Patents and antitrust: A rethinking in light of patent breadth and sequential innovation

Antitrust Law Journal

Volumn 65, Issue 2, 1997, Pages 449-466

  Barton, John H ^a  

^a STANFORD LAW SCHOOL   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 0031511862     PISSN: 00036056     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (64)

1. See Federal Courts Improvement Act of 1982, Pub. L. 97-164, 96 Stat. 37 (Apr. 2, 1982).
2. See James B. Kobak, Jr., Running the Gauntlet: Antitrust and Intellectual Property Pitfalls on the Two Sides of the Atlantic, 64 ANTITRUST L.J. 341 (1996).
3. See John H. Barton, Patent Scope in Biotechnology, 26 INT'L REV. INDUS. PROP. & COPYRIGHT L. 605 (1995). This article includes a description of a survey of a sample of 63 biotechnology patents issued during October 1994. Five of these were extremely broad; another five covered important research tools.
4. U.S. Patent 5,159,135, Umbeck, Genetic engineering of cotton plants and lines, Oct. 27, 1992, reexamination granted, Dec. 7, 1994.
5. E.g., U. S. Patent 5,328,987, Maliszewski, IgA Fc receptors, July 12, 1994.
6. U.S Patent 5,061,620, Tsukamoto et al., Human hematopoietic stem cell, Oct. 29, 1991.
7. If copyright protection extends to reverse engineering of computer programs or to interfaces, that copyright protection can, effectively, affect a variety of related and follow-on technologies, just as is the case for a patented fundamental research tool in biotechnology. For example, control over a widely accepted user interface, such as that for a spreadsheet, could be a major barrier to entry to the entire spreadsheet market. See Lotus Dev. Corp. v. Borland Int'l, Inc., 49 F.3d 807 (1st Cir. 1995), aff'd by an equally divided Court, 116 S. Ct. 804 (1996). Many of the points of this article can, with appropriate doctrinal adjustments, be applied to the software copyright context as well as to the patent context.
8. Edmund W. Kitch, The Nature and Functions of the Patent System, 20 J.L. & ECON. 266 (1977).
9. E.g., Robert P. Merges & Richard R. Nelson, Market Structure and Technical Advance: The Role of Patent Scope Decisions, in ANTITRUST, INNOVATION, AND COMPETITIVENESS 185 (Thomas M. Jorde & David J. Teece eds., 1992).
10. William M. Landes & Richard A. Posner, An Economic Analysis of Copyright Law, 18 J. LEGAL STUD. 325 (1989).
11. E.g., Jerry R. Green & Suzanne Scotchmer, On the Division of Profit in Sequential Innovation, 26 RAND J. ECON. 20 (1995); Howard F. Chang, Patent Scope, Antitrust Policy, and Cumulative Innovation, 26 RAND J. ECON. 34 (1995).
12. E.g., Jerry R. Green & Suzanne Scotchmer, On the Division of Profit in Sequential Innovation, 26 RAND J. ECON. 20 (1995); Howard F. Chang, Patent Scope, Antitrust Policy, and Cumulative Innovation, 26 RAND J. ECON. 34 (1995).
13. Dominique Foray, Production and Distribution of Knowledge in the New Systems of Innovation: The Role of Intellectual Property Rights, 14 SCIENCE TECH. INDUS. DEV. (STI) 119 (1994); Rebecca S. Eisenberg, Patents and the Progress of Science: Exclusive Rights and Experimental Use, 56 U. CHI. L. REV. 1017 (1989).
14. Dominique Foray, Production and Distribution of Knowledge in the New Systems of Innovation: The Role of Intellectual Property Rights, 14 SCIENCE TECH. INDUS. DEV. (STI) 119 (1994); Rebecca S. Eisenberg, Patents and the Progress of Science: Exclusive Rights and Experimental Use, 56 U. CHI. L. REV. 1017 (1989).
15. But see Robert Merges, Intellectual Property Rights and Bargaining Breakdown: The Case of Blocking Patents, 62 TENN. L. REV. 75 (1994). Note, moreover, that a university holding a blocking patent usually has little interest in a cross-license with firms holding blocking patents, for it is not directly engaged in commercial research. If two pharmaceutical firms have patented separate receptors involved in the same overall biological phenomenon, they have every incentive to cross-license each other, royalty-free. If one of the receptor patents is held by a university, however, its interest is in royalties rather than a cross-license. Another area of possible exception, suggested in the text, is a venture capital-style startup seeking to control a major area of technology and licensing only as part of that technology control strategy or as necessary to raise capital.
16. Suzanne Scotchmer, Standing on the Shoulders of Giants: Cumulative Research and the Patent Law, 5 J. ECON. PERSP. 29, 31, 34 (1991).
