Justice News

Assistant Attorney General Makan Delrahim Delivers Remarks at the Federal Circuit Bar Association Global Series 2018 in Ottawa
Ottawa,,
Canada
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Wednesday, October 10, 2018

Good afternoon.  Thank you Chief Judge Prost for that introduction, it is an honor to be here with you.

It is also an honor to share the stage with Commissioner Boswell of the Canadian Competition Bureau.  He has been a great friend and great partner in our fight to protect competition and consumers.

I should also note and congratulate Commissioner Boswell, and the whole Competition Bureau, including recently retired Commissioner John Pecman, for their work and cooperation on the recently concluded United States–Mexico–Canada Agreement.  We have become even closer partners as a result.

I now want to thank the Federal Circuit Bar Association and the European Patent Law Association for organizing this event.

It may seem counter-intuitive to hold a gathering of Federal Circuit practitioners here in Canada, but I believe that drawing on the wisdom and experience of Federal Circuit judges, experts, and practitioners on the international circuit serves an important goal.  This Global Series stands as a recognition that intellectual property disputes are increasingly global in scope.  It also serves as a reminder that the United States’ laws and precedents regarding intellectual property carry significant respect and therefore weight in the global system of innovation and dynamic competition.  The same is true for the antitrust laws, which I consider one of the United States’ most widely adopted exports.

International observers may notice that there is a vigorous debate in the United States regarding how best to structure the rules governing the exercise of intellectual property rights in order to optimize innovation.  At the Antitrust Division, we too play a role in this debate, as competition policy and intellectual property rights often go hand-in-hand.  Indeed, our mission is to protect the free markets in order to allow for the dynamic competition that innovation provides.  This is how consumers benefit best.

Today’s debates over antitrust and intellectual property echo the concerns that animated the Framers of the U.S. Constitution and our early Republic.

The approach the Founders adopted in the Patent and Copyright Clause of the U.S. Constitution was truly revolutionary.  Not only did they embrace the idea that incentives were necessary for invention, they also opted for a decentralized, market-based process for determining inventors’ compensation.

This approach had its origins in the intellectual tradition that the United States and Canada share as original colonies of the British Empire.

Adam Smith, the Scottish philosopher and father of modern economic thinking, recognized the superiority of decentralized innovation policy in a free-market economy.  For centuries before his time, patents were generally disfavored.  They were seen as creating “monopolies” that harmed the public good.  Governments frequently offered “prizes,” rather than exclusive rights, as the means of inducing and rewarding inventions that would benefit the public.

As historian Zorina Khan explains, the rationale for offering “prizes” instead of exclusive rights was that “members of the special class of geniuses would respond more to honors and prizes rather than to mere material incentives.”

Adam Smith was skeptical of this approach.  In his 1763 Lectures on Jurisprudence, he explained that a centralized system of pre-determined “prizes” to compensate inventors was inferior to incentives and awards determined by the free-market process.  In Smith’s words:

[T]he inventor of a new machine or any other invention has the exclusive privilege of making and vending that invention . . . as a reward for his ingenuity . . . . [I]f the legislature should appoint pecuniary rewards for the inventors of new machines, etc., they would hardly ever be so precisely proportioned to the merit of the invention as this is. . . . [I]f the invention be good and such as is profitable to mankind, he will probably make a fortune by it; but if it be of no value he also will reap no benefit.

Smith’s rejection of centralized planning for rewarding inventors and his embrace of exclusive rights and free markets bears a striking resemblance to the constitutional framework that James Madison favored and the Founders adopted.

In The Federalist Papers and a series of letters with Thomas Jefferson, Madison advocated bestowing patent holders with rights to their inventions as an incentive to innovate.  He wrote that “the public good fully coincides . . . with the claims of individuals.”

Madison subsequently helped draft Article I, Section 8, of the Constitution, which established a patent framework bestowing inventors with “exclusive Right[s]” over their “Writings and Discoveries,” in order “[t]o promote the Progress of Science and useful Arts.” 

The Founders did not create a system of central planning for determining rewards for inventors and innovators; they placed their trust in markets.  By bestowing inventors with the “exclusive Right” over their invention once conferred by Congress, the initial patent system decentralized and deregulated the system of innovation.  The patent right under the Constitution rests exclusively with the inventor, who can sell his or her patented technology or negotiate to license that right to others, or to no one at all.

The antitrust laws share this same underlying policy of favoring decentralized, free-market competition.  As Justice Robert Jackson explained during his time as Assistant Attorney General of the Antitrust Division eighty years ago, “The antitrust laws represent an effort to avoid detailed government regulation of business by keeping competition in control of prices.  It was hoped to save government from the conflicts and accumulation of grievances which continuous price control would produce and to let it confine its responsibility to seeing that a true economy functions.”

