Christopher R. Leslie: Patent Tying, Price Discrimination, and Innovation

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 (dtsanders@smu.edu), a 2014 Juris Doctor Candidate at SMU Dedman School of Law and research assistant to Professor Sarah Tran.