17. Green & Scotchmer, supra note 11 (emphasizing loss of incentive to initial innovator); Chang, supra note 11 (defining an allocation of monopoly rents to give initial inventor greatest incentive when subsequent inventor is assumed to make an independent cost/ benefit analysis).
18. Suzanne Scotchmer, Protecting Early Innovators: Should Second-Generation Products Be Patentable?, 27 RAND J. ECON. 322 (1996).
19. See id. at 323.
20. E.g., Richard C. Levin et al., Appropriating the Returns from Industrial Research and Development, BROOKINGS PAPERS ON ECON. ACTIVITY NO. 3 at 783 (1987).
21. At least four of the ten broad or research tool patents identified in the survey described supra note 3, were supported by the government. The weight to be given to this argument must certainly take into account the possibility of substantial declines in government research support; yet, so far those declines, at least in the United States, have been more in applied research than in basic research. Moreover, academic incentives for basic research remain strong.
22. It also seems possible that the use of broad and basic patents makes it more plausible for monopolists to maintain their positions by preemption. See Richard J. Gilbert & David Newbery, Pre-emptive Patenting and the Persistence of Monopoly, 72 AM. ECON. REV. 514 (1982). When the later innovator is smaller, it can further be significantly deterred by the fear of intellectual property litigation costs. See Josh Lerner, Patenting in the Shadow of Competitors, 38 J.L. & ECON. 463 (1995).
23. It also seems possible that the use of broad and basic patents makes it more plausible for monopolists to maintain their positions by preemption. See Richard J. Gilbert & David Newbery, Pre-emptive Patenting and the Persistence of Monopoly, 72 AM. ECON. REV. 514 (1982). When the later innovator is smaller, it can further be significantly deterred by the fear of intellectual property litigation costs. See Josh Lerner, Patenting in the Shadow of Competitors, 38 J.L. & ECON. 463 (1995).
24. Therese Poletti, Microsoft Probe Examines Internet Software, REUTER BUS. REP., Dec. 4, 1995.
25. This also has implications for tying policy in the high-technology area, for tying can be a means of seeking to convert power in one market into power in another. These issues are, not, however, pursued further in this article.
26. See, e.g., Kitch, supra note 8, at 278.
27. Merges & Nelson, supra note 9.
28. Kitch, supra note 8.
29. 35 U.S.C. § 101.
30. 383 U.S. 519, 534 (1966).
31. 35 U.S.C. § 112.
32. See Barton, supra note 3, at 615-16.
33. Merges & Nelson, supra note 9, at 192.
34. See generally Lauren Bruzzone, The Research Exemption: A Proposal, 21 AIPLA O.J. 52 (1993); Rebecca Eisenberg, Technology Transfer and the Genome Project: Problems with Patenting Research Tools, 5 RISK: HEALTH, SAFETY & ENV'T 163 (1994). The doctrine is basically judicially created, although there is a codification for the narrow situation of firms preparing to market drugs when the patents covering those drugs expire. See 35 U.S.C. § 271 (e).
35. See generally Lauren Bruzzone, The Research Exemption: A Proposal, 21 AIPLA O.J. 52 (1993); Rebecca Eisenberg, Technology Transfer and the Genome Project: Problems with Patenting Research Tools, 5 RISK: HEALTH, SAFETY & ENV'T 163 (1994). The doctrine is basically judicially created, although there is a codification for the narrow situation of firms preparing to market drugs when the patents covering those drugs expire. See 35 U.S.C. § 271 (e).
36. For general discussions, see Merges, supra note 13, at 102-05, and Gianna Julian-Arnold, International Compulsory Licensing: The Rationales and the Reality, 33 IDEA 349 (1993). The use of the dependency license is restricted by art. 31 of the Uruguay Round TRIPS Agreement, Agreement on Trade-Related Aspects of Intellectual Property Rights, Including Trade in Counterfeit Goods, Dec. 15, 1993, GATT Doc. MTN/FA II-A1C, which requires, inter alia, that "the invention claimed in the second patent shall involve an important technical advance of considerable economic significance in relation to the invention claimed in the first patent," and that "the owner of the first patent shall be entitled to a cross-license on reasonable terms to use the invention claimed in the second patent." Moreover, any such compulsory license shall "be authorized predominantly for the supply of the domestic market of the Member authorizing such use," but this condition is not obligatory "where such use is permitted to remedy a practice determined after judicial or administrative process to be anti-competitive."
