Federal Tr ade Commission Intellectual Property Rights, Truncation, and Actavis: Who’s Afraid of the Rule of Reason? ♠ Remarks of Joshua D. Wright Commissioner, Federal Trade Commission at the Global Competition Review Live 2nd Annual IP & Antitrust USA Washington, DC April 14, 2015 I. INTRODUCTION Good afternoon. I’m delighted to be here and am grateful for the opportunity to contribute to the discussion of antitrust enforcement in the context of intellectual property rights. I note at the outset that the views I express this afternoon are my own and are not those of the Commission or any of its other Commissioners. ♠ The views stated here are my own and do not necessarily reflect the views of the Commission or any of its other Commissioners. I am grateful to my advisor, Angela Diveley, for her invaluable assistance in preparing these remarks. 1 Today I’d like to discuss an important concept in antitrust enforcement: truncated or so-called structured rule-of-reason analysis. In particular, I would like to focus upon an emerging demand by commentators and courts to apply truncated analysis in the context of business arrangements involving intellectual property rights, or IPRs. Recent calls for truncated antitrust analysis to accommodate IPRs’ unique features raise a number of interesting issues. One is to identify when truncated antitrust rules – that is, any antitrust analysis short of the full-blown rule of reason, including quick looks, presumptions, and per se rules – are appropriate as a general matter, and whether those conditions apply to business arrangements involving IPRs. Another interesting issue is whether IPRs require a special form of antitrust analysis. The demand for application of truncated antitrust analysis to evaluate business arrangements involving IPRs appears to be growing. To give just a few examples, antitrust commentators have proposed truncated antitrust analyses to evaluate standard essential patent holders seeking injunctions, the breach of SSO agreements by patent holders more generally, the business activities of patent assertion entities, and reverse payment settlements in the pharmaceutical industry. Let me begin by discussing the economics of truncated antitrust analysis. The default method of evaluating antitrust-relevant conduct is the rule of reason, which, as 2 I’m sure many of you know first-hand, involves a costly, comprehensive weighing of any pro- and anticompetitive effects of the challenged conduct. Truncated antitrust analysis, by way of comparison, harnesses decision theory to develop shorthand analytical tools based upon judicial and market experience with the restraint at issue, as well as accumulated economic knowledge, to identify conduct that is likely to harm competition. Truncated analysis is appropriate when it, rather than the full-blown or unstructured rule of reason, minimizes the sum of error costs and the administrative costs of adjudicating antitrust claims. The benefit of truncation is that it economizes on existing judicial and economic knowledge to produce more efficient legal rules. We should think of the development of truncated antitrust rules as a dynamic process – that is, antitrust rules evolve over time, and only after significant judicial experience with the challenged conduct or an empirical understanding of its competitive effects can be discerned.1 In short, truncated analysis is at its core intended to be an easily administrable, effects-based application of the rule of reason.2 1 See Polygram v. FTC, 416 F.3d 29 (D.C. Cir. 2005); Polygram, 136 F.T.C. 310 (2003); Timothy J. Muris & Brady P.P. Cummins, Tools of Reason: Truncation Through Judicial Experience and Economic Learning, ANTITRUST, Summer 2014, at 46. 2 ANDREW I. GAVIL, WILLIAM E. KOVACIC & JONATHAN B. BAKER, ANTITRUST LAW IN PERSPECTIVE: CASES, CONCEPTS AND PROBLEMS IN COMPETITION POLICY 185-87 (2d ed. 2008); Muris & Cummins, supra note 1, at 46-47, 50. 3 Recent developments at the intersection of IPRs and antitrust appear to be producing truncated analyses that, although administrable, are inconsistent with traditional effects-based truncation as I have described it here. The rationale typically proffered in defense of these developments is that there is something special about IPRs that requires unique treatment under the antitrust laws. Students of antitrust history will recognize the claim that IPRs require a unique form of antitrust analysis. The zenith of the era of antitrust-IPR exceptionalism was the infamous and now-repudiated “Nine No-Nos.”3 The approach of IP-exceptionalism is generally rejected in modern antitrust analysis in favor of analytical parity between IPRs and real property rights while accounting for important institutional and factual differences where relevant. The parity principle is manifested in the FTC and DOJ’s joint “Antitrust Guidelines for the Licensing of Intellectual Property,”4 which set forth the general principle that “intellectual property [is] essentially comparable to any other form of property.”5 This parity principle provides a consistent and predictable theoretical framework in which to 3 Bruce B. Wilson, Deputy Assistant Attorney Gen., Patent and Know-How License Agreements: Field of Use, Territorial, Price and Quantity Restrictions, Remarks Before the Fourth New England Antitrust Conference (Nov. 6, 1970). 