Monday, June 23, 2008

FTC Submits Staff Comment to FAA on Proposed Congestion Management Rule for LaGuardia Airport

Posted by D. Daniel Sokol

This is travel season and the FTC is on top of this important issue.  To make our lives a bit better, the FTC has approved a staff comment to the Federal Aviation Administration (FAA) on a proposed congestion management rule for LaGuardia Airport

June 23, 2008 | Permalink | Comments (0) | TrackBack (0)

Discount Policies in US and EU Antitrust Enforcement Models: Protecting Competition, Competitors or Consumer Welfare?

Posted by D. Daniel Sokol

Vito Auricchio of Italian law firm Legance has posted his article Discount Policies in US and EU Antitrust Enforcement Models: Protecting Competition, Competitors or Consumer Welfare?

ABSTRACT:  The paper deals with the issue of the standard of enforcement for rebates applied by firms holding market power. The analysis is based on both the US and the EU case-law and on the recent Discussion Paper published by the European Commission on the application of Article 82 of the EC Treaty to exclusionary abuses. In particular, the paper analyses the US case-law and discusses the difference in the approach between the first decisions and the most recent ones, such as Le Page. In addition, when examining the EU decision practice and case-law reference is made to some recent decisions of the Court of Justice of the European Communities and of the European Commission that have left open issues on the appropriateness of the rules used at EU level to scrutinize exclusionary rebates.

June 23, 2008 | Permalink | Comments (0) | TrackBack (0)

Mergers, Asymmetries and Collusion: Experimental Evidence

Posted by D. Daniel Sokol

Miguel A. Fonseca (University of Exeter School of Business) and Hans-Theo Normann (University of London - Department of Economics) write on Mergers, Asymmetries and Collusion: Experimental Evidence.

ABSTRACT:  We analyze the impact of mergers in experimental Bertrand-Edgeworth oligopolies. Treatment variables are the number of firms (two, three) and the distribution of industry capacity (symmetric, asymmetric). Consistent with a dynamic collusion model, we find that, even though they are more concentrated, asymmetric markets exhibit lower prices than symmetric markets with the same number of firms. Consistent with the static Nash prediction, duopolies charge higher prices than triopolies when we control for (a)symmetry. The overall impact of a merger (which comprises both fewer firms and an asymmetry) is anti-competitive but the price increase is not significant.

June 23, 2008 | Permalink | Comments (0) | TrackBack (0)

The Best US Antitrust Practitioners?

Posted by D. Daniel Sokol

In looking at the individual rankings from the recently released Chambers 2008 US rankings for both DC and NY, one striking difference between the two lists is that the DC rankings are heavily populated by former agency people (and indeed former senior ranking agency people) while the New York list has far fewer people with ANY agency experience.

How important is agency experience, and in particular senior agency experience?  If I was a general counsel and I had a complex merger that raised serious pontetial antitrust issues (and I think that it is particularly the case with mergers), I would in almost every case want to hire someone with agency experience for a number of reasons: 1. former agency people may have better credibility before the agencies, 2. former agency people may have a bit more of an insider's sense of the agencies in terms of understanding the agency's thought process and perhaps could better reassue me as the client, 3. if the deal goes bad because of antitrust concerns, I would want to be able to cover myself to my superiors in my company by saying that I had hired someone with lots of experience dealing with the agencies who know the US antitrust agencies inside and out.  I think that none of these reasons cannot be overcome by someone who is really good and has never worked at an agency (and there are a number of people with agency experience who seem to be less good than those that have it), but is is striking how nearly all of the best practitioners in DC have agency experience.  This raises a larger question of whether or not if a deal goesfor competitive bid and there are complex antitrust issues, do GCs nearly automatically choose a separate DC antitrust practice for the legal work even if they choose a NY firm for deal work?  My suspicion in talking to general counsels is that this happens quite a bit.  If so, the big question to me is, given the per partner profits of NY based firms, why don't NY firms plug in senior antitrust agency people into their practices more often either poaching directly from government or via lateral hires?

