Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

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Saturday, June 30, 2007

Ordover and Shaffer on Exclusionary Discounts

Posted by D. Daniel Sokol

Exclusion is one of the core issues of antitrust.   A new working paper by  Janusz Ordover of NYU and Greg Shaffer of the University of Rochester titled Exclusionary Discounts sheds some light on some of the complexities in this area.

ABSTRACT: We consider a two-period model with two sellers and one buyer in which the efficient outcome calls for the buyer to purchase one unit from each seller in each period. We show that when the buyer's valuations between periods are linked by switching costs and at least one seller is financially constrained, there are plausible conditions under which exclusion arises as the unique equilibrium outcome (the buyer buys both units from the same seller). The exclusionary equilibria are supported by price-quantity offers in which the excluding seller offers its second unit at a price that is below its marginal cost of production. In some cases, the price of this second unit is negative. Our findings contribute to the literatures on exclusive dealing, bundling, and loyalty rebates/payments.

June 30, 2007 | Permalink | Comments (0) | TrackBack (0)

Friday, June 29, 2007

Michael R. Baye Named New Director of FTC Bureau of Economics

Posted by D. Daniel Sokol

The FTC released a press release that Michael R. Baye of Indiana University will succeed Michael Sallinger as the Director of the FTC's Bureau of Economics.  The press release is here.

June 29, 2007 | Permalink | Comments (0) | TrackBack (0)

Thursday, June 28, 2007

Abusive Pricing in an IP Licensing Context: An EC Competition Law Analysis

Posted by D. Daniel Sokol

We have noted in a number of posts that there has been a large number of interesting scholarly works on IP-Antitrust interface issues.  The latest is by the eminent Damien Geradin of Howrey LLP and Tilburg University titled Abusive Pricing in an IP Licensing Context: An EC Competition Law Analysis.

ABSTRACT: In the last two decades, the reliance upon “licensing” strategies as a source of revenue for intellectual property (“IP”) rights holders has seen a dramatic increase. Put simply, in return for an adequate remuneration (typically a royalty, but there may be other forms of consideration), innovators (licensors) grant to other firms (licensees) the right to use their proprietary technology to manufacture products for sale in downstream markets. IP licensing strategies are not only pursued by organizations without manufacturing capabilities (e.g., university research centres). IP holders active in downstream product markets (hereafter, “vertically-integrated” firms) may be licensing their technologies to reap additional profits from their research and development (“R&D”) expenditures, but also to obtain access to other firms' technologies through cross-licensing agreements.

Licensing agreements typically benefit licensors and licensees. The licensee gains access to new technologies, which it will use to improve its manufacturing operations or embed in its products to increase their functionalities. The licensor accrues revenues from his initial R&D expenditures that can be invested in the development of new technologies, which will in turn lead to additional revenues, hence creating a virtuous circle of innovation. Licensing agreements are generally heavily negotiated between licensors and licensees, which in the vast majority of the cases reach mutually satisfactory agreements.

Yet, tensions may arise between licensors and licensees over the terms of their IP licensing deals. The diverging incentives of licensors (eager to obtain a fair level of compensation for the investments made in developing their IP) and licensees (eager to minimize the cost of acquiring proprietary technologies) may generate disputes over royalty levels and other forms of consideration. Such disputes are particularly likely to arise when licensing agreements have the potential to be worth hundreds of millions of Euros and small variations in terms and conditions can be financially significant for both parties. Potential licensees may also insist on obtaining a license on terms that are identical, or at least equivalent, to those obtained by licensees with which they compete. Licensors may, however, resist such requests insofar as differing licensing terms are justified by the particular circumstances of each specific agreement.

Additional tensions may arise when the IP in question is essential to a standard. Some have argued that once a proprietary technology has become part of a standard, its owners will be able to extract royalties in excess of those they could have charged before the adoption of such standard (the so-called “hold up” theory). Although, as will be seen, this theory has clear limitations it has contributed to the belief that royalty rates charged by IP holders are too high. Another claim that has been made is that in circumstances where a standard comprises essential IP held by numerous patent holders, the aggregation of the rates charged by such holders (even if individually reasonable) may lead to a royalty burden of a level such that the standard will be too costly to implement (the so-called “royalty stacking” theory). The proponents of such theories argue that some form of control should be placed on the royalties that can be charged by essential patent holders.