4 U.S. DEP’T OF JUSTICE & FED. TRADE COMM’N, ANTITRUST GUIDELINES FOR THE LICENSING OF INTELLECTUAL PROPERTY (1995). 5 Id. at § 2.0(a). 4 analyze IPRs, and it recognizes that strong, clearly defined property rights are essential to dynamic competition. The Supreme Court endorsed these benefits and the parity principle in Independent Ink6 when it rejected the presumption that a patent necessarily confers market power.7 Recent developments in antitrust analysis of IPRs suggest a rejection of the parity principle,8 and in particular, the adoption of truncated antitrust analyses for business arrangements involving IPRs. For example, the FTC has invoked its “unfair methods of competition” authority under Section 5 of the FTC Act to condemn standard essential patent (“SEP”) holders seeking injunctions.9 Of particular concern is the concept that such conduct is in breach of implied contracts to license SEPs on fair, reasonable, and non-discriminatory (“F/RAND”) terms.10 Outside of IPRs, antitrust law does not 6 Illinois Tool Works Inc. v. Independent Ink, Inc., 547 U.S. 28, 28-29, 38-43 (2006); see also Joshua D. Wright, Missed Opportunities in Independent Ink, 2006 CATO SUP. CT. REV. 333 (2006); Bruce H. Kobayashi, Spilled Ink or Economic Progress? The Supreme Court’s Decision in Illinois Tool Works v. Independent Ink, 53 ANTITRUST BULLETIN 5 (2008). 7 Joshua D. Wright & Douglas H. Ginsburg, Whither Symmetry? Antitrust Analysis of Intellectual Property Rights at the FTC and DOJ, COMPETITION POL’Y INT’L, Autumn 2013, at 41, 43 (“an avowed endorsement of symmetrical antitrust analysis.”). 8 See id. at 44-48. 9 See Complaint ¶¶ 25-26, 31, Motorola Mobility LLC, FTC Docket No. C-4410 (July 23, 2013), available at https://www.ftc.gov/sites/default/files/documents/cases/2013/07/130724googlemotorolacmpt.pdf; Complaint ¶¶ 20-21, Robert Bosch GmbH, FTC Docket No. C-4377 (Nov. 21, 2012), available at https://www.ftc.gov/sites/default/files/documents/cases/2012/11/121126boschcmpt.pdf; Complaint ¶¶ 26- 38, Negotiated Data Solutions LLC, FTC Docket No. C-4234 (Sept. 22, 2008), available at https://www.ftc.gov/sites/default/files/documents/cases/2008/09/080923ndscomplaint.pdf. 10 See Statement of the Fed. Trade Comm’n 1, Motorola Mobility LLC, FTC File No. 121-0120 (Jan. 3, 2013) (“Motorola reneged on a licensing commitment made to several standard-setting bodies to license its 5 recognize claims involving “garden variety breach-of-contract . . . disputes.”11 To do so within the context of IPRs rejects the parity principle and singles out IPRs as deserving special antitrust treatment. Some scholars have also rejected the parity principle in the context of patent assertion entities (“PAEs”), calling for a presumption that the PAE business model of asserting and licensing IPRs is anticompetitive.12 The argument that PAEs inherently harm competition rests explicitly upon the assumption that IPRs are fundamentally different from real property rights and should therefore be subjected to stricter antitrust scrutiny.13 In the pharmaceutical sector, lower courts are increasingly relying primarily upon the language in Actavis to use the size of reverse payment settlements as a proxy standard-essential patents relating to smartphones, tablet computers, and video game systems on FRAND terms by seeking injunctions against willing licensees of those SEPs.”); Statement of the Fed. Trade Comm’n 1, Robert Bosch GmbH, FTC File No. 121-0081 (Nov. 26, 2012); Statement of the Fed. Trade Comm’n 1, Negotiated Data Solutions LLC, FTC File No. 051-0094 (Jan. 23, 2008). 11 Dissenting Statement of Commissioner Maureen K. Ohlhausen 3, Robert Bosch GmbH, FTC File No. 121-0081 (observing rejection of the parity principle and stating, “The Commission statement emphasizes the context here (i.e., standard setting); however, it is not clear why the type of conduct that is targeted here (i.e., a breach of an allegedly implied contract term with no allegation of deception) would not be targeted by the Commission in any other context where the Commission believes consumer harm may result”). 12 See Fiona Scott Morton & Carl Shapiro, Strategic Patent Acquisitions, 79 ANTITRUST L.J. 463, 464, 494 (2014); see also Joshua D. Wright & Douglas H. Ginsburg, Patent Assertion Entities and Antitrust: A Competition Cure for a Litigation Disease?, 79 ANTITRUST L.J. 501, 506, n.20 (2014) (describing and criticizing the presumption). 13 See Wright & Ginsburg, supra note 12, at 506 n.20. 6 for patent strength to determine the legality of the settlements under the antitrust laws, and scholars have provided economic analyses attempting to map out a relationship between payment size and likely competitive effects. To illustrate the potential dangers to competition and consumers of truncation before it is adequately supported by judicial and economic learning, I will focus upon recent proposals for truncated rule-of-reason analysis in the reverse payment context based upon reverse payment size. I will contend that, for reasons I will explain shortly, economic analysis to date does not support a presumption of anticompetitive effect based upon a comparison of payment size and litigation costs. II. TRUNCATED ANTITRUST ANALYSIS Let’s begin with a quick primer on truncation in antitrust analysis. The rule of reason arose in recognition of the fact that the antitrust laws were intended to address competitively harmful conduct and not all restraints of trade.14 As modern economic knowledge has been infused into antitrust analysis, the rule of reason has displaced bright-line per se rules of liability.15 The antitrust analysis of maximum and minimum resale price maintenance, exclusive territories, tying arrangements, block booking, exclusive dealing, vertical mergers, and franchise agreements, among others, have 14 See Standard Oil Co. of New Jersey v. United States, 221 U.S. 1, 62-66 (1911). 