Post on 27-Mar-2015
Weak Market Power Presumption
IN-BETWEEN INTELLECTUAL PROPERTY LAW
AND ANTITRUST LAW
A "Weak" Model of Market Power Presumption :
Weak Market Power Presumption
Contents
IntroductionPart One: Tension and HistoryPart Two: Main Arguments concerning the
Market Power PresumptionPart Three: why is the Market Power
Presumption Needed?Part Four: a "Weak" Market Power
PresumptionSummary
• What is the Market Power Presumption ?
Introduction
Weak Market Power Presumption
What is the Market Power Presumption ?
Significant market power is a crucial element in determining the existence of a monopoly (or dominant position)
The Market Power Presumption is a judicial presumption which states that:
in the absence of evidence to the contrary, IP rights which are patent protected confer
significant market power
• The Tension Between IP Law and Antitrust Law• The History of Market Power Presumption in the
US• The Market Power Presumption in Israel• The Market Power Presumption in Europe
Part One: Tension and History
Weak Market Power Presumption
The tension between IP law and Antitrust
The importance of IP, notably patents, in modern economy Public good The law grants a “monopoly” to the patent holder
The rise of Antitrust (competition) in recent years
The development of the economic approach
Weak Market Power Presumption
The tension between IP law and Antitrust
IP LawMaximizing social
welfare through Innovation
“Monopoly” over the invention
Antitrust LawMaximizing social
welfare through encouragement of Market Competition
Reduction in prices, increase of production quantity and encouragement of the development of goods
The right balance
The History of Market Power presumption in US
• Sherman Act 1870• A patent granted a legal monopoly, and therefore conferred market power upon its holder• Within the IP rights realm, all practices were considered legal per se.
• Sherman Act 1870• A patent granted a legal monopoly, and therefore conferred market power upon its holder• Within the IP rights realm, all practices were considered legal per se.
• Nine No-No's• A patent confers market power upon its holder• Not all practices within the IP rights realm are legal per se, but rather some practices are considered anti-competitive prima facie.
• Nine No-No's• A patent confers market power upon its holder• Not all practices within the IP rights realm are legal per se, but rather some practices are considered anti-competitive prima facie.
• AGLIP • IP rights do not confer market power upon its holder, even more so, IP rights suggests that there is no market power to its holder.•There are no illegal actions per se, and every practice is scrutinized, once it is proven that the IP holder has market power
• AGLIP • IP rights do not confer market power upon its holder, even more so, IP rights suggests that there is no market power to its holder.•There are no illegal actions per se, and every practice is scrutinized, once it is proven that the IP holder has market power
Weak Market Power Presumption
The History of Market Power presumption in EU
Shifted from a per se approach to a more economic-oriented regime – “Rule of Reason”.
No market power presumptionIn patent tying agreements
Restrictive agreements (article 81, EC) Abuse of dominant position (article 82, EC). Dominant
position presumption – proving above 20% market share
Using structural factors, among them the existence of a patent, to prove market power
• Market-Power in the Antitrust Sense• The price of IP goods is expected to be
substantially higher than its marginal cost• Is there an Empirical basis to the market power
presumption?
Part Two: Main Arguments concerning the Market Power
Presumption
Weak Market Power Presumption
Market-Power in the Antitrust Sense
Different terminologies:
Monopoly in the
Antitrust sense Market
Power
Economic Monopoly Monopoly
in the Patent sense
Small Monopol
y
Weak Market Power Presumption
Market-Power in the Antitrust Sense
The different terms are not so different and are causing confusion:"The ability profitably to maintain prices above, or output below, competitive levels for a significant period of time." (Horizontal Merger Guidelines; AGLIP)
"[W]hen the deviation of price from marginal cost is trivial, or simply reflects certain fixed cost, there is no occasion for antitrust concern, even though the firm have
market power in our sense of the term“ (R. Posner)A deviation from the marginal price defines
the monopoly
Weak Market Power Presumption
The price of IP goods is expected to be substantially higher than its marginal cost
A patent as public good (copied, replicated or imitated easily)
Usually the marginal cost is close to zeroHigh sunk costs (R&D)Example for market power (Lerner Index): Ex-ante the investment in a patent accounts
the price above the marginal cost:Two companies invest $100 each in research and development in period 1. In period 2 there is a 50% chance to develop a product and get $250 or to fail producing it and get $0. The return over the investment, ex-ante, for each one of the companies is 25%. ; However, the return over the investment, ex-post, is 150%. A rational investor will invest money only when the projected price could be higher.
