DOJ - High royalty rates to reward inventors

R. Hewitt Pate, an Assistant Attorney General with the Antitrust Division of the U.S. Department of Justice wrote a paper dated June 3, 2005, for the 2005 EU Competition Workshop in Florence, Italy, titled Competition And Intellectual Property In The U.S.: licensing Freedom And The Limits Of Antitrust.

Ramboids will be familiar with all the concepts and specific terms discussed and sprinkled in attorney Pate’s paper – some of which include: intellectual property rights; monopolies; market power; licensing; exclusionary or non-licensing; compulsory licensing; royalties and excessive royalties, standard setting committees, RANDs; PTO; FTC; excessive patenting; Unocal; and Rambus.

Attorney Pate’s paper runs about 3,700 words, excluding endnotes, and its conclusion is as predictable as a Judge Payne ruling. With that noted, it is still an interesting read. I have snipped a few quotes for those on the fly . . . with the conclusion first . . .

We have made great strides in the United States in bringing sound economics to the antitrust analysis of intellectual property. Europe is doing the same. . .While some differences remain between the U.S., the EU, and our other important trading partners, the general trend toward convergence is continuing.

It is important to understand precisely what reward is offered by the IP (Intellectual Property) laws. Each type of IP right provides "exclusivity" for its owner. What does this exclusivity mean? It does not mean a right to commercialize any invention or creation. The owner of an improvement patent, for example, may find itself blocked from practicing its own patent if it cannot secure permission from the original patentee. Instead, what IP rights provide is the right to exclude others. The right to exclude is not simply one of the rights provided by intellectual property, it is the fundamental right, the foundation upon which the entire IP system is built.

The subject of unilateral refusals to license intellectual property is one in which the premise that IP is essentially like other forms of property has sometimes been stretched beyond sensible limits. Because, outside the area of IP, antitrust law holds out the possibility of rare exceptions to the principle that parties are free unilaterally to refuse to deal with others, the argument is that there must therefore be some circumstance in which the unilateral, unconditional refusal to license a patent must constitute an antitrust violation. With a single much-criticized exception, this is an argument that has never found support in any U.S. legal decision. At this point in the development of U.S. law, it is safe to say that this argument is without merit.

When analyzing the effects of a unilateral refusal to deal, one cannot merely consider the effect on a rival that is refused a license; one must also consider the alternative world in which the IP owner would have had less of an incentive to innovate because he could not be assured of the right to refuse to license. Would that IP owner have chosen to innovate less? If so, would competition or consumer welfare have been better off with the present state of affairs, including the right to refuse? In the short term, it will always be more efficient to disregard the IP right and allow duplication. The IP system rests on the idea of long-term innovation incentives, so we must think about the long-term effects of a rule imposing liability in this context.

The Antitrust Division sometimes hears complaints about demands for large royalties. Most frequently, although not always, the complaints arise in the context of a technical standard. According to the complainants, one or more patent holders can "hold up" licensees by waiting until participants are locked into the standard, then charging an allegedly "excessive" royalty for patents that cover the standard. The U.S. Federal Trade Commission has brought antitrust enforcement actions related to this issue in two recent cases, Rambus and Unocal. Both cases are ongoing.

Bringing a complaint to the Antitrust Division about "excessive" royalties, without more, is a losing strategy. Antitrust enforcers are not in the business of price control. We protect a competitive process, not a particular result, and particularly not a specific price. In fact, if a monopoly is lawfully obtained, whether derived from IP rights or otherwise, we do not even object to setting a monopoly price. A high patent royalty rate, after all, might just reflect that the Patent Act is functioning correctly and the market is rewarding an inventor for a pioneering invention.

Hat tip to Joe of the Pinehurst Thread for the link.

Donkey Notes:

Remember to send a note to the BOD of MU with a copy of the quote:

In fact, if a monopoly is lawfully obtained, whether derived from IP rights or otherwise, we do not even object to setting a monopoly price. A high patent royalty rate, after all, might just reflect that the Patent Act is functioning correctly and the market is rewarding an inventor for a pioneering invention.