15 See, e.g., Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S 877, 878-80 (2007); Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 36-37 (1977). 7 benefitted tremendously from the greater incorporation of economic reasoning into antitrust standards. There is one rule of reason, which is best understood as a continuum with the per se rule on one end and the full-blown rule of reason on the other.16 The optimal standard or rule for a particular type of business conduct will depend upon its likely competitive effects, the accuracy with which the legal rule can identify anticompetitive conduct, and the costs of applying the rule in practice. As economic knowledge and judicial experience with particular restraints accumulates, truncated analyses have developed where efficient – that is, where a less costly rule can replace a more cumbersome standard without an offsetting loss in the accuracy with which competitive effects can be predicted. The per se rule is the easiest example of truncation. It applies where experience indicates a given type of conduct “always or almost always tend[s] to restrict competition or decrease output.”17 The most illustrative example of such conduct is naked price fixing. The harm is clear: consumers pay higher prices than they would otherwise pay under competitive conditions. Furthermore, there are no procompetitive justifications for price fixing. Thus, the bright-line, per se rule is appropriate here; it 16 Muris & Cummins, supra note 1, at 46 (citing Cal. Dental Ass’n v. FTC, 526 U.S. 726, 779 (1999)). 17 Broad. Music, Inc. v. Columbia Broad. Sys., Inc., 441 U.S. 1, 19-20 (1979). 8 reliably captures anticompetitive conduct with little risk of prohibiting procompetitive conduct, and it is easy to administer. While it is theoretically possible that naked price- fixing behavior increases consumer welfare in some instances, the per se prohibition is optimal because the cost savings from administering the bright-line rule is greater than any loss to consumers from false positives. Antitrust analysis is more nuanced where the challenged conduct appears likely to harm competition but still has potential procompetitive virtue. A prime example of the application of the truncated framework to conduct that might plausibly involve procompetitive virtues is Polygram.18 There, both the Commission and the D.C. Circuit acknowledged the tradeoff between the lower administrative costs incurred under easily administrable rules and the potential for greater error costs arising from less accurate prediction. The D.C. Circuit also acknowledged the benefits of applying “an enquiry meet for the case,” namely the mode of analysis on the rule-of-reason continuum that minimizes total error and administrative costs.19 The D.C. Circuit determined the agreement in Polygram was “inherently suspect,” raised an inference of competitive harm, and shifted the burden to Polygram to raise procompetitive justifications because it “look[ed] suspiciously like a naked price 18 See Polygram v. FTC, 416 F.3d 29, 35-36 (D.C. Cir. 2005); Polygram, 136 F.T.C. 310, 348-51 (2003). 19 See Polygram, 416 F.3d at 34. 9 fixing agreement between competitors” and bore a “close family resemblance [to] another practice that already stands convicted in the court of consumer welfare.”20 This framework is consistent with the Supreme Court’s rationale in California Dental that truncated analysis is appropriate only where judicial experience and economic knowledge suggest the challenged conduct will routinely be treated the same way under a full-blown rule of reason.21 Importantly, decision-theoretic analysis does not always support truncated antitrust rules. Sometimes significant experience analyzing a given class of conduct indicates the full-blown rule of reason is the most appropriate analytical standard. For example, the vast majority of mergers are not anticompetitive and therefore do not violate the Clayton Act.22 Antitrust law and policy recognize there is no single form of truncated analysis that can be applied in the merger context that would efficiently minimize error costs. Similarly, a truncated analysis has failed to develop in the context of resale price maintenance. In Leegin, the Supreme Court charged lower courts with constructing the proper analytical framework for analyzing RPM based upon “experience considering the effects of these restraints by applying the rule of reason over the course of 20 Polygram, 416 F.3d at 37; see also Polygram, 136 F.T.C. at 353-57. 21 See Cal. Dental Ass’n, 526 U.S. at 781; see also Polygram, 416 F.3d at 35. 22 Muris & Cummins, supra note 1, at 47. 10