Antitrust & Competition Policy Blog

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

A Member of the Law Professor Blogs Network

Saturday, April 13, 2013

Antitrust Law Professors On the Move - Version 2 (2013 Edition)

Posted by D. Daniel Sokol

This is the second version of antitrust/competition law professors who are on the move for a visit or permanent move for the 2013-14 academic year. Please let me know if I have missed anybody.

Entry Level Hires
Gus Hurwitz - University of Nebraska
Marek Martyniszyn - Queen's University Belfast
Sebastian Peyer - University of Leicester
Angela Zhang - King's College

Lateral Hires

Doug Ginsburg from NYU to George Mason

April 13, 2013 | Permalink | Comments (1) | TrackBack (0)

Claims for Damages in Competition Law and Intellectual Property - Course

Posted by D. Daniel Sokol

Claims for Damages in Competition Law and Intellectual Property - Course

A 10 hour CPD course taught over 4 weeks 
Taught by Vincent Smith (Sheppard and Smith) and Peter Davis (CompassLexecon)
May / June 2013

 
on Wednesday 15 & 22 May & Monday 3 & 10 June 2013  
from 5 - 7.30pm each week

Download the course brochure

Course Background: 

The course will examine the legal framework for claims for damages in EU and UK competition law as well as in intellectual property law and the economic principles for the evaluation of damages in these contexts. The topic is of particular importance in view of the increasing numbers of competition law claims for damages in the UK, the harmonization initiatives at the EU level, the recent reforms envisaged in UK competition law promoting private enforcement and the importance of damages claims for infringement of IP rights, in view of the issues raised by other forms of protection of IP rights, such as injunctions. It will present a succinct but well focused analysis of the main practical issues involved, such as, the nature and objective of private competition law enforcement, issues of standing and passing-on, causation, characterization of damages, legal issues on the quantification of harm, the binding effect of infringement decisions, collective claims (class actions), access to evidence in a damages case, the interaction between private actions and the leniency programme, including the issue of the discovery of corporate statements. The course will then delve into the economic principles relating to the quantification of damages. We will examine the following issues: cartel overcharges, output effects and deadweight losses, damages to producers of complements, imperfect substitutes and umbrella effects, passing on defences, an introduction to empirical analysis in cartel and abuse of dominance cases (including methods for estimating but-for prices, damages with two part tariffs, damages to rival firms versus consumers), evaluation of damages in IP cases.

At the end of this course the participants will be able to:

  • understand the legal framework for damages cases in the competition law mainly but also IP law context; 
  • understand the economic principles for the evaluation of damages in competition and IP law cases; 
  • assess the application of these principles in practice, by looking to case studies.  

 

Summary of the course content:

Wednesday 15 May - Anatomy of a competition case

  • As a claim 
    • damages for breach of duty
    • injunction to prevent ongoing breach
      • Negative / Prohibition
      • Positive (supply obligations)
  • As a defence
    • ‘euro-defence’ to contract claims
  • How to spot a competition case
    • ‘blacklisted’ conduct - RPM, boycotts, bid rigging etc.
    • high market shares
    • claims involving regulating sectors
    • competition law and intellectual property
  • Where a competition authority has already investigated 
    • primary of EU competition law
      • EU Commission as amicus curiae
      • references to CJCE
    • ongoing investigations
      • duty not to impede (Masterfoods stay)
      • access to information

Wednesday 22 May - Multi-party and multi-jurisdiction competition cases

  • Which was to the forum?
    • for EU cases: ‘Brussels’ regulation
      • domicile of defendant
      • effects jurisdiction
    • for non EU cases: private inernational law of court seised
  • Whose law applies?
    • law of contract
    • law of place of effect? law of forum?
    • overriding effect of EU competition law: ordre publique
  • England as your forum
    • choice of High Court or Competition Appeal Tribunal
      • follow-on vs. stand alone actions
      • proposals for reform of CAT juridiction
  • Multiple claimants
    • collective, group and class actions discussed
    • competition class actions for the UK: government reform proposals
      • aims of proposals: helping small business and consumers
      • only for competition claims in CAT ....
  • Multiple defendants (cartels)
    • join and several liability: ‘anchor’ defendants and contribution claims
    • effect in Englands of non-EU (US) findings
  • Conclusion / Summary
    • competition litigation developments elsewhere

Monday 3 June - Cartel damages

  • Basic theory
    • Cartel overcharges. Output effects and deadweight losses. Damages to producers of complements. Imperfect substitutes and umbrella effects
    • Passing on defenses
  • Estimation and the Risk of the black box: What happends in damages cases when economics is done very bady
  • Introduction to empirical analysis in cartel cases
    • Methods for estimating but-for prices. Overview of Nera Report for DG Competition. 
  • Beyond the basics
    • Damages with two part tariffs
    • Imperfect cartelization
    • Damage estimation in practice
    • Discipline on reasonable interpretations of evidence – when economics is applied well