While differences of views between licensors and licensees are generally ironed out through negotiations, there will be situations where licensees may be tempted to rely on competition rules to seek redress against what they perceive as unfair licensing terms. Against this background, this paper explores the extent to which Article 82(a) and 82(c) of the EC Treaty, which respectively prohibit as abusive for dominant firms from “directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions” to their customers, and to “applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage”, can be relied on by licensees unhappy with the deals they have obtained from licensors. These issues are particularly important at a time where economic growth is increasingly dependent on innovation.

This paper is divided in five parts. Part II discusses the specific challenges raised by market definition and the assessment of dominance in high-technology markets with a specific focus on technology licensing. Part III discusses the application of Article 82(a) EC to licensing agreements. It explains the significant conceptual and practical difficulties of applying this provision of the Treaty in the field of technology licensing and argues that competition authorities should refrain from seeking to control prices or rates in dynamic industries. Part IV explores the issue of price / rate discrimination in IP licensing agreements. It argues that while non-vertically integrated licensors have no incentives to discriminate against their licensees, vertically-integrated firms have strong incentives to offer more favourable licensing terms to their downstream operations that to other downstream firms with which they compete. The case is made that the enforcement of Article 82 EC in this field should therefore focus on preventing vertically-integrated firms from raising their downstream rivals' costs through discriminatory licensing fees. Part V contains a short conclusion. 

June 28, 2007 | Permalink | Comments (0) | TrackBack (0)

Dr Miles Overruled

Posted by Shubha Ghosh

As predicted, the Court overruled Dr. Miles today in the Leegin decision. As also predicted by some, the decision was split 5-4 with Justice Kennedy writing for the majority and Justice Breyer for the dissenters (which included Justices Stevens, Souter, and Ginsburg). 

Justice Kennedy's opinion is a nice mix of economic analyis, discussion of the meaning of stare decisis, and extended appeals to not base antitrust law on formalistic distinctions and outdated doctrines.  The majority characterizes Dr Miles as case relying on a outmoded view of restraints on alienation that did not take into account business realities.  As a refrain, the majority reminds us that per se rules apply only to business practices that "always or almost always restict competition and reduce output."  Overruling Dr Miles would be consistent with the trend of analyzing vertical restraints under the rule of reason and the higher standards for showing agreement in this context under Business Electric.  The spirit of the opinion is best captured in one paragraph: "[The per se rule against minimum RPM] is a flawed antitrust doctrine that serves the interests of lawyers by creating legal distinctions that operate as traps for the unwary--more than the interests of consumers--by requiring manufactures to choose second-best options to achiece sound business objectives."

Justice Breyer's dissent emphasizes the anti-competitive uses of mimimum RPM and states that nothing really has changed since Dr Miles in our understanding of the practice.   As the justice who is perhaps the closest representative of the economics methodology in law, Justice Breyer's skepticism towards the majority's extensive citations to economics is revealing:  "Economic discussion, such as the studies the Court relies upon, can help provide answers to these questions, and in doing so, economic can, and should inform antitrust law.  But antitrust law cannot and should not precisely replicate economists' (sometimes conflicting) views."

Personally, as someone who works in intellectual property as well, my favorite line from Justice Breyer's dissent is the following, made in response to the majority's justification of minimum RPM as a tool to prevent free-riding: "But free riding often takes place in the economy without any legal effort to stop it. Many visitors to California take free rides on the Pacific Coast Highway.  We benefit freely from ideas, such as that of creating the first supermarket. Dealers often take free rides on investments that otehrs have amde in building a product's name and reputation.  The question is how often the free riding problem is enough significantly to deter dealer investment."