June 23, 2008 | Permalink | Comments (1) | TrackBack (0)

Sunday, June 22, 2008

Section 2 Remedies: What to Do After Catching the Tiger by the Tail

Posted by D. Daniel Sokol

Tom Barnett's comments  Section 2 Remedies: What to Do After Catching the Tiger by the Tail, which he presented at the American Bar Association Antitrust Section's Conference on Monopolization Remedies are up on the DOJ website.

June 22, 2008 | Permalink | Comments (0) | TrackBack (0)

Saturday, June 21, 2008

Measuring Market Power in Wholesale Electricity Italian Market

Posted by D. Daniel Sokol

C. Andrea Bollino, Department of Economics, Finance and Statistics - University of Perugia and Paolo Polinori, Department of Economics, Finance and Statistics - University of Perugia analyze Measuring Market Power in Wholesale Electricity Italian Market.

ABSTRACT: In the new deregulated competitive Italian electricity many interesting issues arise as the market complexity, the firm strategic behavior, the market power size, and so on. Effective competition in the electricity market is a necessary features of a successful supply industry restructuring. In this paper we examine the degree of competition in the Italian market during the period April 2004 to December 2004 in two principal ways. In the first one we estimate a very intuitive relation among the differences between the hourly equilibrium price (ph) and the individual hourly bids that the competitors offer around ph, and a large set of structural and behavioral variables. In the second one the aim is twofold. The first one is to build the residual demand for each Italian Generation Company. The construction of the residual demand curve system is the necessary condition to get the second aim which is to measure the unilateral market power for the Italian Generation Companies. Following Wolak (2003) approach the appropriate measure of the unilateral market power is the Lerner index based on the residual demand curve elasticity which is computed as arc elasticity. The expected results is a deeper understanding of the Wholesale Italian Electricity Markets and of its mechanism in order to enhance competition and to design appropriate market surveillance.

June 21, 2008 | Permalink | Comments (0) | TrackBack (0)

Friday, June 20, 2008

The Past, Present, and Future of Monopolization Remedies

Posted by D. Daniel Sokol

Waller Spencer Waller of Chicago Loyola Law School recently uploaded his paper The Past, Present, and Future of Monopolization Remedies, which he presented at the excellent ABA Section 2 remedies conference earlier this month at UVA.

ABSTRACT: A well understood theory of remedies in monopolization and abuse of dominance cases does not exist at present in either the case law or the academic literature and may not even be possible The most likely explanation is that monopolization cases and abuse of dominance cases (particularly successful ones) are relatively rare birds. While these cases are of great importance, they arise only episodically and rarely in the same industries, making comparisons between different industries and time periods not very helpful.

In this essay, I first survey the principal types of remedies that have been imposed in monopolization cases over the past century. I then look at the current state of monopolization law and remedies. Finally I briefly address a likely future that focuses on information and access as a form of virtual, rather than physical, divestiture as a critical issue for the courts and enforcers to resolve through innovative compliance mechanisms.

June 20, 2008 | Permalink | Comments (0) | TrackBack (0)

Divestiture as an Instrument of a Pro-Active Competition Policy: Conceptual Issues and Lessons from International Experiences

Posted by D. Daniel Sokol

Christian von Hirschhausen, German Institute for Economic Research - Department of International Economics Anne Neumann, Dresden University of Technology - Faculty of Business and Economics, and Hannes Weigt, TU Dresden University of Technology - Faculty of Business and Economics explore Divestiture as an Instrument of a Pro-Active Competition Policy: Conceptual Issues and Lessons from International Experiences

ABSTRACT: Given insufficiently competitive wholesale electricity markets in Germany there is an ongoing discussion about the appropriate instruments of a pro-active competition policy. This study analyzes horizontal divestiture form an economic perspective. We discuss the conceptual justification of divestiture and report on selected empirical evidence on divestiture.

