Bargaining in the shadow of rate-setting courts

Antitrust Law Journal

Volumn 76, Issue 1, 2009, Pages 307-328

  Crane, Daniel A ^a  

^a UNIVERSITY OF MICHIGAN LAW SCHOOL   (United States)

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EID: 70350447657     PISSN: 00036056     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Conference Paper

References (107)

1. See, e.g., Arsberry v. Illinois, 244 F.3d 558, 562 (7th Cir. 2001) (referring to rate setting as "a task [courts] are inherently unsuited to perform competendy") ;
2. In re Coordinated Pretrial Proceedings in Petroleum Prods. Antitrust Litig., 906 F.2d 3432, 445 (9th Cir. 1990) ("The federal courts generally are unsuited to act as rate-setting commissions.") ;
3. Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263, 294 (2d Cir. 1979) (rejecting "judicial oversight of pricing policies [that] would place the courts in a role akin to that of a public regulatory commission").
4. Rambus, Inc., FTC Docket No. 9302, 2007-1 Trade Cas. (CCH) ¶ 75, 585, at 107, 065 (Feb. 2, 2007), available at http://www.ftc.gov/os/adjpro/ d9302/070205opinion. pdf
5. rev'd, 522 F.3d 456 (D. C. Cir. 2008).
6. 3Negotiated Data Solutions LLC, FTC Docket No. 051-0094, 2008 WL 258, 308, at App. D (Jan. 22, 2008), available at http://www.ftc.gov/os/caselist/ 0510094/080122do. pdf (requiring defendant to offer paid-up, royalty-free patent license for specified field of use in exchange for one-time fee of $1, 000).
7. Sometimes, a court has ordered licensing on reasonable terms and retained jurisdiction to set a rate, but the government and defendants have then agreed on a rate schedule that has become incorporated into a post-judgment consent decree. See, e.g., Maul Bros., Inc. v. Emhart Corp., 356 F.2d 628 (6th Cir. 1966).
8. Besser Mfg. Co. v. United States, 343 U. S. 444, 449 (1952) ("Compulsory licensing and sale of patented devices are recognized remedies. They would seem particularly appropriate where, as here, a penchant for abuses of patent rights is demonstrated.").
9. The "shadow of the law" metaphor is generally ascribed to Robert H. Mnookin & Lewis Kornhauser, Bargaining in the Shadow of the Law: The Case of Divorce, 88 Yale L. J. 950 (1979).
10. 547 U. S. 388 (2006).
11. To be sure, privately ordered intellectual property regimes like SSOs require RAND commitments for reasons other than avoiding antitrust liability. However, antitrust avoidance is one of the perceived benefits. See Justin Hurwitz, The Value of Patents in Industry Standards: Avoiding License Arbitrage with Voluntary Rules, 36 AIPLA Q. J. 1, 4 (2008) (noting that the "root of the [RAND commitment] problem lies in antitrust law").
12. See United States v. Am. Soc'y of Composers, Authors & Publishers, 981 F. Supp. 199, 201 (S. D. N. Y. 1997) (explaining terms of consent decree).
13. CBS. v. Am. Soc'y of Composers, Authors & Publishers, 320 F. Supp. 389 (S. D. N. Y. 1970).
14. *12 (S. D. N. Y. 1993) (reporting on interim rate setting in Buffalo Broadcasting litigation).
15. *1 (S. D. N. Y. 1989).
16. 13United States v. Am. Soc'y of Composers, Authors & Publishers, 157 F. R. D. 173 (S. D. N. Y. 1994).
17. United States v. Am. Soc'y of Composers, Authors & Publishers, 870 F. Supp. 1211 (S. D. N. Y. 1995).
18. United States v. Am. Soc'y of Composers, Authors & Publishers, 981 F. Supp. 199 (S. D. N. Y. 1997).
19. *1 (S. D. N. Y. 1999).
20. United States v. Am. Soc'y of Composers, Authors & Publishers, 333 F. Supp. 2d 215 (S. D. N. Y. 2004).
21. United States v. Am. Soc'y of Composers, Authors & Publishers, 485 F. Supp. 2d 438 (S. D. N. Y. 2007). The order in this case, setting the royalty rate for downloading of digital music files over the Internet, was entered April 30, 2008.
22. See, e.g., United States v. Am. Soc'y of Composers, Authors & Publishers, 331 F.2d 117 (2d Cir. 1964) (holding that ASCAP was not required to issue the kinds of licenses requested).
