Michael Carrier on the Patent-Antitrust Paradox

Studying for my antitrust exam made me think about the intersection of patents and antitrust—something we only had time to touch on briefly during the class. I've already blogged about the chapters my professor, George Priest, wrote for the Kauffman Foundation's new book on innovation, including Chapter 8 on the role of antitrust law in promoting innovation. But to learn more about the specific patent-antitrust intersection, I read Unraveling the Patent-Antitrust Paradox (U. Pa. L. Rev. 2002) by Professor Michael Carrier (Rutgers Law), which seems to be the most-cited article to tackle the topic in the past decade.

As Carrier notes, patents and antitrust present a paradox because patent laws offer the right to exclude, while antitrust laws sometimes condemn such exclusion. The "disparate tests" courts use are sometimes "overinclusive in condemning conduct that has no adverse effect on welfare" and sometimes "underinclusive in their blind deference to patent laws," failing to recognize that antitrust can also lead to innovation and might increase welfare. Carrier dissects the problems with previous tests, including the "elegant" "ratio" test proposed by Louis Kaplow (looking at the ratio between the patentee's reward and the monopoly loss).

Carrier argues that patent and antitrust laws should be measured by the amount they promote innovation, which is clearly a goal of the patent laws, and which should be the goal of the antitrust laws "because innovation contributes more to economic growth than any other type of efficiency." Courts should evaluate patent-based monopolization claims (under Sherman Act § 2) using 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."

Carrier demonstrates how this test might work using three helpful examples:

1. The Bully Monopolist, which "licenses its patented product only to licenses that agree not to deal with the monopolist's competitors." The only possible justification is harming competitors, so the presumption in step 1 isn't triggered. This is a § 2 violation.
2. The Biopharmaceutical Patentee, which "refuses to share with a competitor the patented drug it develops." The step 1 presumption of lawfulness applies, since this act is based on the business justification of recovering its R&D investment. The step 2 rebuttal does not apply "because patents are critical to innovation in the fields of pharmaceuticals and . . . biotechnology." This is not a § 2 violation.
3. The Internet Auctioneer, which "patents an 'on-line' auction" and "refuses to share this patent with a competitor that wishes to apply the bidding concept in an analogous setting." The step 1 presumption applies "since the defendant rationally can exploit its patented product by refusing to license it." The step 2 rebuttal applies "because there are substantial nonpatent market-based incentives to innovation in the market for Internet auctions." The auctioneer must then show in step 3 whether there is innovation in the market: If the market for Internet auctions "has failed to progress while other analogous markets . . . have incorporated new" technologies, this is a § 2 violation. If "the market [is] characterized by the fast-paced development of new products and services," it is not.

Finally, Carrier addresses the counterarguments that this test is not administrable, that it reduces innovation incentives in the patent system, and that we could get similar results merely by tinkering with the patent system, rather than dragging in antitrust laws. The year after Carrier published this article, Dan Burk and Mark Lemley published their (even more highly cited) Policy Levers in Patent Law, which argues for a similar industry-specific tailoring of patent laws (and notes that there are many levers within the current Patent Act that can be used for this tailoring). But Carrier argues that tailoring through patent law alone "fails to recognize the more important role played by the antitrust laws in fostering competition-induced innovation in industries like the computer software industry" (Figure 2 on p. 852 explains this point).

While this is an intriguing approach, it would be a radical change to the patent laws in certain industries, and courts have not jumped on this proposal in the past decade. In Carrier's first footnote, he notes that "[t]he courts . . . have ignored the most thoughtful literature in the field," and this proposal seems likely to suffer the same fate. Although this article has been cited twice by courts—by the Supreme Court in Bilski, and by Judge Posner sitting by designation in N.D. Ill.—neither court was citing it to use his antitrust proposal.

Blog posts will continue to be slow over the next couple of weeks as I finish my final paper, but I have a bunch of interesting-looking articles to write about this summer!