

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