Distribution, Competition, and Antitrust / IP Law

Patent Tying: Does Price Discrimination Promote Innovation? (Part 3)

Returning to the subject of patent tying, price discrimination, and the promotion of innovation, Christopher Leslie’s recent article comes to the following conclusions:

1. Tying law should apply equally to patent tie-ins as to other tie-ins.

2. Tying law generally should be “fixed” by requiring proof of anticompetitive effects.  In other words, per se treatment should be jettisoned.  (In reality, although many courts still speak of “per se” illegal tying offenses, they often analyze competitive effects.  But there is language in some relatively recent cases suggesting that the offense of per se illegal tying may still exist.)

3. So long as the elements of a tying claim (including anticompetitive effects) are proven, then the fact that the patentee was using the tie-in as a metering device should be irrelevant.

I personally suggest that point no. 2 above makes eminent sense.  Point no. 3 at least has the advantage of simplicity of administration.  But I find, perhaps surprisingly, that point no. 1 is the most interesting one.  For one thing, it may be overbroad.  Patent law, after all, distinguishes between staple products (those that have uses unrelated to the patented product) and non-staple products (which are specially designed for use with the patented product).  Sale of a non-staple product can, at least under certain circumstances, amount to contributory patent infringement.  So if non-staple products are in some sense within the scope of the patent grant, why shouldn’t a patentee be able to engage in metered tying without worrying about tying law?

Additionally, the existence of a patent is probably some evidence of at least some sort of innovation in the patented product.  In the ordinary tying case involving unpatented products, there may be no such presumption.  And although some patentees can directly meter usage instead of using a tie in, as Leslie suggests, in some cases that may not be possible.  For example, suppose a company has a patent on a razor design, which utilizes unpatented blades.  Each consumer may buy only one razor, which lasts many years (or decades).  As a practical matter, it may not be possible to meter the razor usage — but it is relatively easy to meter the blade usage.

So perhaps the rule should be: as to staple products, or as to tied products where metering of the tying, patented product is a practical alternative, the tying rules should be the same.

 

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.

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