Topic 15: Antitrust and Intellectual property rights

1. Antitrust Economics 2013 David S. Evans University of Chicago, Global Economics Group Elisa Mariscal CIDE, Global Economics Group Topic 15: Antitrust and Intellectual property rights Topic 15| Part 2 9 January 2014 Date

2. Overview

3. Current Issues in Antitrust and Intellectual Property All of these cases involve a bilateral contract negotiation. Antitrust issues result from problems with that negotiation. Failure to reach deal in the case of refusal to supply and injunctions for SEPs. Nature of deal for pharma patent settlements.

4. Bargaining and Contracts

5. Bilateral Negotiation with Buyers and Seller Common for businesses to enter into contract negotiations with each other. Considerable portion of B2B exchanges are based on contracts, some simple, some very complex.

6. Deals Happen Between Threat Points Deal can take place between these “threat points” Most the buyer is willing to pay Least the seller is willing to take

7. Bargaining Power

8. Other Determinants of Bargaining Outcome

9. Deals Don’t Necessarily Happen Seller won’t take as little as the buyer is willing to offer. No deal possible! Most the buyer is willing to pay Least the seller is willing to take This situation is important for some of the antitrust debates because the claim is seller is “refusing to supply” in effect or charging an “unfair price”.

10. Contracts are Multifaceted Some business contracts are very complicated, deal with many dimensions involving exchange of value, and address contingencies including breach of contract.

11. Contracts, Bargaining, and the Antitrust of IP

12. Refusal to Supply Intellectual Property

13. Classic Refusal to Supply Cases Note, following Trinko, refusal to supply essentially per se lawful in US. Referral of IMS Health Case to European Court (2004) European Commission decision on Microsoft (Interoperability) (2004) and European General Court judgment (2008). European Commission decision on Magill’s access to television listings of RTE, ITP, and BBC (1988) and European Court of Justice judgment (1995)

14. Key Economic Issues

15. Economics of Refusal to Supply Pre-Microsoft Refusal per se lawful, but for “exceptional circumstances” Microsoft European General Court judgment adopted easier test for Commission to meet. Must show “risk of elimination of competition” and impedes technological development which is short of prevention of new product. Court considers balancing incentives to innovate from providing access versus reduced incentives from forced sharing.

16. P Demand Value of New Product (increases from zero to this value (minus perhaps value of products it has displaced) MC Q Economics of “New Products”: Reflects policy judgment not to interfere with property rights and incentives of firms to invest and innovate except in extreme cases including—in particular—creation of new product. Limits interventions to ones where dynamic benefits of compulsory licensing outweigh dynamic costs of compulsory licensing.

17. FRANDS, SSOs, and SEPs

18. A Guide to the Alphabet Soup of Patents

19. Standard Setting Organizations in Action • “ETSI's purpose is to produce and perform the maintenance of the technical standards and other deliverables which are required by its members (Article 2 of the ETSI Statutes - see ETSI Directives). Like most standards organizations, much of this work is carried out in committees and working groups composed of technical experts from the Institute's member companies and organizations. These committees are often referred to as 'Technical Bodies' (TB), and typically meet between two and six times a year, in the ETSI premises or elsewhere. They also rely heavily on electronic communications to help progress the work, especially in-between meetings.” “With some 33,000 granted patents, Ericsson is the largest holder of standard-essential patents for mobile communication. Our unrivalled patent portfolio covers 2G, 3G and 4G technologies, and we are a net receiver of licensing royalties with more than 100 patent-licensing agreements in place.” “When an ESSENTIAL IPR relating to a particular STANDARD or TECHNICAL SPECIFICATION is brought to the attention of ETSI, the Director-General of ETSI shall immediately request the owner to give within three months an irrevocable undertaking in writing that it is prepared to grant irrevocable licences on fair, reasonable and non-discriminatory (“FRAND”) terms and conditions under such IPR…”

20. FRAND Disputes

21. Patent Hold Up

22. Incremental Value Proposition

23. FRAND Disputes—Breach of Contract Approach

24. Sometimes Parties Just Don’t Agree

25. FRAND Determination Under Contract Theory Finder of fact tries to determine royalty rate that willing buyer and seller would negotiate Most the buyer is willing to pay Least the seller is willing to take Key factors include (1) comparable patent negotiations (same patent, other parties); different but similar patents; (2) (incremental) value of patent; (3) bargaining power.

26. Antitrust Theories Concerning FRAND and SEPs

27. Tests Under Antitrust or Contract Theories

28. Pay for Delay

29. Reverse Payment Settle aka Pay-for-Delay

30. Settlement Economics Factors (Simple Model) • EM+(T-E)D>(PM+(1-P)D)T-C • Patentee settles with R payment and E entry date if certain monopoly profits during delayed entry minus reverse payments exceed expected value of monopoly profits minus litigation costs.

31. Settlement Terms and Consumer Welfare Simple Shapiro (2003) Model

32. Supreme Court Actavis Decision

33. Next Class Topic 16