June 20, 2008 | Permalink | Comments (0) | TrackBack (0)

Dynamic Efficiencies in Merger Analysis

Posted by D. Daniel Sokol

The OECD recently released its roundtable discussion and report summary on Dynamic Efficiencies in Merger Analysis.

ABSTRACT: This roundtable addressed the recurring synergies that mergers sometimes create.  These synergies, or “efficiencies,” can have very potent beneficial effects but are devilishly difficult to identify and measure.  The Committee focused on dynamic efficiencies that facilitate or encourage innovation.

June 20, 2008 | Permalink | Comments (0) | TrackBack (0)

Risk Aversion, Prospect Theory, and Strategic Risk in Law Enforcement: Evidence from an Antitrust Experiment

Posted by D. Daniel Sokol

Maria Bigoni, University of Padua - Department of Economics, Sven-Olof Fridolfsson, Research Institute of Industrial Economics, Chloe Le Coq, Stockholm School of Economics, and Giancarlo Spagnolo, University of Tor Vergata, Stockholm School of Economics discuss Risk Aversion, Prospect Theory, and Strategic Risk in Law Enforcement: Evidence from an Antitrust Experiment in their latest paper.

ABSTRACT: In this paper we investigate the effects of risk preferences and attitudes towards risk on optimal antitrust enforcement policies. First, we observe that risk aversion is negatively correlated with players' proclivity to form a cartel, and that increasing the level of fines while reducing the probability of detection enhance deterrence. This confirms that the design of an optimal law enforcement scheme must keep risk attitudes into account, as suggested by Polinsky and Shavell. We also notice that players' propensity towards communication drops right after detection even if the collusive agreement was successful, and it declines as the sum of the fines paid by a subject increases. This effect could be explained by availability heuristic, Â-a cognitive bias, where people's perception of a risk is based on its vividness and emotional impact rather than on its actual probability. Our results also confirm the crucial role of strategic risk considerations (analogous to risk dominance for one shot games) in determining the effects of leniency programs. Indeed, we show that the effectiveness of leniency programs in deterring cartels is mostly due to the increased risk of a cartel member being cheated upon when entering a collusive agreement, while the risk of a cartel being detected by an autonomous investigation of the Authority seems to play a less important role.

June 20, 2008 | Permalink | Comments (1) | TrackBack (0)

Thursday, June 19, 2008

Kovacic on "FTC at 100: Into Our Second Century"

Posted by D. Daniel Sokol

New on the FTC website today is a press release on FTC at 100: Into Our Second Century, based on a speech that Chairman Kovacic gave yesterday 21st Annual Western Conference of the Rutgers University Center for Research in Regulated Industries held in Monterey, California.

The key conclusion to the speech is the following:

  • We will address these [research questions which Kovacic laid out in the speech] with a mix of internal deliberations and external consultations. We not only want to ask difficult questions of ourselves, but we want to see ourselves as others see us. The external consultations, which will begin in late July and extend through this calendar year, mainly will take the form of workshops to which the FTC will invite a broad collection of expert observers from academia, business groups, consumer organizations, and government bodies. The workshops will take place in the United States and abroad. We expect to complete the proceedings by the close of 2008. The self-assessment will yield recommendations for future Commission operations and supply a template for future comparable exercises.

June 19, 2008 | Permalink | Comments (0) | TrackBack (0)

Disgorgement as an Antitrust Remedy

Posted by D. Daniel Sokol

Elhaugee Einer Elhauge of Harvard Law School offers what I believe is an important additional tool that should be used in the antitrust arsenal of remedies in his thought provoking paper Disgorgement as an Antitrust Remedy.

