633 Intellectual Property, Antitrust, and the Rule of Law: Between Private Power and State Power Ariel Katz* This Article explores the rule of law aspects of the intersection between intellectual property and antitrust law. Contemporary discussions and debates on intellectual property (IP), antitrust, and the intersection between them are typically framed in economically oriented terms. This Article, however, shows that there is more law in law than just economics. It demonstrates how the rule of law has influenced the development of several IP doctrines, and the interface between IP and antitrust, in important, albeit not always acknowledged, ways. In particular, it argues that some limitations on IP rights, such as exhaustion and limitations on tying arrangements, are grounded in rule of law principles restricting the arbitrary exercise of legal power, rather than solely in considerations of economic efficiency. The historical development of IP law has reflected several tensions, both economic and political, that lie at the heart of the constitutional order of the modern state: the tension between the benefits of free competition and the recognition that some restraints on competition may be beneficial and justified; the concern that power, even when conferred in the public interest, can often be abused and arbitrarily * Associate Professor and Innovation Chair — Electronic Commerce, Faculty of Law, University of Toronto. An earlier version of this Article was presented at The Constitution of Information: From Gutenberg to Snowden conference, held at the University of Toronto Faculty of Law on May 28-29, 2015. The conference was organized with the cooperation and support of Tel Aviv University’s Cegla Center for Interdisciplinary Research of the Law and Theoretical Inquiries in Law, and with a contribution from Google Canada. I wish to thank my colleague Lisa Austin, who organized the conference with me, as well as the other speakers and participants for their comments and insights. I also wish to thank Aaron Perzanowski and Guy Rub for their comments, Eden Sarid, Michael Stenbring, and Matthew Marinett for their research assistance, and the Social Sciences and Humanities Research Council of Canada for supporting this research. Citation: 17 Theoretical Inquiries L. 633 (2016) 634 Theoretical Inquiries in Law [Vol. 17:633 applied to advance private interests; and the tension between freedom of contract and property and freedom of trade. This Article explores how rule of law considerations have allowed courts to mediate these tensions, both in their familiar public law aspects but also in their less conspicuous private law dimensions, and how, in particular, they have shaped the development of IP doctrine and its intersection with antitrust law and the common law. IntroductIon T his Article explores the rule of law aspects of the intersection between intellectual property, antitrust, and the rule of law. Contemporary discussions and debates on intellectual property (IP), antitrust, and the intersection between them are typically framed in economically oriented terms. In antitrust, economic efficiency has not only become the predominant metric for the analysis of specific legal rules, but according to some it constitutes the sole legitimate goal of antitrust law as a whole.1 In a similar vein, economically oriented cost-benefit arguments tend to dominate contemporary discussions on IP law. From this perspective, the central challenge for IP law lies in designing a system that facilitates an optimal tradeoff between the supposed benefits of IP rights (enhanced creativity and innovation) and the costs that such exclusivity imposes on access to and use of the works and innovation thus created. Scholars, courts, and antitrust enforcers dealing with questions at the interface of both areas of law nowadays describe IP and antitrust laws as acting in tandem to accomplish the same overarching goals: “to maximize wealth by producing what consumers want at the lowest cost”2 and “encourag[e] innovation, industry and competition.”3 Within this framework, IP laws do their part by providing “incentives for innovation and its dissemination and commercialization by establishing enforceable property rights for the creators of new and useful products, more efficient processes, and original works of expression,”4 while antitrust law complements IP and “promote[s] innovation 1 Camden Hutchison, Law and Economics Scholarship and Supreme Court Antitrust Jurisprudence, 1950-2010, 20 Lewis & CLark L. rev. (forthcoming 2016); see also Barak Orbach, Was the Crisis in Antitrust a Trojan Horse?, 79 antitrust L.J. 881 (2014). 2 ward simon Bowman, Patent and antitrust Law: a LegaL and eConomiC aPPraisaL 1 (1973). 3 Atari Games Corp. v. Nintendo of America, Inc., 897 F.2d 1572, 1576 (Fed. Cir. 1990). 