Do patent tying arrangements diminish incentives for innovation? In his recent article Patent Tying, Price Discrimination, and Innovation, 77 Antitrust Law Journal 811 (2011), Professor Christopher R. Leslie (University of California, Irvine School of Law) argues that, contrary to the views of commentators who justify patent tying as pro-innovation, metered tying can diminish incentives for innovation. He therefore recommends that antitrust law not recognize a price discrimination defense to patent tying.
A patent’s exclusivity permits the prices of patented
products to reside at levels in excess of the market equilibrium. This supracompetitive
pricing creates a social loss; specifically, a portion of consumers will exclude
themselves from purchasing the product. Charging higher prices to consumers who
are likely to value the product more and lower prices to consumers who value the
product less (price discrimination) is one way to minimize this deadweight
loss. In his
article, Professor Leslie critically analyzes the arguments in favor of price discrimination
through tying. Those in favor of tying
arrangements argue that patent tying should be justified because the practice
rewards innovation. However, Professor Leslie argues that a patent confers the
right to exclude and permits monopoly pricing of the patented product only. Metered tying arrangements allow patentees to be
rewarded from an unpatented product rather than from the invention.
Proponents of patent tying insist that metered tying arrangements
provide additional inducement for
innovation. Professor Leslie points to
the underlying premise that this theory fundamentally relies upon: the current
reward (without tying) is deficient. He
argues that it could be justified only by evidence showing that those patent
holders wishing to impose tying requirements would earn insufficient profits
from the patented product to rationalize future investments.
Professor Leslie further discusses how metered tying may increase rent seeking behavior.
Economic theory suggests that as the value of a monopoly increases, a
firm is increasingly more willing to expend greater resources in order to
obtain that particular monopoly. In
patent law, this can be equated to patent races that cause unnecessary or
duplicative investment. Professor Leslie
argues that these possibilities provide enough uncertainty to undermine the
presumption that patent tying would induce innovation. Not only is there an indeterminate effect on
the innovation of the patented tying product, but tying arrangements would
greatly impact innovation incentives in the tied product market.
Theories regarding the effects of patent tying have been commonplace
among commentators for quite a while. See, e.g.,
Louis Kaplow, The Patent-Antitrust
Intersection: A Reappraisal, 97 Harv. L. Rev. 1813 (1984); Benjamin Klein
& John Shepard Wiley Jr., Competitive
Price Discrimination as an Antitrust Justification for Intellectual Property
Refusals to Deal, 70 Antitrust L. J. 599 (2003); Brian T. Grill, The Treatment of Metering in Antitrust Law:
The Supreme Court’s Apparent Abolition of the Per Se Rule Against Metering in Illinois
Tool Works, Inc. v. Independent Ink, Inc., 2006 Wis. L. Rev. 1465 (2006). Since the enactment of the Clayton Act nearly
one hundred years ago, admirable levels of innovation have seemingly been
sustained. In this article, Professor
Leslie convincingly demonstrates that legal doctrine cannot be justifiably
reformed by arguments premised on theories; there must be some evidence to
substantiate the pro-innovation claims.
Posted by Derik Sanders (firstname.lastname@example.org), a 2014 Juris Doctor Candidate at SMU Dedman School of
Law and research assistant to Professor Sarah Tran.