What Adam Smith, James Madison, and Justice Jackson all shared is the understanding that innovation works best when the government protects free markets and economic liberty rather than engaging in central planning.

Against this backdrop, over the past year, the Antitrust Division has re-evaluated our U.S. policies governing the application of the antitrust laws to intellectual property disputes.  We are concerned specifically that there is a new, but growing perception among some in the United States and abroad that patent rights—and the exclusivity of such rights in particular—threatens harm to competition and innovation.  Indeed, some have taken the draconian position that, in certain circumstances, seeking an injunction against infringement of a valid patent should be deemed unlawful under the antitrust laws.

Those assertions are inconsistent with the decentralized, free-market patent framework established by the Founders and Congress, and they run contrary to the policies of the antitrust laws.  Antitrust policy was not designed to be an instrument for fine-tuning the incentives created by patent law.  Nor does antitrust law take away any legitimate right that patent law grants. 

Patent rights function best if an owner retains a right to exclude.  That right ensures that any price paid for a patented product or license reflects the bargaining leverage that the patent regime bestows.  Depriving a patent holder of this right would skew the bargain away from the free-market incentive scheme that the Constitution and Congress have established.  Even worse, it threatens to convert the licensing bargaining process into a compulsory licensing scheme.

We, at the Division, shoulder some of the blame for these developments.  In 2013, for example, we issued a Policy Statement that, I worry, may be misconstrued to endorse the application of antitrust law to attempts to seek injunctions.  I will return to the 2013 Policy Statement in a moment.

Before I do that, I’d like to explain what I mean by the “free market” bargaining outcome in the context of patent licensing.  That process ordinarily involves bargaining between sophisticated parties over how to divide the gains from commercializing an invention.  Our economic tools help us understand how that process works.  The economics of bargaining was pioneered by Nobel Prize winner John Nash—more popularly known as the character portrayed by Russell Crowe in the movie A Beautiful Mind.  That theory begins with the insight that trade is voluntary, and the terms negotiated depend on each party’s alternative position if they do not reach a deal.

For example, suppose an innovative start-up company develops and patents a technology but lacks the means of manufacturing and commercializing it.  It needs to license that technology to stay afloat.  A large manufacturer of thousands of commercial products might take an interest in the new technology, but that manufacturer hardly needs to sell the start-up’s product in order to be profitable.  If the innovator and manufacturer come together to bargain, each has an alternative to no deal.  Without a deal, the start-up would need to find a different manufacturer; if it failed to do so, it could risk collapse.  Without a license, the manufacturer would pursue other profitable activities and suffer little downside, except for a lost opportunity.

The insight of bargaining economics is that these alternatives determine each commercial party’s negotiating leverage.  Different alternatives can improve or weaken a party’s leverage.  If the innovative start-up attracts interest from a second manufacturer, then it will suffer little from failing to reach a deal with the first manufacturer, and it therefore will have greater leverage to demand a higher license fee.

Licensing negotiations of this sort play out every day around the world as inventors and technological implementers come together to create value.  It is the free market at its best, with licensing rates for new technologies determined by the forces of supply and demand, not by central planners.  Rewarding innovation at free-market rates offers incentives for each generation of inventors deciding whether to invest in research and development.

A patent holder’s right to seek an injunction against infringement gives it necessary leverage in a free market negotiation.  Expanding the hypothetical, the first manufacturer could also threaten to infringe the start-up’s patent.  This threat changes the two parties’ alternatives should a deal not be reached.  The precise impact of the threat on negotiations will depend on whether the start-up can obtain an injunction against that infringement, or whether it will be forced to seek damages after a long, costly fight in court.

In the United States, the patent framework established in the Constitution and by Congress defines the parameters of the free market negotiation for patent licenses.  Under that free market system, patent holders may go to court to seek to exclude rivals from using their technology without obtaining a license. 

The right to exclude is not unqualified, of course.  To obtain an injunction against infringement of a valid patent, a patent holder must meet the equitable test for obtaining injunctive relief.  The right to seek an injunction, however, is enshrined in the Constitution as a foundation of free market negotiations for patented inventions.

From the perspective of competition, the animating principle behind the antitrust laws, patent licensing works best where royalty rates reflect the outcome of free-market competitive bargaining.  Using antitrust law to police the unilateral conduct of patent holders threatens to disrupt the foundation of free market bargaining.

To understand why that is the case, let’s examine from a high level how standard setting functions.  In one context, by bringing innovators and implementers together, standard setting creates interoperability benefits that could not be achieved without unification.  At its best, standard setting can eliminate some of the inefficiencies and friction costs associated with competition for the standard.