So there we have it: old precedents don't just fade away, they die.  And die, without any discussion of price as the central nervous system of the economy or how trademark law serves much of the same function in limiting free riding and promoting the provision of services.   This new decision should keep the next generation of students of retail sales quite busy.    The opinion can be downloaded here: Download Leegin.pdf

June 28, 2007 | Permalink | Comments (0) | TrackBack (1)

Wednesday, June 27, 2007

Chambers USA Antitrust Rankings Are Out - How Does Your Firm Stack Up?

Posted by D. Daniel Sokol

The Chambers USA Rankings are out.  For those people who are obsessed with rankings, the top antitrust firms are (apologies to those firms and lawyers outside of DC):

Band 1

Arnold & Porter LLP
Cleary Gottlieb Steen & Hamilton LLP
Jones Day

Band 2

Hogan & Hartson LLP
Howrey LLP
O'Melveny & Myers LLP
Weil, Gotshal & Manges LLP
WilmerHale

Band 3

Boies, Schiller & Flexner
Dickstein Shapiro LLP
Fried, Frank, Harris, Shriver & Jacobson LLP
Gibson, Dunn & Crutcher LLP
Kirkland & Ellis LLP
Latham & Watkins LLP
Morgan, Lewis & Bockius LLP
Skadden, Arps, Slate, Meagher & Flom LLP
White & Case LLP 

Band 4

Crowell & Moring LLP
Freshfields Bruckhaus Deringer LLP
Heller Ehrman LLP
Hunton & Williams LLP
King & Spalding LLP
Mayer, Brown, Rowe & Maw LLP
McDermott Will & Emery LLP
Paul, Weiss, Rifkind, Wharton & Garrison LLP

June 27, 2007 | Permalink | Comments (0) | TrackBack (0)

FTC on Net Neutrality

Posted by D. Daniel Sokol

The FTC released its long awaited report on broadband connectivity competition.  The press release reports in part:

According to Chairman Deborah Platt Majoras, "This report recommends that policy makers proceed with caution in the evolving, dynamic industry of broadband Internet access, which generally is moving toward more not less competition. In the absence of significant market failure or demonstrated consumer harm, policy makers should be particularly hesitant to enact new regulation in this area."

As the report notes, certain conduct and business arrangements that broadband providers may pursue, including data prioritization, exclusive deals, and vertical integration into online content and applications, can benefit consumers. "The primary reason for caution is simply that we do not know what the net effects of potential conduct by broadband providers will be on all consumers, including, among other things, the prices that consumers may pay for Internet access, the quality of Internet access and other services that will be offered, and the choices of content and applications that may be available to consumers in the marketplace.

June 27, 2007 | Permalink | Comments (1) | TrackBack (0)

Class Certification in Antitrust Cases

Posted by D. Daniel Sokol

The newest issue of the Journal of Competition Law and Economics (I love this journal) has a great article by John H. Johnson and Gregory K. Leonard on NERA consulting on Economics and the Rigorous Analysis of Class Certification in Antitrust Cases.

ABSTRACT: Defendants in Sherman Act Section 1 class action cases have historically faced a low likelihood of success in their attempts to defeat class certification, in part because courts often started from a presumption that all class members were harmed by price-fixing. Recent trends in recent judicial decisions, however, have suggested that courts are starting to take a harder look at whether classes should be certified in Section 1 cases. In this paper, we demonstrate that the presumption of harm on all class members is not justified in many cases. Instead, given the economic characteristics of many industries, a rigorous economic analysis will be required to determine whether antitrust impact for each proposed class member can be established using common proof. What is more, determining whether this condition holds in a given situation generally requires that analyses based on individual data be performed—exactly the outcome that the use of the class action mechanism is intended to avoid. This creates a "common proof paradox" in Section 1 cases. We go on to show that the potential hurdles for class certification are even greater in Sherman Act Section 2 cases.