37. Code de la Propriété Intellectuelle, Loi 92-597, art. L. 613-15 (July 1, 1992).
38. The Code specifically provides: The Tribunal de Grande Instance, having heard the Ministère Public, may, in the public interest, grant, on request, which may not be before the time specified in article L. 613-11 [three years after patent grant or four years after patent application] a non-exclusive license to the holder of the improvement to the extent necessary to the practice of the invention covered by this patent, and to the extent that the invention covered by the improvement patent reflects important technological progress over the prior patent. The holder of the first patent may obtain, upon request to the tribunal, the grant of a license on the improvement patent. Id.
39. See, e.g., Prepared Statement of Jacques J. Gorlin, Director, Intellectual Property Committee, Hearings Subcomm. on Trade of the House Ways and Means Comm. (Sept. 11, 1996); Prepared Statement of Michael K. Kirk, Executive Director, American Intellectual Property Law Association, Hearings Before the Subcomm. on Energy and Environment of the House Comm. on Science (May 2, 1996).
40. See, e.g., Prepared Statement of Jacques J. Gorlin, Director, Intellectual Property Committee, Hearings Subcomm. on Trade of the House Ways and Means Comm. (Sept. 11, 1996); Prepared Statement of Michael K. Kirk, Executive Director, American Intellectual Property Law Association, Hearings Before the Subcomm. on Energy and Environment of the House Comm. on Science (May 2, 1996).
41. See F.M. SCHERER, INDUSTRIAL MARKET STRUCTURE AND ECONOMIC PERFORMANCE 456-57 (2d ed. 1980) (discussing the concept extensively and presenting 1958-60 congressional studies). Scherer dropped the issue from his more recent edition. For a brief review of the European discussion, see Foray, supra note 12, at 126-27.
42. Chang notes that under his model of the follow-on invention issue, a compulsory license could be a way to enforce the royalty allocation formula that he concludes would create the best possible incentives for each of the inventors. Chang, supra note 11, at 43.
43. See, e.g., the leading article, Louis Kaplow, The Patent-Antitrust Intersection: A Reappraisal, 97 HARV. L. REV. 1813 (1984).
44. See, e.g., Data Gen. Corp. v. Grumman Sys. Support Corp., 36 F.3d 1147 (1st Cir. 1994); Miller Insituform, Inc. v. Insituform of N. Am., Inc., 830 F.2d 606 (1987); SCM Corp. v. Xerox Corp., 463 F. Supp. 983 (D. Conn. 1978), aff'd, 645 F.2d 1195 (2d Cir. 1981), cert. denied, 455 U.S. 1016 (1982); see generally Norman Rosen, Intellectual Property and the Antitrust Pendulum: Recent Developments at the Interface Between the Antitrust and Intellectual Property Laws, 62 ANTITRUST L.J. 669 (1994).
45. 36 F.3d at 1187.
46. 463 F. Supp. at 1013.
47. Admittedly, the new products would not be possible without the initial invention; they would not be possible without the subsequent invention either.
48. The standard would be very similar to that of Radio Telefis Eireann v. Commission, 4 C.M.L.R. 718 (E.C.J. 1995), in which a copyright holder was required to grant a license to permit creation of an all-channel TV guide. In thus overriding an intellectual property right on competition grounds, the court stated: The appellants' refusal to provide basic information by relying on national copyright provisions thus prevented the appearance of a new product, a comprehensive weekly guide to television programmes, which the appellants did not offer and for which there was a potential consumer demand. Such refusal constitutes an abuse under . . . Article 86 . . . . Id. at 791. As in the discussion in the text, the logic is that the intellectual property right is being stretched to cover markets beyond that for which it reasonably confers a monopoly.
49. Supra note 4.
50. Moreover, action under antitrust law avoids the limitations imposed on the dependency license under art. 31 of TRIPS, supra note 32.
51. Commission Reg. 240/96 of 31 Jan. 1996 on the Application of Article 85(3) of the Treaty to Certain Categories of Technology Transfer Agreements, O.J. (L 31) 2 (Feb. 9, 1996). Article 2(1)(4) states that certain grantback license requirements are acceptable provided that, in certain circumstances, they are nonexclusive and reciprocal; art. 3(6) states that an assignment requirement is not acceptable.
52. U.S. Department of Justice and Federal Trade Commission Antitrust Guidelines for the Licensing of Intellectual Property (1995) § 5.6, reprinted in 4 Trade Reg. Rep. (CCH) ¶ 13,132 [hereinafter IP Guidelines]; see United States v. Pilkington, Civ. Action No. 94-345, Competitive Impact Statement (D. Ariz. filed May 25, 1994), 59 Fed. Reg. 30,604 (June 14, 1994).
53. E.g., Intel Corp. v. ULSI Sys. Technology, Inc., 995 F.2d 1566 (Fed. Cir. 1993); Intel Corp. v. U.S. Int'l Trade Comm'n, 946 F.2d 821 (Fed. Cir. 1991); Cyrix Corp. v. Intel Corp., 879 F. Supp. 672 (E.D. Tex. 1995); see generally FRED WARSHOFSKY, THE PATENT WARS (1994).