ABSTRACT: Disgorgement of illicitly-gained profits is a legally available remedy, but is rarely sought by antitrust agencies. This piece argues that the main conventional explanation for its rare usage - the availability of private damage remedies - is often unconvincing given obstacles to such suits, and is becoming even less convincing given recent antitrust decisions narrowing private and class action damage suits. Further, because the behavioral and structural remedies otherwise sought by the government are often ineffective in monopolization cases, disgorgement might often be a referable governmental remedy. Finally, if we understood the EC claim for excessive pricing to be a claim for disgorgement of profits earned through the anticompetitive acquisition of a dominant position, we could both make better policy sense of that claim and fill a regulatory gap that EC law would otherwise leave for exclusionary conduct that created a dominant position, but did not abuse existing dominance.

June 19, 2008 | Permalink | Comments (0) | TrackBack (0)

China Begins Antitrust Probe of Microsoft... Or Maybe Not

Posted by D. Daniel Sokol

Though the Chinese AML does not go into effect until August 2008, news reports from China (for Chinese language reports see here, here, and here) state that Chinese authorities have already begun an investigation into monopolistic practices by Microsoft.  For a new antitrust regime, my sense is that this is a terrible strategic decision to make in terms of agency priorities given very significant agency capacity constraints.  If Chinese enforcers want to make an immediate impact, they should focus on cartels and competition advocacy.  These are low hanging fruit and success will build momentum in creating a competition culture in China.

HT- Paul Jones


11:30am Update

According to Bloomberg, China Says There's No Antitrust Probe on Microsoft.

June 19, 2008 | Permalink | Comments (0) | TrackBack (0)

Is Hong Kong's Competition Law Fundmentally Flawed?

Posted by D. Daniel Sokol

An article in today's Wall Street Journal casts some doubt on the ability of of the proposed Hong Kong competition law to attach anti-competitive conduct.

June 19, 2008 | Permalink | Comments (0) | TrackBack (0)

Fourth Annual Conference of the Global Competition Law Centre - Cartels and Enforcement Proceedings: Current Legal Issues

Posted by D. Daniel Sokol

The College of Europe's Global Competition Law Centre hosts its 4th annual program, with a very strong list of speakers on the topic of Cartels and Enforcement Proceedings: Current Legal Issues, starting today.

19-20 June 2008
Hilton Hotel
Boulevard de Waterloo 38
1000 Brussels
Belgium

Speakers include:

  • Neelie Kroes, European Commissioner for Competition
  • R. Whish, Professor of Law, King’s College London
  • Edurne Navarro, Partner, Uria Menéndez
  • Jacques Bourgeois, President of the GCLC, Of Counsel, WilmerHale LLP
  • Sven Voelcker, Partner, WilmerHale LLP
  • Maarten Peter Schinkel, Professor of Economics, University of  Amsterdam
  • Johan Ysewyn, Partner, Linklaters LLP
  • Ewoud Sakkers, Head of Unit, DG COMP, European Commission
  • Sir Christopher Bellamy, Legal consultant, Linklaters LLP, Former President of the UK Competition Appeal Tribunal (CAT)
  • Flavio Laina, Deputy Head of Unit, DG COMP, European Commission
  • María Tierno Centella, Deputy Head of Unit, Cartels II, DG COMP, European Commission
  • Denis Waelbroeck, Partner Ashurst LLP, Professor, College of Europe
  • Stanisław Sołtysiński, Professor at the Law and Administration School of Poznań University, Partner SK & S Legal
  • Christof Swaak, Partner, Stibbe LLP
  • Jacques Derenne, Partner, Lovells LLP
  • John Temple Lang, Counsel, Cleary Gottlieb
  • Pierre Bos, Partner, BarentsKrans
  • Matthew Levitt, Partner, Lovells LLP
  • Rainer Becker, European Commission
  • Philip Collins, Chairman, Office of Fair Trading
  • Alan Wiseman, Partner, Howrey LLP
  • Till Schreiber, CDC Cartel Damage Claims Holding SA
  • Michel Waelbroeck, Emeritus Professor, Free University of Brussels
  • Floris Vogelaar, Professor of Law, University of Amsterdam
  • James Flynn QC, Brick Court Chambers

June 19, 2008 | Permalink | Comments (0) | TrackBack (0)

Wednesday, June 18, 2008

Corporate Governance and Collusive Behaviour

Posted by D. Daniel Sokol

Paolo Buccirossi, Laboratory of Economics, Antitrust, Regulation (LEAR) and Giancarlo Spagnolo, University of Tor Vergata, Stockholm School of Economics (SITE) have a very interesting article that brings together corporate governance and antitrust themes, titled Corporate Governance and Collusive Behaviour.