June 27, 2007 | Permalink | Comments (0) | TrackBack (0)

Tuesday, June 26, 2007

EU Restarts Sony/BMG Investigation

Posted by D. Daniel Sokol

The Wall Street Journal reports that the EU has restarted its investigation into the merger of their respective music units that took place in 2004.  We will know by October what DG Comp thinks of this deal.  Given the explosion on online music sales since 2004, I wonder how much this will affect the Commission's thinking about the deal.  One positive effect of the merger is that you can watch music videos from the company's large stable of artists here including some vintage videos of Bruce Springsteen and the E Street Band from the 1970s.

June 26, 2007 | Permalink | Comments (0) | TrackBack (0)

Objectives of Unilateral Conduct Laws, Assessment of Dominance/Substantial Market Power, and State-Created Monopolies

Posted by D. Daniel Sokol

One of the most interesting documents to emerge from last month's ICN meeting in Moscow was the report by the Unilateral Conduct Working Group on Objectives of Unilateral Conduct Laws, Assessment of Dominance/Substantial Market Power, and State-Created Monopolies.  This document is the first step to creating a common set of better practices in the area of unilateral conduct, perhaps the most challenging area of antitrust law around the world in terms of divergent substantive views.

June 26, 2007 | Permalink | Comments (0) | TrackBack (0)

Causation in European Merger Control

Posted by D. Daniel Sokol

In the latest issue of the Journal of Competition Law and Economics, Antonio Bavasso of the Jevons Institute for Competition Law and Economics at University College London and Alistair Lindsay of Allen & Overy provide an insightful analysis on issues involving causation and the failing firm defense under EC Competition Law in their article Causation in EC Merger Control.

ABSTRACT: This article looks at two areas of merger control under EC Law where the principles of causation are applied and, in our view, misapplied. The article traces the development of the concept of the "counterfactual" in antitrust law. It then draws on this analysis in considering the operation of the "failing firm defense," and in particular the standard of proof employed by the Commission when analyzing the "counterfactual" in relation to the failing firm defense. We argue that the Commission employs an excessively high standard of proof, and that this standard of proof contributes to the drawing of the failing firm defense too narrowly, through a misapplication of the principles of causation. We then proceed to contrast and prefer the approach of the UK Competition Commission in recent cases. In the  inal part of the article we consider scenarios where two or more mergers are contemplated in the same market at the same time, in cases of both parallel and overlapping mergers. In these complicated scenarios, which require prospective, multifaceted analysis, we set out in detail how, despite inherent difficulties, a similarly rigorous application of the principles of causation produces coherent results.

               

June 26, 2007 | Permalink | Comments (0) | TrackBack (0)

Monday, June 25, 2007

Monday Morning Roundup- Possible Divestitures in Thompson/Reuters, Chinese Anti-Monopoly Law and "National Security"

Posted by D. Daniel Sokol

Today's Daily Deal speculates on the types of divestitures that  the Thompson/Reuters deal might create.  Halfway across the world, the Wall Street Journal reports that the Chinese government may consider national security interests in the anti-monopoly law when the deal involves a foreign acquisition of a Chinese firm (perhaps learning how to make business more costly unnecessarily from the most recent modifications to the US CFIUS process). 

June 25, 2007 | Permalink | Comments (0) | TrackBack (0)

Sunday, June 24, 2007

Scherer on Antitrust Private Litigation

Posted by D. Daniel Sokol

F.M. Scherer of Harvard's Kennedy School of Government reviews the US experience of private litigantion in antitrust in his paper Class Actions in the U.S. Experience: An Economist's Perception.

ABSTRACT: This paper, presented at a University of the Piedmont (Italy) conference in January 2007, analyzes several features of the U.S. experience with class action litigation, emphasizing suits alleging antitrust law violations. It observes that despite the trebling of damages under U.S. antitrust law, deterrence has been less than completely successful, as shown by the large number of important price-fixing conspiracies proven in recent years. It argues too that many class action suits are brought with insubstantial evidence of violation. An important motivator is the significant share of settlement damages realized by entrepreurial law firms organizing the class actions. The retention by judges of neutral economic experts can help sort out the evidentiary complexities of class action suits, but the approach is far from a panacea.

June 24, 2007 | Permalink | Comments (0) | TrackBack (0)