54. For example, Agracetus licensed its cotton technology to Monsanto and Calgene, BIOTECHNOLOGY NEWSWATCH, Dec. 19, 1994, at 5; but more recently, Monsanto purchased Agracetus, John A. Jones, Monsanto Using Biotech to Develop New Farm Chemicals, INVESTOR'S BUS. DAILY, July 1, 1996, at B14, and acquired a substantial interest in Calgene, Mara Bovsun, Monsanto to Acquire Half of Calgene for Expertise, $30M, BIOTECHNOLOGY NEWSWATCH, July 3, 1995, at 1.
55. For example, Agracetus licensed its cotton technology to Monsanto and Calgene, BIOTECHNOLOGY NEWSWATCH, Dec. 19, 1994, at 5; but more recently, Monsanto purchased Agracetus, John A. Jones, Monsanto Using Biotech to Develop New Farm Chemicals, INVESTOR'S BUS. DAILY, July 1, 1996, at B14, and acquired a substantial interest in Calgene, Mara Bovsun, Monsanto to Acquire Half of Calgene for Expertise, $30M, BIOTECHNOLOGY NEWSWATCH, July 3, 1995, at 1.
56. For example, Agracetus licensed its cotton technology to Monsanto and Calgene, BIOTECHNOLOGY NEWSWATCH, Dec. 19, 1994, at 5; but more recently, Monsanto purchased Agracetus, John A. Jones, Monsanto Using Biotech to Develop New Farm Chemicals, INVESTOR'S BUS. DAILY, July 1, 1996, at B14, and acquired a substantial interest in Calgene, Mara Bovsun, Monsanto to Acquire Half of Calgene for Expertise, $30M, BIOTECHNOLOGY NEWSWATCH, July 3, 1995, at 1.
57. See Carpet Seaming Tape Licensing Corp. v. Best Seam Inc., 616 F.2d 1133 (9th Cir. 1980); see generally IP Guidelines, supra note 47, § 5.5.
58. IP Guidelines, supra note 47, § 5.5 & example 7.
59. Admittedly, Texas Instruments broke with the pattern and brought suit against competitors under unlicensed patents. See, e.g., Texas Instruments, Inc. v. U.S. Int'l Trade Comm'n, 988 F.2d 1165 (Fed. Cir. 1993). The incentives to do so are strongest for a firm with a relatively weak product position, for such a firm is least vulnerable to countersuit by its competitors.
60. This analysis assumes, of course, that sham use of a patent arrangement to define price or quantity allocation cartels is an antitrust violation, and deals instead with the impact on innovation. On the price and quantity allocation cartel issues, see George L. Priest, Cartels and Patent License Arrangements, 20 J.L. & ECON. 309 (1977).
61. See United States v. Automobile Mfrs. Ass'n, 1969 Trade Cas. (CCH) ¶ 72,907 (C.D. Cal. 1969) (cross-license of automobile emissions control technology); Thomas N. Dahdouh & James F. Mongoven, The Shape of Things to Come: Innovation Market Analysis in Merger Cases, 64 ANTITRUST L.J. 405, 425-29 (1996).
62. 374 U.S. 174 (1963); see also IP Guidelines, supra note 47, § 5.5 (citing discussion in Northwest Wholesale Stationers, Inc. v. Pacific Stationery & Printing Co., 472 U.S. 284 (1985)).
63. IP Guidelines, supra note 47. §§ 3.2.2 & 3.2.3: FEDERAL TRADE COMMISSION STAFF, ANTICIPATING THE 21ST CENTURY: COMPETITION POLICY IN THE NEW HIGH-TECH. GLOBAL MARKET PLACE (May 1996); see, e.g., The Upjohn Co., 60 Fed. Reg. 56.153 (FTC Nov. 7, 1995); Glaxo plc. 60 Fed. Reg. 16.139 (FTC Mar. 29, 1995); Boston Scientific Corp., 60 Fed. Reg. 12.948 (FTC Mar. 9, 1995).
64. This should not, of course, be read to mean that the participants in a focused cross-license designed, as part of a strategic alliance, to develop new technology for a specific market should thereby be held to have lost their right to maintain any form of exclusivity. Such a focused strategic alliance is a competitively desirable business operation. And, in the normal case, the parties to the strategic alliance will not have substantial market power, they will typically not be in direct competition, and their licensing restraints will be limited to those needed to maintain incentives to develop a specific product. See Symposium: Joint Ventura, Including Strategic Alliances, to Develop Computer Technology, 61 ANTITRUST L.J. 859 (1993).