ABSTRACT: This chapter examines the relationship between corporate governance and competition, particularly with regard to cartel formation, and discusses how corporate governance and firm agency problems affect optimal law enforcement against cartels, both in terms of sanctions and leniency policies. Many of the conclusions appear applicable, with minor changes, to non-antitrust forms of collusion, such as collusion between auditors and management, and more generally to corporate and organized crime.

June 18, 2008 | Permalink | Comments (0) | TrackBack (0)

Section 2 Enforcement and Developments

Posted by D. Daniel Sokol

Bonny E. Sweeney (Coughlin Stoia Geller Rudman & Robbins) offers some thoughts on Section 2 Enforcement and Developments in the AAI symposium that appeared in the Wisconsin Law Review.

ABSTRACT: In the United States, monopoly enforcement rises and falls with political and ideological trends. The George W. Bush administration believes that the potential for monopoly profits incentivizes firms to innovate, and it avoids aggressive enforcement policies that might chill innovation. While few would argue for blind condemnation of monopoly power, critics argue that current monopoly-enforcement policy ignores exclusionary conduct that harms competition—and ultimately consumers.

This Paper gives a brief overview of section 2 of the Sherman Act, describes recent developments, summarizes the Antitrust Modernization Commission’s (AMC) recent section 2 findings and recommendations, and describes current enforcement policies. It suggests that a more aggressive federal enforcement policy would benefit both consumers and the competitive process and recommends that antitrust enforcers do the following: increase scrutiny of monopolists’ potentially anticompetitive behavior; adopt a more balanced approach in amicus briefs; be more open to the views of foreign antitrust-enforcement agencies; seek opportunities through case law to develop coherent approaches to bundling and refusals to deal; give more serious consideration to structural remedies in appropriate cases; and restore balance between the apparently competing goals of protecting intellectual-property rights and enforcing the antitrust laws.

June 18, 2008 | Permalink | Comments (0) | TrackBack (0)

Telecommunications Mergers

Posted by D. Daniel Sokol

Picture127 Blogger guru and Dean of the law school Jim Chen of the University of Louisville Brandeis School of Law has authored a forthcoming chapter on Telecommunications Mergers.

ABSTRACT:  Telecommunications mergers are at once a historical mirror and a harbinger of the legal future. Since the passage of the Telecommunications Act of 1996, no significant telecommunications merger has failed to receive regulatory approval in the United States.
 
The Telecommunications Act of 1996 has accelerated the trend toward consolidation and concentration. Having devoted most of its energy on issues doomed to become technologically and economically obsolete, the Act failed to anticipate the technological conditions (especially the emergence of the Internet) that drove telecommunications carriers to consolidate. Nevertheless, possible avenues for reform remain open should the federal government ever conclude that the anticompetitive potential of telecommunications mergers outweighs their salutary effects.

June 18, 2008 | Permalink | Comments (0) | TrackBack (0)

Bundled Discounts as Competition for Distribution

Posted by D. Daniel Sokol

Ben Klein of UCLA (Department of Economics) and LECG discusses Bundled Discounts as Competition for Distribution in his latest working paper.

ABSTRACT: The antitrust law of bundled discounts is unsettled. LePage’s broadly condemned bundled discounts instituted by a dominant firm where it appeared that the discounts served no economic purpose other than to place rival, single-product suppliers at a competitive disadvantage. In contrast, PeaceHealth more recently proposed a less restrictive standard, requiring for antitrust liability that the firm’s attributed price, allocating all discounts on the entire bundle of products to the rival’s product, be less than the firm’s costs of producing that product.