P
MCPL
)(
Weak Market Power Presumption
Is there an Empirical basis to the market power presumption?
95% of the patents have no economic value.The Market Power Presumption is a judicial
presumption; therefore, it is used in courts when a case is litigated
Patents that get to court have, usually, economic value.
IP and Antitrust cases often (mainly in the US) have higher litigation expenses than other fields
• The efficiency parameter • The cost of a mistake, when anti-competitive
restriction are made on an entity without substantial market power
• Other Arguments Against the Market Power Presumption
Part Three: Why is the Market Power Presumption
needed ?
Weak Market Power Presumption
The efficiency parameter
The process of proving market power is expensive Relevant market definition SSNIP: small but significant non-transitory increase of price
The process of proving market power is complicated
The substitutes to the formal proof of the relevant market and of the monopoly in this market can be found by the defendant in lower costs
Weak Market Power Presumption
The costs of a judicial mistake
A false positive (in a market power presumption): the court held that a non-monopoly is a monopoly Costs:
the loss to the social welfare due to the action of the non-monopoly entity that were prevented by the false positive
In a non monopolistic market the chances of reducing the social welfare by restricting a single entity are low
A false negative: the court falsely held that an entity is not a monopoly. Costs:
the loss to the social welfare due to the anti competitive action of the monopoly entity
Costs of litigation are higher (proving the relevant market) A negative mistake
Weak Market Power Presumption
Other Arguments Against the Market Power Presumption
The presumption will lead to more judicial errors
Pragmatically, the courts will be flooded with antitrust claims against patent holders
The presumption existed in the past The incentive to innovate will decrease,
and eventually will decrease social welfare
“An antitrust policy that reduced prices by 5 percent today at the expense of reducing by 1 percent the annual rate at which innovation lowers the costs of production would be a calamity .In the long run a continuous rate of change, compounded, swamps static losses”
• Evident Existence of Close Substitutes of the Patent• A Prima Facie Proof that the Price does not Deviate
Substantially from the Marginal Cost• The relevant Market Comprises of a Monopson, and
the Patent is not Crucial for the Monopson• The Case Involves a Patent without any Economic
Value• The Case involves, allegedly, frivolous or invidious
Purposes
Part Five: A “Weak” Market Power Presumption
Weak Market Power Presumption
A weak market power presumption
Defined situation in which the presumption is not valid
The defined situation can be proved by the defended.
When proven the burden of proof shift to the plaintiff to prove the existence of market power
Weak Market Power Presumption
Situation 1: Evident Existence of Close Substitutes of the Patent
The market structure is known for instance, if the goods are a basic product the market was already declared in different court
decisions
The relevant market through the eyes of the “reasonable consumer” rather than through an economic eyes
A judicial approach to the relevant market definition
Can be applied only when the market defined over a reasonable doubt
Weak Market Power Presumption
Situation 2: A Prima Facie Proof that the Price does not Deviate Substantially from the Marginal
Cost
An initial proof that the marginal cost does not deviate substantially from the price
A defendant, mainly if it is a big firm, has more ability and means to prima facie prove that its price does not deviates substantially from its marginal costs
Weak Market Power Presumption
Situation 3: The relevant Market Comprises of a Monopson,
and the Patent is not Crucial for the Monopson
A Monopson, although being the consumer and not on the seller, have some market power
The monopson has a substantial market power
When the patent is not considered as being an essential input within the monopson – it is justified to shift the burden of proof back to the plaintiff
Weak Market Power Presumption
Situation 4: The Case Involves a Patent without any Economic Value
95% of the patents have no economic valueEven though it is unlikely – there is a
possibilty that a patent, in the litigation phase, have no economic value
Example: royalties paid for using the patent are low
Weak Market Power Presumption
Situation 5: The Case involves, allegedly, frivolous or invidious Purposes
In order to prevent the use of the presumption as a tactical business means
By proving the lawsuit is frivolous or invidious the defendant can cancel the use of the presumption
Used as deterence against false claims, pre litigation stage
• Summary• details
Summary
Weak Market Power Presumption
Summary
Tension between IP and AntitrustMutual goal – maximizing the social wealthA weak form of the market power
presumption
Weak Market Power Presumption
Details
Guy Pessach…Itamar Morad…