4 u.s. deP’t of JustiCe & fed. trade Comm’n, antitrust guideLines for the 2016] Intellectual Property, Antitrust, and the Rule of Law 635 and consumer welfare by prohibiting certain actions that may harm competition with respect to either existing or new ways of serving consumers.”5 A great deal of the discourse in the area (including my own scholarship) involves competing narratives on how deciding cases or formulating more general rules one way or the other would impact innovation and other measures of social welfare, which are also discussed in predominantly economic terms. Historically, however, both areas of law evolved with more than economic considerations in mind. Rule of law principles, similar to those which constitutional and administrative law lawyers are versed in, have played a central role in the development of the law in these areas, and they continue to do so today, albeit in less noticed ways. In a recent article titled The Antitrust Constitution,6 Tom Nachbar has demonstrated how economic theory cannot account for several persistent features of antitrust doctrine, and argued that antitrust law’s concern about harm to “competition” is better viewed as consisting of two distinct harms: the familiar “market harm,” described and measured as a harm to efficiency, but also a “regulatory harm” — harm to the freedom of choice felt by those participating in the market.7 He suggested that “antitrust is of a piece with a much larger body of law that governs the proper exercise of regulatory authority, a body of law more closely associated with constitutional theory than economic theory.”8 Antitrust law does not merely provide rules of economic regulation, but also establishes a set of rules against private regulation.9 This Article discusses a similarly neglected aspect of IP law, focusing on one important principle of the rule of law: the principle that any restraints on a person’s freedom must be grounded in a recognized legal rule, and that the courts will not enforce any restraint that is not so grounded. The Article brings to light the following legal proposition and discusses the central role it has played in the development of IP law and its intersection with antitrust: Patents and copyrights are legal monopolies, as this term has been used since at least the sixteenth century.10 That is, they are statutory grants that restrain people from doing things that they would otherwise be free to do under the common law. Because patents and copyrights give their owners power over LiCensing of inteLLeCtuaL ProPerty § 1.0 (1995), http://www.usdoj.gov/atr/ public/guidelines/0558.pdf. 5 Id. 6 Thomas B. Nachbar, The Antitrust Constitution, 99 iowa L. rev. 57 (2013). 7 Id. at 69. 8 Id. 9 Id. 10 Oren Bracha, Monopolies, in 4 the oxford internationaL enCyCLoPedia of LegaL history 186 (Stanley N. Katz ed., 2009). 636 Theoretical Inquiries in Law [Vol. 17:633 the exercise of the common law rights of others, their exclusionary power must not only be grounded in a recognized legal rule, but also be bounded by law. Thus, determining the scope of IP rights and the limitations on their exercise involves more than balancing economic interests, and ultimately relies on the general principles of the rule of law. Struggles over who has the legal authority to promulgate and enforce rules that restrain the liberties of others has been a central motif in the development of England’s constitutional law, and the common narrative describes the gradual decline of royal prerogative and the corresponding ascendance of Parliament. Some of the famous struggles concerned the power to levy taxes and other forms of the exercise of state power — questions that continue to occupy constitutional and administrative law lawyers. But other contentions involved the power to grant monopolies or otherwise delegate lawmaking powers to private entities, and the proper exercise of those powers.11 I think there will be a better flow if the sentence is: in large part, the laws on monopolies and the common law doctrines against restraint of trade and restraint on alienation were forged in the context of these constitutional debates. Economic considerations have played a role in those debates and in courts’ decisions, but ultimately the courts made their decisions on the basis of legal principles that reflected political and constitutional theory, not economic theory. Many of these rule of law principles migrated to North America and other former British colonies, but by the mid nineteenth century, with the rise of laissez faire philosophies, courts’ interests in the limits on the exercise of legal powers by private actors had diminished. However, the passage of the antitrust laws towards the end of the nineteenth century generated renewed interest in those constitutional questions, and they played a pivotal role in a series of key decisions of the U.S. Supreme Court since the beginning of the twentieth century, including decisions in IP and antitrust cases.12 This Article tracks the development of those rule of law principles and the ways in which their evolution was intertwined with and continues to influence the development of IP law, antitrust law, and the common law doctrines on restraint of trade and restraints on alienation. This Article proceeds as follows. The next two Parts discuss the concept of the rule of law that I employ in this Article and its historical development. Part III highlights how the same rule of law principles informed the development of several private law common law rules, such as the doctrines against restraint of trade and alienation, while Part IV discusses the rule of law aspects of antitrust and their connection to due process and nondelegation doctrine. In 11 See infra Part II. 12 See infra Part IV. 