Monday 10 June - Damages in abuse of dominance and IP cases

  • Damages to rival firms versus consumers 
  • Framework for analysis
  • Introduction to damages in IP cases


About the course tutor
Vincent Smith is a partner at Sheppard & Smith and was, until mid 2010, a founding partner at Hausfeld & Co LLP in London focussing on UK and European claimant and complainant competition matters. He is also currently a Visiting Fellow at the British Institute of International and Comparative Law.

While at Hausfeld, Vincent led the team in the high profile ‘air cargo’ representative claim (Emerald v British Airways plc) and in a Competition Appeal Tribunal case in the chemicals sector for cartel claimants (Moy Park and ors v Degussa AG). He also worked on the claims against the marine hose cartel and the paraffin wax cartel for a wide spectrum of corporate claimants. In addition Vincent took a leading role in structuring insurance and funding for the firms collective damages claims.

He joined from the Office of Fair Trading, the UK’s main public competition enforcement body, where he was Senior Director for Competition and Director of its Competition Enforcement division from 2003 – 2007. He led the OFT’s 180-strong competition function, having overall responsibility for the OFT’s work in combatting cartels and other anti-competitive practices, and also for the OFT’s ‘first phase’ merger control duties, as well as oversight of its developing enforcement policy – for example on case prioritisation. From 2002-2003 he was the OFT’s Director of Competition Policy Co-ordination and deputy Director of the division.

At the OFT Vincent was responsible for many high profile decisions and policies. In particular, he led the settlement negotiations in Independent Schools and was heavily engaged in the ground breaking Mastercard interchange fees decision. Cartel enforcement, particularly in the construction sector, formed a large part of his responsibilities, and he was involved in all of the OFT’s major cartel investigations during his tenure. In particular he initiated the first steps in the UK to ‘fast track’ groups of cartel cases for public enforcement purposes. He also oversaw the OFT’s input to the later stages of negotiating and then implementing the ‘devolved’ European competition enforcement regime under EC Regulation 1/2003 in the UK and latterly took the initiative in shaping the OFT’s ongoing work on encouraging a greater degree of private enforcement of competition law through damages actions in the UK.

Before joining the OFT, Vincent was Legal Director for competition issues at OFTEL, then the UK telecommunications regulator, for two years, where he advised on a wide range of regulatory issues, including the first use in the UK by a public enforcement body of its formal powers under the Competition Act 1998 in March 2000.

Vincent qualified as a Solicitor (England and Wales) in 1990 after training with Simmons & Simmons and spent ten years in private practice in London and Brussels with the firm, specialising in EU and competition law.

Peter Davis, Executive Vice President at Compass Lexecon, and has substantial experience in competition policy and regulatory investigations. His current case-load includes advising on an ongoing Competition Commission’s (CC) market investigation; work on a large pan-European follow-on cartel damages case; and he has also worked on various high profile EU merger cases including EMI/Sony, NYSE Euronext/Deutsche Börse and Glencore/Xstrata.

Prior to joining Compass Lexecon he served on the Compeition Commissions panel of expert academic economists (2004-2006) and subsequently as Deputy Chairman of the CC (2006-2011), acting as Chairman of a range of inquiry groups investigating mergers and also hearing appeals against regulatory price control decisions in telecoms and water sectors. He also chaired the CC’s Payment Protection Insurance (PPI) market investigation.

He was President of the Association of Competition Economics (2009-2011).

Prior to joining the CC, he provided advice to clients and submitted written and/or oral testimony in a variety of Competition Act cases including Bacardi and BHB Rules and Orders in front of the OFT and in At the Races at the High Court under CPR Part 35.

He has a PhD in economics (Yale, 1999) and served on the faculties of MIT (1998-2002) and LSE (2002-2006). His academic work includes contributions to a number of leading academic journals. He is co-author of the leading textbook, Quantitative Analysis for Competition and Antitrust Investigations, which was published by Princeton University Press in 2010. He is currently Visiting Professor at University College London’s Faculty of Laws and has been listed in Who’s Who since 2010

 

Cancellation terms: 
If you wish to cancel your order for the course your cancellation must be received in writing no later than 14 days before the start of the course. If we receive your cancellation no later than 14 days before the start of the course we will refund any amount you have paid to us for the course less an administration charge of 20%. No refunds will be made for cancellations made by you within 14 days of the conference date. 