A major shortcoming in both of these decisions, and in antitrust analysis more generally, is the failure to understand the competitive role served by bundled discounts. This absence of a pro-competitive rationale has fundamentally influenced the terms of the debate and antitrust litigation. Without an understanding of the pro-competitive economic forces that may lead firms to use bundled discounts, competition does not appear to be occurring “on the merits.” This leaves bundled discounts unnecessarily vulnerable to challenge on monopolization/attempted monopolization grounds.

The Antitrust Modernization Commission’s attempt to develop reasonable safe harbor screens, including the attributed price less than cost requirement adopted by the PeaceHealth court, was an effort to control such challenges to pricing arrangements generally considered part of the normal competitive process, even if we do not know exactly what purpose they serve.

The goal of this article is to begin to fill this gap in our economic understanding by outlining the possible efficiencies associated with bundled discounts. In undertaking this economic analysis, this article focuses on cases of bundled discount arrangements that have the potential effect of limiting competitors’ access to the market by controlling distribution.

June 18, 2008 | Permalink | Comments (0) | TrackBack (0)

Tuesday, June 17, 2008

The Quandary of Quanta: Thoughts on the Supreme Court Decision One Week Later

Posted by Shubha Ghosh

The United States Supreme Court handed down its decision in Quanta v LG Electronics last week (download decision here: Download quantaopinion.pdf ), and the unanimous, relatively short opinion has raised more questions than it perhaps answered.  Professor Christopher Holman of The University of Missouri-Kansas City Law School offers his thoughts here.   Although Professor Holman and I submitted amicus briefs on opposite sides of the case (mine were on behalf of Quanta and authored for the American Antitrust Institute), we agree on many critical points.  Our overlap in views represents how controversial the Supreme Court opinion turned out to be.  I will divide my comments into three parts here: (1) what the case is about, (2) what the Supreme Court opinion says, and (3) what the Court's opinion means.

The Road to Quanta

The controversy began in 1992 when the United States Court of Appeals for the Federal Circuit decided Mallinckrodt v. Medpart (download opinion here: Download Mallinckrodt.pdf).  At issue in Mallinckrodt was the enforceability of a license restriction that prohibited reuse of a patented device for releasing a therapeutic spray in mist form.   The Federal Circuit upheld the restriction, holding that conditions are enforceable if within the terms of the patent grant.  Through its decision, the Federal Circuit created the "conditional sale doctrine," which allows a patent owner to impose conditions in a patent license and enforce them through claims for patent infringement. 

At issue in Quanta was the relationship between the conditional sale doctrine and the doctrine of patent exhaustion, dating back to the Nineteenth Century.  Under the doctrine of patent exhaustion, the sale of a patented item exhausts the patent owner's rights and limits the ability of the patent owner to sue for patent infringement.  Patent exhaustion allows users to sell or reuse patented items without being sued for patent infringement.   The facts of Quanta illustrate the controversy. LG and Intel settled a patent dispute involving several of LG's patents relating to methods and products relating to computer memory.   Under the terms of the settlement, Intel was given a blanket license over the use of LG's patent portfolio and LG had placed several restrictions on the use of its patents, including combination of patented methods and products with unpatented components.  These restrictions were to run against comptuer manufacturers who bought computer chips from Intel that incorporated LG's patents.   LG brought suit against several manufacturers for violation of the licensing restrictions, and the manufactures argued that LG's patent rights had been exhausted when the chips were sold.   The Federal Circuit held that method patents could not be exhausted as a matter of law and that the product patents had not been exhausted since LG had conditioned the sale of the patents with restrictions on combinations.  Last week, the Supreme Court reversed, ruling in favor of Quanta that (1) method patents can be exhausted and (2) LG's patent rights had been exhausted in the transfer of the patents to Intel. 

