Weak Market Power Presumption IN-BETWEEN INTELLECTUAL PROPERTY LAW AND ANTITRUST LAW A "Weak" Model...

Weak Market Power Presumption

IN-BETWEEN INTELLECTUAL PROPERTY LAW

AND ANTITRUST LAW

A "Weak" Model of 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


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


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


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


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


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


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


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

)(


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 ?


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


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


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


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


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


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


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


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


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


Summary

Tension between IP and AntitrustMutual goal – maximizing the social wealthA weak form of the market power

presumption


Details

Guy Pessach…Itamar Morad…

Weak Market Power Presumption IN-BETWEEN INTELLECTUAL PROPERTY LAW AND ANTITRUST LAW A "Weak" Model...

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