2016] Intellectual Property, Antitrust, and the Rule of Law 637 Part V, I revisit key IP decisions that many economically minded analysts have considered puzzling if not outright misguided. I show that a careful reading of these decisions — which deal with exhaustion of IP rights, tying, and contributory liability — reveals that rule of law considerations, not economic theory, were at the heart of the courts’ decisions. The courts were more concerned with setting boundaries to the exercise of the legal powers delegated to IP owners than with optimizing the degree of IP owners’ market power and deciding whether its exercise promotes or hinders efficiency. I. the rule of law A. A Working Definition That the rule of law is a central tenet of any liberal democracy is almost axiomatic,13 even if widespread agreement on what this term actually means is hard to come by.14 My goal in this Article is not to offer a general theory of the rule of law, but only to expose the latent role of one aspect of the rule of law in the development of IP law and its intersection with antitrust. The aspect of the rule of law that I focus on is the proposition that, in the words of A.V. Dicey, the prominent nineteenth century British constitutional law scholar, no man is punishable or can be lawfully made to suffer in body or goods except for a distinct breach of law established in the ordinary legal manner before the ordinary Courts of the land. In this sense the rule of law is contrasted with every system of government based on the exercise by persons in authority of wide, arbitrary, or discretionary powers of constraint.15 In Dicey’s view, the rule of law included two additional aspects: that no man is above the law, that officials are bound by the same laws as ordinary 13 E.g., Canadian Charter of Rights and Freedoms, The Constitution Act, 1982, being Schedule B to the Canada Act 1982, c 11, pmbl. (U.K.); margaret Jane radin, BoiLerPLate: the fine Print, vanishing rights, and the ruLe of Law 37 (2012). 14 See, e.g., Richard H. Fallon, Jr., The Rule of Law as a Concept in Constitutional Discourse, 97 CoLum. L. rev. 1 (1997); Peter W. Hogg & Cara F. Zwibel, The Rule of Law in the Supreme Court of Canada, 55 u. toronto L.J. 715, 717 (2005); Thomas B. Nachbar, Defining the Rule of Law Problem, 6 green Bag 303, 304 (2009); Margaret Jane Radin, Reconsidering the Rule of Law, 69 B.u. L. rev. 781 (1989); see also PauL gowder, the ruLe of Law in the reaL worLd 1-2 (2016). 15 a.v. diCey, introduCtion to the study of the Law of the Constitution 183-84 (Macmillan & Co. 8th ed. 1927) (1889). 638 Theoretical Inquiries in Law [Vol. 17:633 subjects,16 and that the common law courts play a crucial role in the recognition and protection of individual rights and other constitutional principles.17 For Dicey, the rule of law was synonymous with the supremacy of law,18 by which he meant “the security given under the English constitution to the rights of individuals,”19 and “the absolute supremacy or predominance of regular law as opposed to the influence of arbitrary power, and excludes the existence of arbitrariness, of prerogative, or even of wide discretionary authority on the part of the government.”20 B. Defining “Law” The Diceyan understanding of the rule of law also requires clarification of what constitutes “law.” A law, for Dicey’s purposes, means “any rule which will be enforced by the Courts.”21 “Law” includes the common law, as well as “[a]ny Act of Parliament, or any part of an Act of Parliament, which makes a new law, or repeals or modifies an existing law.”22 Likewise, parliamentary sovereignty implies that “[t]here is no person or body of persons who can, under the English constitution, make rules which override or derogate from an Act of Parliament, or which (to express the same thing in other words) will be enforced by the Courts in contravention of an Act of Parliament.”23 Parliament’s exclusive lawmaking power does not imply that no other persons or bodies are capable of promulgating rules that will be enforced by the courts. Indeed, Dicey described a panoply of “non-sovereign law- making bodies,” such as chartered railway companies, school boards, or town councils.24 These bodies have lawmaking powers in the sense that the rules they promulgate might be enforceable by the courts. For example, an English 16 Id. at 189. 17 Id. at 191-92. 18 Id. at 179. 19 Id. at 180. 20 Id. at 198. 21 Id. 22 Id. 23 Id. at 8. 24 For Dicey, the category of non-sovereign lawmaking bodies also includes legislative bodies such as the parliaments of the British Colonies, or the parliaments of countries such as Belgium or France, which, while they may be properly called “legislatures,” are not truly sovereign bodies: the former, because they derive their power from and are subordinate to the British Parliament and to the power of the imperial government to disallow their statutes, id. at 113-14, and the latter, because they are legislative but not constitutive bodies, and therefore are limited 2016] Intellectual Property, Antitrust, and the Rule of Law 639 railway company may be empowered, statutorily, to make bylaws allowing it to regulate traveling upon the railway, as well as to impose a penalty for the breach of such bylaws, which can then be enforced by the courts.25 The