Some have advocated that, in certain circumstances, the antitrust laws should condemn a patent holder’s efforts to obtain injunctive relief for patents that are part of a standard.  In particular, they argue that the standard setting process can cause the owner of a standard-essential patent to obtain market power over its technology.  With greater leverage from being the chosen technology, the argument goes, the SEP-owner would be able to “hold up” implementers and charge “excessive royalties” if it were able to obtain an injunction against infringement.

This concern is misplaced, and should not warrant the application of the antitrust laws where more appropriate remedies are available.

Consider the alternative: a free market in which no standard-setting body existed at all.  If a group of patent owners emerged as the de facto winner of a standard because consumers deemed their technologies superior, they likely would enjoy market power.  The patent holders would not violate the antitrust laws if one unilaterally sought to enjoin an infringer.  Quite the contrary—the right to seek an injunction would be consistent with the policies of the antitrust laws and patent laws.  That is because it would allow innovators to monetize their technology in a free market, offering incentives to the next generation of inventors to do the same, therefore generating dynamic competition for the benefit of consumers.

Substituting a formal standard-setting process for the free-market process of choosing technological winners and losers does not turn the technology winner’s constitutional right to exclude into a suspicious exercise of unlawful market power.  Moreover, recognizing a cause of action for treble damages where the patent owner seeks an injunction would transform standard setting into a compulsory licensing scheme and depress licensing rates below levels that a free market would dictate.

The Nash bargaining model helps us understand why that is the case.  In a free market, when a patent holder and implementer negotiate, the implementer’s alternative to no deal is either to avoid using the patented technology at all, or to infringe on the patent and risk a lawsuit.  If the implementer chooses the latter option and infringes, the patent holder must decide whether to sue for damages or seek to stop the infringement entirely.  The threat of an injunction provides leverage to the patent holder.  It creates a risk that an infringer may incur a cost greater than merely having to pay damages.

Subjecting a patent holder to the threat of antitrust liability would disrupt the free market framework, because the prospect of treble damages likely would deter the innovator even from exercising its right to seek an injunction.  As a result, unless a patent holder can meet the high standard for demonstrating willful infringement, the most a patent holder would be able obtain is a reasonable royalty after years of litigation.

In turn, such a cause of action would depress license rates below the but-for competitive level and thereby harm the incentive for innovation and ultimately harm consumers.

Now I would like to turn to the joint statement issued by the Department of Justice and the U.S. Patent & Trademark Office in early 2013, entitled “Policy Statement on Remedies for Standards-Essential Patents Subject to Voluntary F/RAND Commitments.”  That Policy Statement purports to offer the agencies’ perspectives on the propriety of issuing an injunction “when a patent holder seeking such a remedy asserts standards-essential patents that are encumbered by a RAND or FRAND licensing commitment.”

It asserts that an injunction or ITC exclusion order “may be inconsistent with the public interest,” particularly when such relief “appears to be incompatible with the terms of a patent holder’s existing F/RAND licensing commitment.”  Without explicitly stating that injunctions pose an antitrust problem, the Policy Statement claims that a SEP-holder’s injunction “may harm competition and consumers.”

The Policy Statement’s analysis runs contrary to the free-market principles that align the policies of the patent laws and antitrust laws.  It also is difficult, if not impossible, to square with the constitutional patent framework.

Moreover, I worry that some have overread the Policy Statement as endorsing a special set of FRAND-specific rules for injunctions.  To be clear, any such reading of our Policy Statement is wrong.  There is one standard for obtaining injunctive relief against the infringement of patents, which the Supreme Court articulated in eBay v. MercExchange.  That ruling does not create any FRAND-specific rules.

The equitable test for an injunction does, however, require a court to consider whether injunctive relief is in the public interest.  Contrary to how some have read the 2013 Policy Statement, I maintain that injunctions against infringement frequently do serve the public interest in maintaining a patent system that incentivizes and rewards successful inventors in accordance with the free market.  

Over the past year, the Antitrust Division has engaged in extensive advocacy and welcomed debate regarding the role of antitrust law in the context of intellectual property disputes.  Our goal is to achieve greater symmetry between competing concerns over so-called “hold-up” by innovators and “hold-out” by implementers.  We have dubbed this effort the “New Madison” approach, but by calling it “new” we do not mean to suggest that our approach is novel; rather, it is a new effort to draw on well-established, constitutional principles to curb any recent misapplications of antitrust in a manner that would undermine dynamic competition and innovation itself.

Topic(s): 
Antitrust
Intellectual Property
Component(s): 
Updated October 10, 2018