April 13, 2013 | Permalink | Comments (0) | TrackBack (0)

Friday, April 12, 2013

Income Distribution in Network Markets

Posted by D. Daniel Sokol

Corrado Benassi (Universiy of Bologna) and Marcella Scrimitore (University of Salento) analyze Income Distribution in Network Markets.

ABSTRACT: We enquiry about the effects of first and second order stochastic dominance shifts of the distribution of the consumers’ willingness to pay, within the standard model of a market with network externalities and hump-shaped demand curve. This issue is analyzed in the polar cases of perfect competition and monopoly. We find that, while under perfect competition both types of distributional changes result in higher output, provided marginal costs are low enough, in the monopoly case the final outcome depends on the way income distribution and the network externality interact in determining market demand elasticity.

April 12, 2013 | Permalink | Comments (0) | TrackBack (0)

ANTITRUST DIVISION ISSUES 2013 EDITION OF ITS ANNUAL NEWSLETTER

Posted by D. Daniel Sokol

ANTITRUST DIVISION ISSUES 2013 EDITION OF ITS ANNUAL NEWSLETTER. See here.

April 12, 2013 | Permalink | Comments (0) | TrackBack (0)

GOOGLE SEARCH: ANTITRUST & IP PERSPECTIVES APRIL 15, 2013

Posted by D. Daniel Sokol

Avishalom Tor of Notre Dame law has a panel discussion on

GOOGLE SEARCH: ANTITRUST & IP PERSPECTIVES
APRIL 15, 2013 3:30–5:00 P.M.
2130 ECK HALL OF LAW
NOTRE DAME LAW SCHOOL

Download LawMarketBehaviorConferencePost.v4

 

April 12, 2013 | Permalink | Comments (1) | TrackBack (0)

Competing with Asking Prices

Posted by D. Daniel Sokol

Benjamin R. Lester (Federal Reserve Bank of Philadelphia), Ludo Visschers (Universidad Carlos III de Madrid) and Ronald Wolthoff (University of Toronto) have a paper on Competing with Asking Prices.

ABSTRACT: In many markets, sellers advertise their good with an asking price. This is a price at which the seller is willing to take his good off the market and trade immediately, though it is understood that a buyer can submit an offer below the asking price and that this offer may be accepted if the seller receives no better offers. Despite their prevalence in a variety of real world markets, asking prices have received little attention in the academic literature. We construct an environment with a few simple, realistic ingredients and demonstrate that using an asking price is optimal: it is the pricing mechanism that maximizes sellers' revenues and it implements the efficient outcome in equilibrium. We provide a complete characterization of this equilibrium and use it to explore the positive implications of this pricing mechanism for transaction prices and allocations.

April 12, 2013 | Permalink | Comments (0) | TrackBack (0)

Anatomy of Cartel Contracts

Posted by D. Daniel Sokol

Ari Hyytinen University of Jyvaskyla - School of Business and Economics, Frode Steen, Norwegian School of Economics (NHH) - Department of Economics and Otto Toivanen, KU Leuven - Faculty of Business and Economics (FBE) have a very interesting paper on Anatomy of Cartel Contracts.

ABSTRACT: We study cartel contracts using data on 18 contract clauses of 109 legal Finnish manufacturing cartels. One third of the clauses relate to raising profits; the others deal with instability through incentive compatibility, cartel organization, or external threats. Cartels use three main approaches to raise profits: Price, market allocation, and specialization. These appear to be substitutes. Choosing one has implications on how cartels deal with instability. Simplifying, we find that large cartels agree on prices, cartels in homogenous goods industries allocate markets, and small cartels avoid competition through specialization.

April 12, 2013 | Permalink | Comments (0) | TrackBack (0)

Thursday, April 11, 2013

Supermarket Entry and the Survival of Small Stores

Posted by D. Daniel Sokol

Fernando Borraz Universidad de la Republica - Faculty of Social Sciences; Central Bank of Uruguay, Juan Dubra, University of Montevideo - Department of Economics, Daniel Ferres, University of Montevideo - Department of Economics, and Leandro Zipitria, Universidad de Montevideo research Supermarket Entry and the Survival of Small Stores.

ABSTRACT: We analyze the effect of supermarket entry on the exit of small stores in the food retailing sector in Montevideo between 1998 and 2007. By using detailed geographical information about supermarkets and smaller stores we are able to identify the link between entrants and the exit of nearby small stores. Entry of supermarkets using small to medium-size formats creates a competitive threat for the existing small stores, decreasing their probability of survival. The result is robust to several model specifications and varying definitions of what constitutes a supermarket. The impact of supermarket entry is unequivocal for butchers, bakeries, grocery and fresh pasta shops but significance varies with model specification for kiosks.

