Unraveling the patent-antitrust paradox.

• Author: Carrier, Michael A.

INTRODUCTION

The intersection of the patent and antitrust laws presents a formidable paradox. The patent laws increase invention and innovation by offering inventors a right to exclude. The antitrust laws foster competition, sometimes through the condemnation of such exclusion. As patents become ever more important in our information-based economy, the significance of the conflict between the patent and antitrust laws will only increase.

Courts and commentators have struggled with this paradox for generations. They have experimented with an array of disparate tests to determine, for example, when a company's reliance on its patents should immunize it from the antitrust offense of monopolization. Courts have applied rebuttable presumptions, emphasized the "scope" of the patent, examined the defendant's intent, and questioned whether an "essential facility" was denied. These various tests not only have dashed any hopes of predictability but also have failed to wrestle with the fundamental tension between the patent and antitrust laws. (1)

Moreover, the tests are both overinclusive and underinclusive in targeting activity that harms welfare. (2) Some of the tests are overinclusive in condemning conduct that has no adverse effect on welfare. For example, a company's intent to exclude typically reveals nothing more than an unexceptional desire to defeat its competitors. By penalizing the right to exclude, courts engaging in this type of inquiry take direct aim at the modus operandi of the patent laws.

At the same time, some of the tests are underinclusive in their blind deference to the patent laws. To state that action within the scope of the patent should automatically be immune from antitrust scrutiny (so the incentives underlying the patent system are not diminished) "solves" the patent-antitrust conflict only by according priority to the patent laws. This purported solution amounts to an assumption that the increase in welfare from safeguarding the patentee's right to exclude will always outweigh the increase that would have resulted from antitrust's enhanced competition. Such an approach ensures that only the patent, rather than the antitrust, path to innovation will be traversed. In short, courts' approaches to the patent-antitrust intersection fail to recognize the two independent paths to innovation and fail to articulate a framework that conceivably could be used to maximize (or at least to increase) welfare.

This Article proposes a new reconciliation of the patent and antitrust laws. It proffers a common denominator by which the laws can be measured and compared: innovation. It also recognizes that innovation is achieved through different routes in different industries and thus adjusts the antitrust analysis based on the industry. For example, it counsels courts (3) to defer to patents in industries in which patents are critical to innovation, such as pharmaceuticals. And it anticipates a more significant role for the antitrust laws in industries in which the market provides the incentives to innovate, such as computer software.

Part I of this Article sketches the dimensions of the conflict between the patent system and the antitrust laws, both in theory and through a hypothetical example. Part I then surveys representative approaches to the intersection that courts have taken and rejects proposed solutions to the conflict that courts and commentators have offered.

Part II begins the process of reconciling the patent and antitrust laws by introducing the common denominator of innovation. Part II grounds this selection in the text and legislative history' of the statutes and the relevant jurisprudence and economic theory.

Part III sets forth the test that courts should apply when evaluating monopolists' patent-based activity under Section 2 of the Sherman Act. Introduced at its most general level, the test takes the form of a rebuttable presumption that proceeds in three steps: (1) a presumption that, as long as the monopolist has a justification for the patent-based action other than harming competitors, the conduct is lawful; (2) a rebuttal if competition (and not patents) is responsible for innovation in the industry; and (3) a surrebuttal by which the monopolist can demonstrate that the relevant market in the industry is characterized by innovation. Courts are to determine whether the rebuttal applies based on an evaluation of three ex ante factors--the presence of market-based incentives to innovate, the ease of creating the patented product, and the difficulty of imitating the product--and the ex post factor of the cumulative nature of innovation in the industry. If both the ex ante and ex post factors reveal the primacy of competition in attaining innovation in an industry, then the rebuttal will be met. Part III concludes by applying the test to three hypothetical patentee monopolists: the Bully Monopolist, the Biopharmaceutical Patentee, and the Internet Auctioneer.

Part IV responds to anticipated objections to the proposal. First, it contends that courts are able to apply the test. Second, it demonstrates that any reduction in the incentives underlying the patent system resulting from the application of the test would be minor and not cause for concern. Third, it explains why the proposal is superior to readjustments to the patent system alone.

1. THE PROBLEM: A CONFLICT AND NO EASY RECONCILIATION

   1. The Patent-Antitrust Conflict (4)

      1. Different Paths to Welfare

         On their broadest level, the patent and antitrust laws both endeavor to increase welfare. (5) But the paths by which they pursue this objective frequently diverge.

         The primary purpose of the patent system is straightforward. (6) Inventors and investors expend substantial resources in creating and developing inventions. Conducting research and development and bringing an invention to market often are lengthy and expensive processes, with no guarantees of success at the end of the tunnel. And on those occasions when success is achieved, "free riders" who did not make any such investments might imitate the hard-earned innovation and appropriate its value for themselves. Such activity would tend to deter future inventors and investors, thereby reducing innovation. (7) To prevent this, the patent laws promise inventors a right to exclude for a period of twenty years, (8) a right that permits inventors to charge prices higher than their postinvention costs, thereby allowing them to recover profits in excess of the value of their front-end investments. (9) The right to exclude thus is designed to increase appropriability and thereby the level of invention in society.

         The unique characteristics of intellectual property support the right to exclude and shed light on the tension between the patent and antitrust laws. First, intellectual property is a public good. That is, it is nonrival (consumption by one person does not leave any less of the good to be consumed by others) and nonexclusive (others cannot be excluded from consuming it). (10) As a result of these characteristics, public goods tend to be underproduced and subject to free riders, who are tempted to imitate the invention after it has been developed. (11) Second, the value of intellectual property often is uncertain, most notably because of its novelty and information asymmetry. (12) From an antitrust perspective, therefore, it is difficult for enforcers and courts to determine the effect of particular practices involving intellectual property on welfare.

         The antitrust laws, on the other hand, scrutinize activity that restricts competition. The rationale of the laws is that competition leads to lower prices, higher output, and more innovation, and that certain agreements between competitors or conduct by monopolists prevents consumers from enjoying these benefits. (13) Because, for example, monopolists lack the constraints provided by competitive markets, they often reduce output, raise prices, limit innovation (so as not to introduce products that might dislodge their market position), and fail to allocate resources to the uses most highly valued by consumers. (14) But many acts undertaken by patentee monopolists or agreements between patentees and licensees restrict competition by their very operation. For example, patentees may refuse to use or license their patent (15) or may impose quantity restrictions, royalty payments, grantbacks, (16) territorial restrictions, (17) or field of use restrictions (18) on licensees. Activity that may be encouraged under the patent system frequently raises the suspicion of the antitrust laws by reducing competition.

         The provision of the antitrust laws that targets monopolies, Section 2 of the Sherman Act, exposes this tension most dramatically in focusing on the actions of a single firm. A court may view a company's refusal to share its patented product as predatory conduct justifying a Section 2 violation, even if the action is perfectly lawful under the patent laws. And as courts employ tests that fail to acknowledge the beneficial purposes of patents, such as those focusing on the intent of the monopolist, a change in the market, or the denial of an essential facility, patents may get short shrift. (19)

         Another lens through which to view the tension between the patent and antitrust laws involves the balance between static and dynamic efficiency. In interpreting antitrust law, courts have focused primarily on static efficiency--in other words, on increasing economic welfare through a reallocation of the existing supply of resources in a Pareto-optimal fashion (i.e., so that no individual's welfare could be improved by a resource reallocation without some other person's welfare being diminished). (20) In particular, courts analyze allocative efficiency, striving for an optimal allocation of goods and services to customers. (21) Patent law, on the other hand, attempts to increase dynamic efficiency, or the Pareto-optimal allocation...