Jonathan Barnett on Competition Regulators and Standard-Essential Patents

The following post comes from Connor Sherman, a 2L at Scalia Law and a Research Assistant at CPIP.

By Connor Sherman

The field of intellectual property (IP) can sometimes be wrong in its approach towards promoting economic health, especially when that approach overlaps with antitrust law. An example of this is laid out in a new article by CPIP Senior Fellow for Innovation Policy Jonathan Barnett at Competition Policy International’s Antitrust Chronical entitled How and Why Almost Every Competition Regulator Was Wrong About Standard-Essential Patents. In the article, Prof. Barnett explains how antitrust regulators discourage investment and limit innovation when they take enforcement actions without first gathering rigorous evidence of market harm.

A standard-essential patent (SEP) is a core innovation that entire industries build upon—in other words, an innovation that is necessary to include in a product in order to comply with an industry specific standard. A business cannot just slap Wi-Fi or Bluetooth onto its new smart lightbulb without including the functions associated with those standards. This protects consumers from false advertising, but it also protects the goodwill or quality assured by those standards.

For many years, the consensus among academics, courts, and general opinion has been that the owners of these SEPs will, if given the chance, engage in a form of economic harm called a “patent holdup.” As used in the article, a holdup can be understood as raising the cost of using a patent once it has been identified as a standard innovation. In response to this consensus, regulators have attempted to use antitrust law to prevent patent holdup from occurring.

However, Prof. Barnett encourages skepticism of this premise for several reasons. Most prominently, claims of patent holdup often will fail to meet the basic antitrust injury standard of causing competitive harm. In fact, more often than not, legal issues relating to the licensing of SEPs are resolved under exactly the fields of law one would expect—that is, under patent law with regard to the validity of the patent and under contract law with regard to the validity of the licensing agreement. Another reason presented by Prof. Barnett is the lack of empirical evidence of the expected harm to justify the intervention. Without sound evidence of anticompetitive harm, it makes little sense to employ policies aimed at preventing the nonexistent harm from occurring.

Both the 1995 and 2017 Antitrust Guidelines, issued by the Department of Justice and the Federal Trade Commission, view IP licensing as having procompetitive effects, yet the actions of regulatory agencies have been inconsistent with that understanding. Prof. Barnett states that the rush to include antitrust considerations may reflect an ongoing failure to appreciate the functionality of patent licensing agreements. After all, if a patented innovation demonstrably harms competition in an already established industry, one can presume that the innovation was either so obvious as to be improperly issued or so revolutionary as to deserve the benefits provided by the patent. In the former situation, that patent will likely be invalidated, and in the latter, the patent owner deserves the reward for creating a useful innovation.

Prof. Barnett states that a strong indictment of the current policy is reflected in the Ninth Circuit’s opinion in FTC v. Qualcomm, which overturned the lower court’s imposition of an antitrust penalty based on an erroneous view of SEPs. The lower court’s position was that Qualcomm would continue to invest in innovation under the same licensing-based business model while receiving lower rewards. Prof. Barnett argues that the more likely outcome would have been for Qualcomm to begin vertical integration, freeing it from the duty to deal with obligations of antitrust law. He then explains that the hypothetical harm of patent holdup would be minor compared to the harm that would occur from encouraging the consolidation of businesses around closely guarded, industry-changing innovations.

Prof. Barnett reasons that where patents are weak and antitrust laws are strict, the monetization structure of firms will be internal—even if funding for innovations remains robust. In the inverse situation, however, the range of feasible monetization structures are expanded to include third party firms. Thus, Prof. Barnett argues that in such a situation, an IP owner will be encouraged to license out its patents to all interested users at a modest rate in order to encourage widespread adoption of the invention.

It remains to be settled whether the long-held skepticism of SEP licensing is counterproductive, as Prof. Barnett claims. However, if Prof. Barnett is correct, this period of SEP uncertainty will perhaps provide an excellent lesson about enacting antitrust policy without the empirical evidence to back it up.