railway company, thus, can make “laws,” but it has no sovereign lawmaking powers, because (a) it is subordinate to and has to comply with the Act of Parliament creating the company and all other laws; (b) while it can make and change its bylaws, it lacks the power to change the Act that constitutes it; and (c) the courts determine the validity of the company’s bylaws,26 and decide whether, in enacting and implementing its bylaws, the company acted within the powers conferred upon it by Parliament, or beyond them.27 Although in many important respects the traditional Westminster parliamentary sovereignty is quite different from constitutional supremacy, to which countries such as both Canada and the United States subscribe, the historical circumstances that led to principles of parliamentary sovereignty and their legal and intellectual heritage continue to be relevant throughout the entire Anglo-American legal tradition and its concept of the rule of law. The crucial point for the current discussion is that the power to make new laws or to abridge existing laws lies within the exclusive domain of the legislature. As a result, any person purporting to enforce any law, impose a penalty or fine, or deprive another person of her liberty or possessions, must show that her claim is based on a valid legal rule, either a rule of the common law or a rule of statutory law. Without such basis, the court will decline to enforce the claim. As I show below, the same principles have played an important role in the development of both intellectual property law and antitrust. II. the hIstorIcal development of the rule of law The roots of the modern concept of rule of law can be traced back to the early modern period. Until the end of the sixteenth century, English common law supported a legal and economic order that tightly controlled individuals’ economic activities and limited the opportunities available to them.28 But the sixteenth century saw the decline of the Church and medieval modes of social, political, and economic organization, alongside the rise of individualism on the by the written constitutions of those countries, which they lack the power to modify, id. at 120-21. 25 Id. at 90-91. 26 Id. at 91-92. 27 Id. at 94. 28 miChaeL J. treBiLCoCk, the Common Law of restraint of trade: a LegaL and eConomiC anaLysis 10-11 (1986). 640 Theoretical Inquiries in Law [Vol. 17:633 one hand and of strong centralized governments on the other.29 These changes also transformed the common law, which has grown increasingly averse to this system of regulation and privilege and had to develop a framework that could distinguish between legitimate and illegitimate restraints. In England, these developments fueled prolonged constitutional power struggles concerning the scope of royal prerogative. The Stuart monarchs relied on asserted extensive prerogative powers to grant monopolies, levy taxes, dispense with certain laws, as well as to adjudicate and enforce the law. But the ambition of their claims met a growing and equally ambitious opposition,30 and those asserted powers were challenged before the courts and in Parliament, eventually resulting in the decline of royal prerogative and the corresponding triumph of English constitutionalism based on Parliamentary sovereignty and the supremacy of law. However, similar principles also emerged in contexts we would consider today as private law, such as the development of doctrines against contracts in restraint of trade, and limitations on restraints of alienation of property.31 It was also during this period that the prototypes of modern copyright and patent laws began to take shape. Thus, the struggles surrounding the scope of royal prerogative resulted in legal principles that would not only give rise to the rule of law and the supremacy of law, but also influence certain key aspects of modern IP and antitrust laws. The next sections describe some key legal moments in these historical developments and their interconnectedness. A. The Struggle over Monopolies The scope of royal prerogative to grant monopolies and patents played an important role in the development of English constitutionalism and the rule of law around the turn of the seventeenth century. To modern economically trained ears, the term “monopoly” connotes questions of antitrust and economic policy, and the term “patent” connotes questions of IP law and innovation policy. But while the debates on monopolies and patents during the sixteenth century included economic concerns, their fundamental question was not economic but constitutional. The focus of the debates was not the optimal level of intervention in the free operation of the market, or how to stimulate innovation, but the question of who had the power to make laws that interfered with the rights of individuals. 29 Id. 30 John V. Orth, Did Sir Edward Coke Mean What He Said?, 16 Const. Comment. 33, 36 (1999). 31 Indeed, the contemporary distinction between public and private control of trade practices developed much later. See Nachbar, supra note 6, at 79-80. 