April 11, 2013 | Permalink | Comments (0) | TrackBack (0)

Repeal McCarran-Ferguson - Before it's too late

Posted by D. Daniel Sokol

David Balto urges to Repeal McCarran-Ferguson - Before it's too late.

April 11, 2013 | Permalink | Comments (1) | TrackBack (0)

Quality Competition in Markets with Regulated Prices and Minimum Quality Standards

Posted by D. Daniel Sokol

Roberto Cellini, University of Catania - Department of Economics and Business and Fabio G. Lamantia, University of Calabria - Department of Economics, Statistics and Finance examine Quality Competition in Markets with Regulated Prices and Minimum Quality Standards.

ABSTRACT: We study the equilibrium and its stability property in a duopoly market in which minimum quality standards (MQS) are set, prices are regulated with links to product quality, and firms compete in quality. The adjustment dynamics are taken into account. We focus on the role that MQS play, in affecting equilibrium allocations and the system dynamic properties. In particular, we show that chaotic dynamics may emerge, precisely due to MQS; under specific circumstances, MQS are responsible for the outcome of maximal differenciation in product qualities across providers.

April 11, 2013 | Permalink | Comments (0) | TrackBack (0)

Determinants of EC Antitrust Fines for Members of Global Cartels

Posted by D. Daniel Sokol

John M. Connor, Purdue University; American Antitrust Institute (AAI) and Douglas J. Miller, University of Missouri at Columbia - Department of Economics have posted Determinants of EC Antitrust Fines for Members of Global Cartels.

ABSTRACT:In this paper, we estimate quantitatively the determinants of variation in administrative fines imposed on companies by the European Commission for price-fixing violations. Estimates from our behavioral model provide the first direct test of the predictive power of the optimal deterrence theory of antitrust violations in the EU. In addition, they offer insights into other determinants of the EC’s leniency program for cartels and its effectiveness.

Regressions are fitted to a sample of 204 corporate participants of hard-core global cartels fined between 1990 and early 2010 to explain variation in the absolute Commission fine. Independent variables fall into four groups: the extent of the cartel’s antitrust injuries; factors that affect the probability of detection and conviction by antitrust authorities; the size of non-EC penalties on the cartel; and controls for time, for changes in EC guidelines, for nationality of the defendant, and for industry-specific characteristics. The predictive power of the final model is quite satisfactory.

We find that EC corporate cartel fines generally follow the precepts of optimal deterrence theory and the EC’s Fining Guidelines. Fines are directly related to economic injuries from collusion and inversely related to proxies for factors that increase the probability of detection and conviction of clandestine cartels. The elasticity of expected fine with respect to harm is 0.32, hence ex post sub-optimal. Expected fines are directly related to recidivism and increase by roughly 80% under the 2006 revised Guidelines.

However, we also find evidence that the Commission either deviates from optimal deterrence principles or follows practices unmentioned in its Fining Guidelines. Expected fines increase as other penalties (including fines levied by other governments, private fines, and the number of executives charged or sanctioned) increase and are much higher for North American firms.

April 11, 2013 | Permalink | Comments (0) | TrackBack (0)

Determinants of U.S. Antitrust Fines of Corporate Participants of Global Cartels

Posted by D. Daniel Sokol

John M. Connor, Purdue University; American Antitrust Institute (AAI) and Douglas J. Miller, University of Missouri at Columbia - Department of Economics discuss Determinants of U.S. Antitrust Fines of Corporate Participants of Global Cartels.

ABSTRACT: For criminal violations of the Sherman Act, although guided by federal sentencing guidelines, U.S. Department of Justice has great latitude in recommending corporate cartel fines to the federal courts, and its recommendations are nearly always determinative. In this paper, we analyze the determinants of variation in size of criminal fines imposed by the Antitrust Division of the DOJ on 118 corporate participants of hard-core global cartels. Our behavioral model provides the first direct test of the optimal deterrence theory of antitrust crimes.

Regressions are fitted to a sample of the corporations that participated in international cartels and that were fined between 1996 and March 2010. The predictive power of the optimal-deterrence model is quite good. We find that U.S. corporate cartel fines are strongly directly related to economic injuries from collusion. However, U.S. fines do not conform to the theory’s predictions about the probability of detection and conviction of clandestine cartels. We also find that fines complement other antitrust penalties: the number of months that a corporate defendant’s managers are sentenced to prison and private damages paid.

April 11, 2013 | Permalink | Comments (0) | TrackBack (0)

Wednesday, April 10, 2013

Competition Agencies with Complex Policy Portfolios: Divide or Conquer?

