Compulsory Licensing of Intellectual Property As Merger Remedy: A Decision-Theoretic Approach

• Author: Jennifer E. Sturiale
• Position: Law Research Fellow, Georgetown University Law Center
• Pages: 605-646

Compulsory Licensing of Intellectual Property As

Merger Remedy: A Decision-Theoretic Approach

Jennifer E. Sturiale∗

ABSTRACT

Consistent with its goals of encouraging innovation and

enhancing consumer welfare, antitrust law generally does not

compel a firm to give access to the very assets that are the source of

a firm’s competitive advantage, including a firm’s intellectual

property, unless a firm has illegitimately gained some edge in the

market. And yet, in the context of merger review, compulsory

licenses are a fairly common remedy. The Federal Trade

Commission and Department of Justice do not impose a compulsory

license in every case, but the principles guiding the decision are not

entirely clear.

This Article is suspicious of the benefits of a compulsory license

and concerned about the costs. Ultimately, the agencies use

compulsory licenses as a remedial tool to change the post-merger

market dynamics. Although a remedial compulsory license may

achieve the goal of restoring competition lost as a result of the

merger, it may also undermine the merged firm’s incentives to

innovate. This may undo the very benefits and efficiencies the

merger hoped to achieve.

To take account of the uncertain effects of a compulsory license,

this Article suggests the agencies adopt a decision-theoretic

approach to the remedy phase of a merger analysis. The Horizontal

Merger Guidelines issued in 2010 adopt an approach for reviewing

mergers consistent with a decision-theoretic approach. But that

process stops short of considering the potential effects of a proposed

remedial mechanism. This Article recommends that the agencies

extend the decision-theoretic analysis implicit in the revised Merger

Guidelines and include consideration of the possible outcomes that

can result if a potential remedy is chosen, the likelihood of those

outcomes, as well as the magnitude of harm and benefits that will

follow if those outcomes should come to pass. A decision-theoretic

approach will enable the reviewing agency to take better account of

the potential, but uncertain, outcomes of a potential remedy.

Moreover, such an approach will discipline the agencies’ decision-

Copyright 2012, by JENNIFER E. STURIALE.

∗ Law Research Fellow, Georgetown University Law Center. The author

is grateful for the helpful comments of Steve Salop, Howard Shelanski, David

Super, Mark Silverstein, and the participants of the Georgetown Fellows’

Collaborative, and for the research assistance of Ann Baum.

606 LOUISIANA LAW REVIEW [Vol. 72

making processes, ensuring that remedies are imposed only when

they are actually likely to benefit consumers.

TABLE OF CONTENTS

Introduction ..........................................................................607

I. Merger Review .....................................................................612

A. The Hart-Scott-Rodino Filing Requirement ..................612

B. Horizontal Merger Guidelines .......................................613

1. Merger Analysis Under the Merger Guidelines .......613

2. The Specific Case of Innovation Under the

Merger Guidelines ...................................................618

3. Price and Output Effects Versus Innovation

Effects ......................................................................619

II. Merger Remedies .................................................................623

A. Injunction, Fix-it-First, Negotiated Settlement ..............623

B. Compulsory License ......................................................624

1. Benefits of a Compulsory License ...........................625

a. Lower Barriers to Entry .....................................625

b. Lower an Existing Competitor’s Costs ..............626

c. Costless To Provide ...........................................627

2. Costs of a Compulsory License ...............................627

a. Change the Incentives of the Merged Firm ........628

b. Change the Incentives of the Licensee ...............630

c. Change Incentives of Market Participants

over Time ...........................................................632

III. Decision-Theoretic Approach to the Remedy Phase

of Merger Analysis ..............................................................633

IV. Model Scenarios: A Decision-Theoretic Approach

in Practice.. ...........................................................................641

A. Anticompetitive Effects to Static Price and Output

Effects, with No Expected Benefits to Innovation .........641

B. Anticompetitive Effects to Innovation ...........................642

C. Anticompetitive Effects to Static Price and Output

Effects; Expected Benefits to Innovation ......................644

Conclusion ...........................................................................646

2012] COMPULSORY LICENSING AS MERGER REMEDY 607

INTRODUCTION

In recent years, it has become generally accepted that the

intellectual property laws and the antitrust laws serve the common

goals of encouraging innovation and enhancing consumer welfare.1

The intellectual property laws encourage investments in the

creation, dissemination, and commercialization of original works

and inventions by securing for authors and inventors, for a limited

time, the exclusive right to exploit their works.2 At the same time,

the antitrust laws attempt to encourage innovation by promoting

competition among firms and rewarding the winners of that

competition with legitimately earned monopoly profits, as

explained by the Supreme Court in Verizon Communications Inc.

v. Law Offices of Curtis V. Trinko, LLP:

The opportunity to charge monopoly prices—at least for a

short period—is what attracts “business acumen” in the

first place; it induces risk taking that produces innovation

and economic growth. To safeguard the incentive to

innovate, the possession of monopoly power will not be

found unlawful unless it is accompanied by an element of

anticompetitive conduct.3

A firm may acquire monopoly power—i.e., the ability to

charge supra-competitive prices, reduce output, or otherwise harm

consumer welfare—a number of ways, including by establishing

facilities, personnel, and other assets that enable the firm to

1. COUNCIL OF ECON. ADVISERS TO THE PRESIDENT OF THE U.S., ECONOM IC

REPORT OF THE PRESIDENT 174 (1999) [hereinafter ECONOMIC REPORT OF THE

PRESIDENT] (“The use of antitrust policy as a framework for preserving and

encouraging innovation[] . . . is a more recent development . . . .”); see also id. at

182 (“On the surface, a tension exists between intellectual property protection and

competition policy: one grants exclusive rights that confer a limited, temporary

monopoly; the other seeks to keep monopoly at bay. But at a more basic level the

two areas of policy have a common goal: to enhance economic performance and

consumer welfare.”); DEP’T OF JUSTICE & FED. TRADE COMM’N, ANTITRUST

GUIDELINES FOR THE LICENSING OF INTELLECTUAL PROPERTY 2 (1995)

[hereinafter LICENS ING GUIDELINES], available at http://www.justice.gov/atr/

public/guidelines/0558.htm (“The intellectual property laws and antitrust laws

share the common purpose of promoting innovation and enhancing consumer

welfare.”); Atari Games Corp. v. Nintendo of Am., Inc., 897 F.2d 1572, 1576

(Fed. Cir. 1990), quoted in L

ICENSING GUIDELINES at 2 n.7 (“[T]he aims and

objectives of patent and antitrust law may seem, at first glance, wholly at odds.

However, the two bodies of law are actually complementary, as both are aimed at

encouraging innovation, industry and competition.”).

2. U.S. CONST. art I., § 8; 35 U.S.C. §§ 154(a)(1), 271 (2011); 17 U.S.C.

§§ 106–122, 501 (2011); see also LICENSING GUIDELINES, supra note 1, at 2.

3. 540 U.S. 398, 407 (2004).