What the Supreme Court Opinion Says

As is often the case, the manner in which the Court stated the issue at the beginning of its opinion frames the issues decided.  Justice Thomas' twenty page, unanimous opinion states at the outset the question the Court purports to answer: "In this case, we decide whether patent exhaustion applies to the sale of components of a patented system that must be combined with additional components in order to practice the patented methods."  The framing of the question suggests how the Court viewed the facts of the case and the issues to be decided.  Two points are striking.  First, the reference to the "patented methods."  The Court, unlike many practitioners watching the case,  was concerned with the method patent issue.  Second, the Court viewed the combination of patented and unpatented components as crucial to this case.  The patents could be practiced only if the inventions were combined with other components; this commercial background affected the expectations of the parties when they entered into the transactions that were at issue in the case.

Accordingly,  the Court decided the issues consistent with this initial statement.  First, the Court held that patent methods could be exhausted, overruling the Federal Circuit and creating precedent in a murky area of patent law.  Although lower courts had disagreed on this issue, the Court decided that there is no reason to treat method patents any differently from product patents for the purposes of patent exhaustion.  Once the Court had ruled on this new principle of patent exhaustion, the Court moved on to the issue of whether LG's patent rights had been exhausted in this case.   Relying on an antitrust case, United States v. Univis Lens Co., 316 U.S. 241 (1942), the Supreme Court held that the rights had been exhausted when the patent owner sold patented items to purchasers who would use the patented item consistent with the manner in which the patent was to be practiced.   In Univis Lens,  the Court had examined whether the patent owner had exhausted its rights in the distribution of its patented eyeglass lens and thereby had given up any patent defenses to the antitrust claims raised by the government.  The Court ruled that the patentee had exhausted its rights because the product sold incorporated essential features of the patented invention.   Following the logic of Univis Lens, the Court in Quanta reasoned that the chips purchased by the computer manufacturers incorporated the features of LG's patents and practiced the patents.  To quote the Court, "Everything inventive about each patent is embodied in the Intel Products."  Hence, the Court concludes, LG had exhausted its patent rights and could not enforce the limitations against Quanta and the other computer manufacturers as patent infringement claims.

Note the last point.  In what I think will become a famous footnote, the Court stated that LG may still have contract claims against the manufactures, but these claims were not before the Court (see footnote 7).   Therefore, the Court acknowledges that patent owners may still be able to enforce license limitations through contract claims, but implictly acknowledges that violations of such limitations may not be the basis for claims of patent infringement.  Nowhere in its opinion does the Court mention the Mallinckrodt decision, but footnote 7 strongly suggests that Mallinckrodt no longer stands as the prevailing precedent and that there are now limits on the Federal Circuit's conditional sale doctrine.

The Road After Quanta

There are four points I would like to emphasize about the Quanta decision. 

First,  the Court's decision on the exhaustion of method patents caught many people by surprise because the issue had not been a main focus of the briefing or the oral argument.   It is not clear that the ruling was necessary for the Court to find in favor of Quanta or for its second holding about exhaustion under Univis Lens.  Nonetheless, the fact that the Court addressed and settled the issue of patent exhaustion for method claims suggests that the Court takes the patent exhaustion doctrine seriously as a bedrock principle of patent law.

Second, the dog that did not bark makes the most noise.  The Court does not mention the Mallinckrodt decision, suggesting that the Federal Circuit's 1992 is still good law.   But the Court seems to weaken the conditional sale doctrine in many respects.  Footnote 7, for example,  could be read to mean that the conditional sale doctrine gives rise to contract remedies, rather than patent ones.  Furthermore, the broad reading that the Court gives to Univis Lens and to patent exhaustion suggests that licensing restrictions may not survive the scrutiny of the patent exhaustion doctrine.  What to make of the silence? An affirmation or a cold dismissal?   There are two ways in which Mallinckrodt and Quanta can be read together consistently.  First,  the conditional sale doctrine applies to use restrictions placed on the direct purchaser of a patented invention.   The Quanta decision applies to attempts by a patent owner to use licensing restrictions to reach through and enjoin subsequent purchasers and users of the patented invention.  Second,  the Quanta decision applies to situations where patented inventions are integrated with other components in complex inventions.  This second interpretation is consistent with the concern that the Supreme Court has expressed for the integration of patented and unpatented components in cases like eBay and KSR.  In eBay, for example, Justice Kennedy's influential concurrence admonished the granting of injunctive relief when a patented invention is part of a larger unpatented product.  In KSR, the Court was concerned about the combination of patented and unpatented items to satisfy the nonobviousness requirement.  The Quanta decision can be read in line with these other two recent precedents. 