Posted by D. Daniel Sokol

David A. Hyman, University of Illinois College of Law and William E. Kovacic, George Washington University - Law School ask Competition Agencies with Complex Policy Portfolios: Divide or Conquer?

ABSTRACT: Antitrust law has been adopted by 120 jurisdictions worldwide. In more than half of these jurisdictions, the agency charged with enforcing antitrust law also has other responsibilities. The assignment of multiple regulatory tasks can affect the performance of a competition agency in complex and subtle ways. We present a framework for analyzing the consequences of creating public bodies with complex policy portfolios. Using examples from across the administrative state, we analyze the forces that shape the content of an agency’s policy duties, and how the portfolio of assigned duties affects the way an agency approaches its assigned tasks, and its performance of those tasks. We apply this framework to the U.S. Federal Trade Commission, whose diversified policy portfolio includes antitrust, consumer protection, and data protection/privacy.

April 10, 2013 | Permalink | Comments (0) | TrackBack (0)

Taming Credit Card Fees by Requiring the Biggest Banks to Compete for Merchant Acceptance: An Inter-Bank Competitive Model

Posted by D. Daniel Sokol

Steven Semeraro, Thomas Jefferson School of Law offers Taming Credit Card Fees by Requiring the Biggest Banks to Compete for Merchant Acceptance: An Inter-Bank Competitive Model.

ABSTRACT: In the multi-district class action In re: Payment Card Interchange Fee and Merchant Discount Antitrust Litigation merchants claim that the fees they pay to accept Visa and MasterCard cards are too high because the banks issuing those cards do not compete for card acceptance. Because so many of their customers rely on Visa and MasterCard cards, the merchants contend that they cannot stop accepting either brand in toto. They would risk losing too many customers. But if the banks had to compete with each other, the merchants believe, they might credibly threaten to refuse one bank’s cards, forcing it to lower its acceptance fees. The merchants also contend that they could apply competitive pressure on the card-issuing banks by steering their customers to payment mechanisms that are less expensive than credit cards. Visa and MasterCard, however, prohibit merchants from pursuing these strategies. Without the ability to spur competition, the merchants contend, the card networks’ default interchange fee is the proverbial offer they can’t refuse.

In 2005, the merchants filed a class action alleging that the card networks’ rules restrained competition on card acceptance fees and thus violated the antitrust laws. After seven years of litigation and negotiation, the case has entered a settlement phase. Visa and MasterCard have offered to (1) pay the merchants approximately $7.25 billion and (2) relax their rules restraining merchants from steering their customers toward less expensive payment mechanisms. The proposed settlement, however, would not alter the rules requiring merchants to accept all Visa or MasterCard credit cards regardless of the issuing bank.

This article shows that simply empowering merchants to steer customers to less expensive payment mechanisms through discounting or surcharging cannot sufficiently address the competitive problem with card acceptance fees. Restrictions in the settlement would likely prevent most merchants from using these competitive devices, and if merchants were given unfettered discretion to steer their customers, consumers could be worse off than they are now. Merchants should instead be empowered to accept credit cards on an issuer-by-issuer basis. This intuitively obvious solution has traditionally been criticized on the ground that it would undermine the efficiency of the credit card system. The dramatic growth and popularity of credit card networks demonstrates, the critics argue, that they have been doing something right. Compelling millions of card-accepting merchants to enter individual fee agreements with thousands of card-issuing banks would impose transaction costs swamping any possible savings from more competitive interchange fee setting. And the patchwork of card acceptance could frustrate and anger cardholders.

This article proposes an inter-bank competitive model that would produce virtually all of the benefits of issuer-based-acceptance-fee competition with virtually none of the feared inefficiencies. Visa and MasterCard would be permitted to continue to operate exactly as they do now with one exception – any merchant could insist that one or more of the four largest card-issuing banks offer it a bilateral card acceptance fee below the networks’ default rates. Replacing the customer steering provisions in the proposed settlement with this inter-bank competitive model and revising the release provisions to exclude anticompetitive conduct relating to unforeseeable market conditions would likely satisfy the objecting merchants and thus enable relatively quick court approval, ending years of continuous litigation in credit-card markets. It would also stand a significantly better chance than the proposed settlement of actually bringing meaningful competition to the credit card acceptance-fee market.

April 10, 2013 | Permalink | Comments (0) | TrackBack (0)

The strengths and weaknesses of the DG Competition Manual of Procedure

Posted by D. Daniel Sokol

John Temple Lang describes The strengths and weaknesses of the DG Competition Manual of Procedure.

