An economic analysis of unilateral refusals to license intellectual  property

An economic analysis of unilateral refusals to license intellectual property

Richard J. Gilberta and
Carl Shapirob

^aDepartment of Economics and ^bHaas School of Business, University of California at Berkeley, Berkeley, CA 94720

Abstract

The intellectual property laws in the United States provide the owners of intellectual property with discretion to license the right to use that property or to make or sell products that embody the intellectual property. However, the antitrust laws constrain the use of property, including intellectual property, by a firm with market power and may place limitations on the licensing of intellectual property. This paper focuses on one aspect of antitrust law, the so-called “essential facilities doctrine,” which may impose a duty upon firms controlling an “essential facility” to make that facility available to their rivals. In the intellectual property context, an obligation to make property available is equivalent to a requirement for compulsory licensing. Compulsory licensing may embrace the requirement that the owner of software permit access to the underlying code so that others can develop compatible application programs. Compulsory licensing may undermine incentives for research and development by reducing the value of an innovation to the inventor. This paper shows that compulsory licensing also may reduce economic efficiency in the short run by facilitating the entry of inefficient producers and by promoting licensing arrangements that result in higher prices.

Footnotes

Abbreviation: R&D, research and development.
↵ c Copyright protection does not extend to “an idea, procedure, process, system, method of operation, concept, principle, or discovery, regardless of the form in which it is described, explained, illustrated, or embodied in such work” [17 U.S.C. §102(b)].
↵ d “[T]he aims and objectives of patent and antitrust laws may seem, at first glance, wholly at odds. However, the two bodies of law are actually complementary, as both are aimed at encouraging innovation, industry and competition” [Atari Games Corp. v. Nintendo of America, Inc., 897 F.2d 1572, 1576 (Fed. Cir. 1990)]. The Federal Circuit has responsibility for appeals of cases involving patent rights.
↵ e Scotchmer (5) and Scotchmer and Green (6) provide a framework for analyzing the incentive effects of patent scope on cumulative innovation. Merges and Nelson (7, 8) offer several historical examples of the effects of the scope of intellectual property protection on innovative performance.
↵ f Baxter notes that “a promise by the licensee to murder the patentee’s mother-in-law is as much within the ‘patent monopoly’ as is the sum of $50; and it is not the patent laws which tell us that the former agreement is unenforceable and subjects the parties to criminal sanctions” (10).
↵ g See, for example, SCM Corp. v. Xerox Corp., 645 F.2d 1195 (2d Cir. 1981) cert. denied 455 U.S. 1016 (1982) and Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100 (1969). Furthermore §271(d) of the 1988 Amendments to the Patent Act specifies that a refusal to license a patent cannot be the basis for a patent misuse claim.
↵ h Indeed, the recent jury verdict in Image Technical Services v. Eastman Kodak Company (Civil No. C-87-1686 BAC, March 1995) finds Kodak’s unilateral refusal to sell patented parts to be an antitrust offense. C.S. testified on behalf of Kodak in this case. See ref. 14 for an analysis of the issues involved in this and related cases.
↵ i Farrell (15, 16), Farrell and Saloner (17), Menell (18), and R. H. Lande and S. M. Sobin (unpublished work) offer useful perspectives on the efficient scope of protection for computer software. A recent case that raises important issues on the scope of copyright protection is Lotus Dev. Corp. v. Borland Int’l, Inc., F.3d 807 (1st Cir. 1995).
↵ j See, for example, United States v. Grinnell Corp., 384 U.S. 563, 571 (1966) and United States v. Aluminum Co. of America, 148 F.2d 416, 430 (2nd Cir. 1945).
↵ k Other examples include the control of quality or safety standards [see Anton and Yao (20)].
↵ l See Werden (21). Ordover, Salop, and Saloner (22) and Riordan and Salop (23) each provide an illuminating analysis of related competitive effects in the context of vertical mergers.
↵ m See MCI Communications Corporation v. AT&T at 1132–1134. The Supreme Court recently affirmed this general approach. “It is true as a general matter a firm can refuse to deal with its competitors. But such a right is not absolute: it exists only if there are legitimate competitive reasons for the refusal.” [Image Technical Services v. Eastman Kodak Company, 504 U.S. 541 (1992)].
↵ n See ref. 24 for an analysis of how a refusal to deal, implemented by a price squeeze, can facilitate price discrimination.
↵ o Baker (26), Carlton and Klammer (27), D. W. Carlton and S. C. Salop (unpublished work), and H. Hovenkamp (unpublished work) discuss issues that bear on mandatory access for network joint ventures.
↵ p We take p ^m as a parameter in the definition, independent of the nonintegrated firm’s output. More generally, price will vary with the nonintegrated firm’s output and can be a further constraint on the nonintegrated firm’s profits.
↵ q These results contrast with the conclusion in Economides and Woroch (unpublished work), who consider a model of interconnecting networks and show that foreclosure (refusal to deal) is not a profit-maximizing strategy. However, in their model, the owner of the essential facility and the potential entrant produce differentiated products. Entry adds value that can be captured by the owner of the essential facility.
↵ r The royalty arrangement has to prevent firm 2 from entering as an inefficient producer, which may require a provision restricting firm 2 from using its own technology (28).
↵ Of course, many monopolists, such as local telephone companies, face price regulation, but not under antitrust law.
↵ t For example, in D&H Railway Co. v. Conrail, 902 F.2d 174 (2nd Cir. 1990), the Second Circuit Court of Appeals found that Conrail’s 800% increase in certain joint rates raised a genuine issue supporting a finding of unreasonable conduct amounting to a denial of access by Conrail. Compare this, however, with Laurel Sand & Gravel, Inc. v. CSX Transp., Inc., 924 F.2d 539 (4th Cir. 1991), in which the plaintiff, a shortline railroad, received an offer from CSX for trackage rights but alleged that the rate quoted was so high as to amount to a refusal to make those trackage rights available. The Fourth Circuit found on these facts that there could be no showing that the essential facility was indeed denied to the competitor.
↵ u The Terminal Railroad Association was a joint venture of companies that controlled the major bridges, railroad terminals, and ferries along a 100-mile stretch of the Mississippi River leading to St. Louis. Reiffen and Kleit (31) argue that the antitrust issue in Terminal R. R. was not the denial of access but rather the horizontal combination of competitors in the joint venture.
↵ v See, for example, Data General, discussed above, and Image Technical Services, Inc. v. Eastman Kodak Company, 504 U.S. 541 (1992).
↵ w The MCI case is an example.
↵ x See, for example, Atari Games Corp. v. Nintendo of America, Inc., 897 F.2d 1572, 1576 (Fed. Cir. 1990).