Third,  the Court speaks broadly of the patent exhaustion doctrine but seems to conflate other related doctrines in crafting this new precedent.   Intellectual property law deals with three sets of doctrines that govern what users can do with intellectual property that they have obtained.  The first doctrine deals with resale by the user and is called, appropriately enough, the first sale doctrine.  The second doctrine deals with uses other than sales, such as reuses of the commodity protected by intellectual property law.  This second doctrine goes under various names, such as fair use in copyright and trademark, repair in patent law, and the broader category of implied licenses that runs through copyright and especially patent law.   The third doctrine is that of  exhaustion and governs limitations on the IP owner's ability to enforce its IP rights, once the protected work has been transferred.   Copyright law, for the most part, deals with these issues statutorily through Section 109 of the Copyright Act (dealing with the first sale doctrine) and Section 107 (dealing with fair use).  In fact, the last time the Supreme Court addressed the question of first sale was in the copyright context, exactly ten years ago in its Quality King v L'Anza decision, a case dealing with the statutory right of importation and the first sale doctrine under the Copyright Act.   The Court's decision in Quanta could have been handled as one of implied license:  Quanta implicitly had the right to make use of the patentend invention given the context of the transaction and the expectations of the parties.   But the Court's appeal to patent exhaustion reflects its precedents from patent and antitrust law (see Univis Lens) on the interpretation and enforcement of patent licenses.  More broadly,  the Court's decision reflects the common law nature of the patent exhaustion doctrine.  Perhaps once the dust of the most recent patent reform venture clears, Congress could focus on an area where patent reform might be useful: crafting statutory solutions to first sale and exhaustion in patent law, much like it has in copyright law.

Finally, there is the issue of the relationship between contract law and patent law.  Footnote 7 of the Quanta opinion leaves open the possibility that licensing restrictions can be enforced, possibly even against downstream purchasers, under contract law.  The Court does not address the contract  and property law issues raised by this possibility (for example, do covenants run with the chattel and how?), but needless to say  contract remedies are not as substantial as patent ones.  The conditional sale doctrine allows patent owners to turn violations of patent licensing restrictions into claims for patent infringement, with the attendant benefit of treble damages.   Whatever the status of Mallinckrodt,  footnote 7 and the Court's decision in Quanta places limitations on the patent owners to bring licensing restrictions under the purview of patent law. 

Professor Holman and I perhaps differ the most on this last point.   Although the Court did not delve into the policy issues raised by the Quanta case and the conditional sale doctrine,  its decision goes a long way in limiting a patent owner's ability to reach past the initial transaction and control downstream users and purchasers of patented products.   Such reach through is inconsistent with the principles of contracting as it leads to uncertainty and unpredictability in the use of products and services.  The Court seemed alert to these concerns in the oral argument with a number of justices asking questions about the implications of the conditional sale doctrine for contracting and business practice.   The Court's decision, despite its problems,  attempts to strike the right balance between patent law and contract law by recognizing limits on the patent owner's rights while leaving room for contract principles.  More importantly,  the silence on Mallinckrodt implies that a modified version of the conditional sale doctrine may survive the Quanta decision.   

My assessment on this week old decision:  it could have been much worse and much room is left for the development of both patent law and commercial law in this area.

June 17, 2008 | Permalink | Comments (1) | TrackBack (0)