ABSTRACT: The Competition Directorate General of the European Commission has published a useful descriptive Manual of its procedure in cases of restrictive agreements and abuse of dominance. However, there are several serious omissions. The Manual does not deal with submissions made to other parts of the Commission. It says nothing about the need for impartiality, or the duty to respect the Charter of Fundamental Rights, or the need to expect judicial review of all decisions. It allows officials to hold meetings without keeping minutes. It says too little about interim measures, and does nothing to reduce the two basic flaws in the Commission's procedure: the same officials draft the statement of objections and the decision, and none of the Commissioners who formally take the decision have seen the evidence or read the arguments. There are several examples of failure to deal with difficult questions, which are precisely those on which guidance is needed.

April 10, 2013 | Permalink | Comments (0) | TrackBack (0)

Tom Ewing on Patent Assertion Entities

Posted by Tom Ewing

Which factors in the patent system and high-tech economy have led to the increase in PAE activity? Who has benefited?

Tom Ewing (Avancept LLC)

The contemporary increase in PAE activity arises from the combination of several complementary factors.  The factors that will be discussed below are:

  1. The maturity of the PAE business model.
  2. The acceptance of intellectual property as an asset class.
  3. The surge of patent issuances in the pro-patent era.

Many of these contributing factors themselves arose from the exuberance of the early pro-patent era that began in the early 1980s.  The factors often cited for the rise of the pro-patent era are: 1) the creation of the Court of Appeals for the Federal Circuit with its exclusive jurisdiction over patent appeals, 2) the Bayh-Dole Act that simplified the process for universities to own patents arising from government-funded research, and 3) anecdotal stories about companies like Texas Instruments using patent licensing campaigns against competitors to return themselves to profitability.

The primary beneficiaries of increased PAE activity are the managers of PAEs and their investors.  Patent litigators on both plaintiff-side and defendant-side have also benefited, especially since PAE litigation now comprises such a heavy share of overall patent litigation.

1. The maturity of the PAE business model

The viability of the PAE business model was proved by the mid-1990s.  Most of the early PAEs began with limited capital resources.  These pioneers evolved a licensing/litigation scheme in which reasonable returns could be obtained with minimal cash expenditures. 

These early pioneers worked out how to exploit patents on a budget using contingency fee lawyers. They tended to hire licensing agents paid on a commission basis.  They also tended to take on small investors to handle litigation fees.  These steps dramatically reduced the out-of-pocket expenses for royalty collection while still leaving adequate returns for the effort.  For the early PAEs who already owned patent assets, this was just about all they needed to work out. 

The success of these early PAEs encouraged newer entrants who did not already own or control patents.  This next group worked out a revenue share model with patent owners, which allowed for the development of the modern PAE business model.  This second group also evolved patent targeting/acquisition techniques in order to obtain the set of patents that would provide the best returns during a licensing/litigation campaign.

The strengths of the PAE model comprise:

a)     Invulnerability to countersuit,

b)     No reputational considerations among other corporate actors,

c)     The expense of the US patent litigation system,

d)     The distractions caused by patent litigations among corporate actors,

e)     The ability of corporate actors to pass IP costs onto consumers,

f)      The corporate fear of severe consequences (e.g., injunction) for losing a patent
litigation, &

g)      The generally favorable view of patents by courts during the pro-patent era.

By the time the mass patent aggregators arrived in the early 2000s, the PAE business model had been completely worked out and ironically was not itself protected by IP.  The mass patent aggregators provided scale to the PAE business model which made the business model more attractive/available to investors.

This final step – the attraction of investment – ensured that the PAE business model would grow ever upwards, as it has.

2. The acceptance of intellectual property as an asset class

Promotion of the notion that intellectual property, particularly patents, comprised an asset class worthy of investment seems to have arisen in the early 1990s.  The result of this effort has become increasing interest by investors and their financial advisors in patents as a means for generating returns comparable to other investments.  A few wheel-healed investment firms have created their own initiatives involving intellectual property.  However, the primary result has been an increase in intellectual property investments by institutions.  Institutional investors tend to seek investments across all asset classes as a means for attaining a diversified portfolio.

Intellectual property is undoubtedly a separate asset class from other types of assets, e.g., stocks, bonds, real property, etc. However, prior to the pro-patent era, the IP asset class was not considered to be the type of asset class that an investor would necessary need to have in a diversified portfolio.  The IP asset was likely used more as a means for sorting wealth into categories for purpose such as tax treatment.  In other words, a few people have always made money from patents, but they tended to be the inventors or original owners of the patents and not third parties who specifically sought out patents as a means for diversifying their assets into the available classes.