2016] Intellectual Property, Antitrust, and the Rule of Law 641 The term “monopoly” has described, at least since the first half of the sixteenth century, the grant of various commercial and industrial privileges to individuals or companies.32 The grants of such privileges often took the form of Letters Patent, hence the term “patent.” Lord Coke defined a monopoly as an institution, or allowance by the king by his grant, commission, or otherwise to any person or persons, bodies politique, or corporate, of or for the sole buying, selling, making, working, or using of any thing, whereby any person or persons, bodies politique, or corporate, are sought to be restrained of any freedome, or liberty that they had before, or hindred in their lawfull trade.33 Monopolies took different forms, serving different purposes and functions.34 The first type resembled today’s patents: exclusive rights granted to inventors of new technologies, or those who introduced foreign technologies into England.35 The second type were non obstante patents, namely patents exempting the patentees from certain regulations and prohibitions.36 While sometimes justified as a method for fine-tuning regulation, those patents were increasingly granted as a means of favoritism or as a way of raising revenue for the Crown.37 The third type were monopolies granting regulatory authority over particular trades,38 32 Bracha, supra note 10. 33 3 edward Coke, institutes of the Laws of engLand ch. 85 (1797). 34 For the early history of monopolies in England since the fourteenth century and the growth of their use by Queen Elizabeth during the second half of the sixteenth century, see wiLLiam hyde PriCe, the engLish Patents of monoPoLy 5 (1913). 35 Thomas B. Nachbar, Monopoly, Mercantilism, and the Politics of Regulation, 91 va. L. rev. 1313, 1324 (2005). 36 Id. at 1325. 37 Id. 38 For example, prior to the enactment of the first copyright statute in 1709, patents of the first kind, granting exclusive rights to print, distribute, and import books, were given to publishers of new books, or of certain popular titles. However, in addition to those patents, when the publication and distribution of books which the Crown considered seditious or heretical, “by divers scandalous malicious schismatical and heretical persons,” became widespread, the Crown instituted a licensing regime, prohibiting the publication, distribution or importation of any book not authorized by the competent state or church authorities. Stationers’ Charter, London (1557), Primary sourCes on CoPyright (1450-1900) (Lionel Bently & Martin Kretschmer eds.), http://www.copyrighthistory.org/cam/tools/ request/showRepresentation?id=representation_uk_1557. A crucial component of the licensing regime was the monopoly granted to the London Company of Stationers over the book trade, which entrusted it with extensive powers to 642 Theoretical Inquiries in Law [Vol. 17:633 allowing the grantee to license and supervise other trades.39 Another variant involved the right to collect fines for violations of trade regulations. Those patents were not used to punish violations in order to stop them, but simply to extract fees from tradesmen in exchange for continuing the de jure prohibited practice.40 Lastly, monopolies were granted for no particular reason other than as an assertion of royal prerogative.41 The lines between the different categories were not necessarily clear, and patents could have mixed features.42 But despite the differences, they all shared a common economic feature: they would confer upon the patentees the power to extract rents from the economic activities subject to the patents, at least where that exclusivity was enforced, or where competing patents would not dissipate those rents.43 Towards the end of the sixteenth century the widespread use of royal monopolies, and the inevitable resulting abuses, had become a source of growing political and legal agitation. In Darcy v. Allen (The Case of Monopolies),44 the Court invalidated a patent granted by Queen Elizabeth, which conferred a monopoly on the manufacture and importation of playing cards. The Court held that the grant of the monopoly was “against the common law, and the benefit and liberty of the subject,”45 because it, like “any other monopoly, is not only a damage and prejudice to those who exercise the same trade, but also to all other subjects, for the end of all these monopolies is for the private gain of the patentees.”46 The Court (or at least Lord Coke’s account of the decision47) explained that monopolies were harmful for several reasons: they tend to raise prices, enforce the licensing regime and with a source of monopoly rents that provided its members with an economic incentive to maintain this censorship regime. See Ian A. Gadd, ‘A Suitable Remedy’? Regulating the Printing Press, 1553-1558, in CathoLiC renewaL and Protestant resistanCe in marian engLand 127, 139-41 (Elizabeth Evenden & Vivienne Westbrook eds., 2015). 39 Nachbar, supra note 35, at 1325. 40 Id. 41 Id. 42 Id. 43 Id. 44 Darcy v. Allen (The Case of Monopolies) (1602) 77 Eng. Rep. 1260 (KB). 45 Id. at 1262-63. 46 Id. at 1263. 47 Coke himself was Attorney General at the time and actually acted for the plaintiff and argued that the patent was valid. The only report of the case was Coke’s. It was published in 1615, and is suspected to reflect more of Coke’s own hostile views towards monopolies and crown prerogative than a true reflection of the court’s decision. Nevertheless, Coke’s report has been accepted and treated as