Once an institutional investor becomes aware of an asset class in which he holds no assets, then the investor is essentially compelled to make some form of investment in the asset class in order to demonstrate a diversified portfolio.  This likely explains why disclosures in the Xilinx litigation revealed that investors in Intellectual Ventures included institutions like the University of Texas, the University of Pennsylvania, Brown University, Stanford University, the Mayo Clinic, Reading Hospital, the Rockefeller Foundation, and the World Bank’s International Bank for Reconstruction and Development.  This also likely explains the investment by mutual funds like Oppenheimer, Fidelity, and Vanguard in public companies like Acacia Research.  The funds provided by these groups of investors to PAEs are likely mirrored by private investors, although the amount of their investments would be difficult to determine.

In short, the evolved PAE business model has not suffered from a lack of capital although the evolved PAE model essentially has fairly low capital requirements.

3.  The surge of patent issuances in the pro-patent era

Others have written about the surge of patent issuances during the pro-patent era.  Some of this
increased activity no doubt reflects greater attention to research and development during this period.  However, a sizeable portion of the surge arises from the filing, particularly by corporations, of patent applications for inventions that in the past would not have been protected.  In other words, patent applicants became less picky about the sorts of inventions for which they file patent applications. 

The increase in patent issuances provided more fuel for PAEs activities.  In addition, many corporations themselves came to view their patent assets more as liabilities since significant expenditures were made to obtain and hold the increased patents they obtained during the pro-patent era.  Only a relatively small number of patents are typically necessary to use against a direct competitor.  Consequently, corporations became interested in obtaining revenue from their patent portfolio, which has provided PAEs with greater opportunities for attaining licensable patents.

If the patent allowance rate of the 1963 to 1980 era had stayed in effect through the pro-patent era, there would be roughly 2 million fewer issued patents today. That means we would have 6 million U.S. patents as opposed to the current 8 million plus.

The U.S. Patent Office issued its first patent in 1790.  Patents issue sequentially.  On March 26, 2013, the USPTO issued patent 8,407,811.  Thus, the “halfway point” for US patents was 4,203,905 which issued on May 20, 1980.  So, half of all granted U.S. patents were issued after May 20, 1980 – 190 years of R&D on one side of the midpoint line and 33 years on the other … and the midpoint line moves closer to the current date each Tuesday when then USPTO issues another batch of patents.

Patent Chart (2013)
 
Of course, some of this growth resulted from heightened R&D funding. But much of it traces to companies simply filing for patents more often. That means more opportunities for PAE activity.

This surge in patenting is sometimes blamed on software patents and business method patents. While there may be some truth to this, the larger truth is that more patents are filed across more technical areas than was previously the case. 

Antennas, for example, do not immediately present themselves as being software inventions.  However, using patent filing data, one could conclude that we are living in the great antenna revolution.  For IPC class H01Q (aerials) from 1978-2000, some 7,958 patents were issued in the US.  For IPC H01Q from 2000-2012, some 13,269 patents were issued.  So, one 22-year period produced less than 8,000 patents while the more contemporary 12-year period produced more than 13,000 patents. 
For the 1978-2000 period, antenna patents issued on an annual average of 361.73 patents/year.  For the 2000-2012 period, antenna patents issued on an annual average of 1,105.75 or three times the rate of the earlier period. 

While much of the surge in antenna-patenting undoubtedly resulted from increased R&D related to antennas during the growth of wireless communications, one should really question the premise that increased R&D should necessarily lead to increased patent issuances.  While the patent system tends to favor incremental advances, it was absolutely not intended to favor minor advances within the abilities of an ordinary technician, and with so much prior art in the antenna field, the raw number – 13,269 patents in 12 years – raises questions about non-obviousness over the whole group. 

A more detailed analysis of how the Patent Office processes applications would provide a useful discussion but will have to wait for another time.  In short, in a variety of ways, the Patent Office was not prepared or adequately equipped to handle the surge of patent filings brought on by the pro-patent era.

Conclusion

Contemporary PAE activity results from the combination of a number of complementary factors.  Many of these factors themselves arose from the exuberance of the early pro-patent era that began in the early 1980s.  Some of the major factors leading to the present increase in PAE activity are the maturity of the PAE business model, the acceptance of intellectual property as an asset class, and the surge of patent issuances in the pro-patent era.

 

April 10, 2013 | Permalink | Comments (0) | TrackBack (0)

Antitrust Corporate Governance and Compliance

Posted by D. Daniel Sokol

Rosa M. Abrantes-Metz, Global Economics Group, LLC; New York University - Leonard N. Stern School of Business - Department of Economics and D. Daniel Sokol, University of Florida - Levin College of Law; University of Minnesota School of Law have posted Antitrust Corporate Governance and Compliance.

ABSTRACT: Cartel detection has been an important part of antitrust scholarship and policy for some time. Most of the development of the literature on cartel detection has focused at the firm level. This should not be surprising since industrial organization studies firms and markets. Antitrust scholarship has not focused as much on compliance and corporate governance within a given firm. Understanding the internal workings of firms would allow for closer to optimal deterrence, as this understanding would allow for calibrating policy around the incentives within a given firm, its subunits and individuals who work therein, to comply with antitrust law.

Both theoretical and empirical work in a number of different fields, including economics, accounting, finance, organizational theory and sociology provide important insights indicating that a firm is not merely a single entity in its actions. Rather, a firm is made up of a number of various components, each of which has its own incentives that shape firm behavior. This chapter reviews both the antitrust and the non-antitrust literatures on compliance and corporate governance to provide a clearer picture of the extant literature and the theoretical and empirical gaps within the antitrust literature to better inform antitrust policy on detecting cartels. This chapter explores the scholarship both within and outside of antitrust to better understand internal detection of wrongdoing and improved compliance in the antitrust cartel context.

April 10, 2013 | Permalink | Comments (0) | TrackBack (0)

The Competition Act 2002, ten years later: lessons from the Irish experience of prosecuting cartels as criminal offences

Posted by D. Daniel Sokol

Terry Calvani (Freshfields) and Kaethe M. Carl (Freshfields) analyze The Competition Act 2002, ten years later: lessons from the Irish experience of prosecuting cartels as criminal offences.

ABSTRACT: A decade has passed since the Irish Competition Act, 2002, was signed into law and the cartel enforcement regime in Ireland began in earnest. Preventing hard-core cartel behaviour has throughout this period remained the Irish Competition Authority’s top enforcement priority, yet the achievements of the Authority have been mixed. The article traces the evolution of the criminal cartel provisions of the Irish competition law and the enforcement mechanisms available to the Authority. The article then assesses the Authority’s enforcement record and compares the Irish experience with other cartel enforcement regimes. Although the Authority has secured multiple convictions, Irish judges have been unwilling to commit a single convicted individual to prison. The existence of sufficient statutory sanctions is irrelevant absent a willingness of Irish judges to impose them, and the absence of meaningful sanctions makes the Cartel Immunity Programme less successful because the benefit of immunity is reduced. The article discusses the Authority’s case selection and suggests changes that would make the Authority more effective. It also advocates legislation that strengthens whistleblower protections, proscribes perjury as an indictable offence, and continues to increase the Authority’s cartel resources.

April 10, 2013 | Permalink | Comments (0) | TrackBack (0)

Tuesday, April 9, 2013

Antitrust's Rule of Reason: Only Competition Matters

Posted by D. Daniel Sokol

Greg Werden (DOJ) argues Antitrust's Rule of Reason: Only Competition Matters.

ABSTRACT: The rule of reason is the standard for testing whether a restraint violates the Sherman Act. The thesis of this article is that the only issue under the rule of reason is the impact of a restraint on the competitive process; the Sherman Act does not employ a welfare standard. This thesis is developed by reviewing Supreme Court decisions articulating and explicating the rule of reason, then outlining its proper application consistent with precedent. Debates of recent decades are revisited to clarify welfare concepts and explain how the views of Robert Bork were distorted and maligned. The article also explains how promoting welfare can be the overarching goal of the Sherman Act, even though welfare considerations are not directly relevant in applying the Act. Finally, the article shows that no Sherman Act case cited by scholars as adopting or implying a welfare standard actually did so.

April 9, 2013 | Permalink | Comments (0) | TrackBack (0)

Supermarkets as a Natural Oligopoly

Posted by D. Daniel Sokol

Paul B. Ellickson, Simon Graduate School of Business, University of Rochester has an interesting paper on Supermarkets as a Natural Oligopoly.

ABSTRACT: This paper proposes and tests a model of supermarket competition based upon an endogenous fixed cost (EFC) framework (Sutton, J. Sunk Cost and Market Structure: Price Competition, Advertising, and the Evolution of Concentration. Cambridge: MIT Press, 1991.). The relevance of the EFC framework to supermarket competition stems from the industry's surprisingly uniform competitive structure: irrespective of the size of the local market, a small number of firms (between three and six) capture the majority of sales. As markets grow, local rivalry drives firms to expand their fixed investments, limiting the number of firms that can profitably enter even the largest markets. Although markets stay concentrated, competition remains fierce, reflecting the inherently rivalrous nature of the underlying competitive mechanism. The goal of this paper is to identify the strategic focus of this rivalry, namely the drive to provide an ever greater variety of consumer products, and to eliminate alternative explanations for the observed structure by highlighting the unique form of firm conduct that characterizes this industry.

April 9, 2013 | Permalink | Comments (0) | TrackBack (0)