23. See generally Richard A. Epstein, Antitrust Consent Decrees in Theory and Practice 32-34 (2007) (discussing drawbacks of having ASCAP rate-regulated while BMI was not).
24. See United States v. Broad. Music, Inc., 426 F.3d 91, 92 (2d Cir. 2005) (Music Choice).
25. Broad. Music, Inc. v. Weigel Broad. Co., 488 F. Supp. 2d 411 (S. D. N. Y. 2007).
26. See http://www.ascap. com/about/(reporting that ASCAP represents more than 330, 000 U. S. composers, songwriters, lyricists, and music publishers) ;
27. http://www.bmi. com/about/?link=navbar (reporting that BMI represents 375, 000 songwriters, composers, and music publishers).
28. Table 1 includes only decrees that contained a specific retention-ofjurisdiction provision allowing interested third parties to seek a rate determination. It excludes many other antitrust decrees that include other forms of reasonable royalty provisions. For example, the 2001 Microsoft consent decree requires Microsoft to license (on reasonable and nondiscriminatory terms) to ISVs, IHVs, IAPs, ICPs, and OEMs any intellectual property rights owned or licensable by Microsoft that are required to exercise any of the options or alternatives expressly provided to those entities under the Final Judgment. The decree, however, does not allow the specified third parties to directly enforce the decree through a rate-setting procedure. New York v. Microsoft Corp., 224 F. Supp. 2d 76 (D. D. C. 2002)
29. aff d sub nom. Massachusetts v. Microsoft Corp., 373 F.3d 1199 (D. C. Cir. 2004).
30. United States v. Am. Optical Co., 95 F. Supp. 771 (S. D. N. Y. 1950).
31. In each case I tried to double-check the existence of any rate-setting decisions by examining both the docket sheet and searching for reported decisions. As noted in the Appendix, docket sheet information was unavailable for thirty of the cases.
32. I make this point more completely in Daniel A. Crane, Technocracy and Antitrust, 86 Tex. L. Rev. 1159, 1184-88 (2008).
33. Broad. Music, Inc. v. CBS., 441 U. S. 1, 13 (1979). Although the Supreme Court only decided whether the ASCAP and BMI blanket licensing systems, as modified by the consent decree, fell under the per se rule of illegality for price fixing, later decisions have upheld blanket licensing under the rule of reason.
34. See Buffalo Broad. Co. v. Am. Soc'y of Composers, Authors & Publishers, 744 F.2d 917 (2d Cir. 1984).
35. See, e.g., Munn v. Illinois, 94 U. S. 113 (1877) (permitting rate regulation of grain elevators and other industries affected with the public interest) ;
36. Smyth v. Ames, 169 U. S. 466 (1898) (requiring rate regulators to allow regulated enterprise a reasonable return on its capital investment).
37. See generally John F. Duffy, The Marginal Cost Controversy in Intellectual Property, 71 U. Chi. L. Rev. 37 (2004).
38. For example, it is well known that only a small fraction of new drugs invented by pharmaceutical companies ever reach the market. See Michael A. Carrier, Two Puzzles Resolved: Of the Schumpeter-Arrow Stalemate and Pharmaceutical Innovation Markets, 93 Iowa L. Rev. 393, 419 (2007) (reporting percentages of drugs reaching the market at three clinical study phases).
39. I am assuming that the marginal costs are only incurred after it is known that the drug will be commercially successful (i.e., it has received FDA approval and has been shown effective in clinical trials) and therefore there is no need to adjust the marginal costs of production for risk.
40. Georgia-Pacific Corp. v. U. S. Plywood Corp., 318 F. Supp. 1116, 1120 (S. D. N. Y. 1970) (identifying fifteen factors to be used in calculating patent royalty rates).
41. Id.
42. To be more precise, in a remedial rate-setting proceeding, the correct rate is not necessarily a monopoly-free rate-since the defendant may have had monopoly power even before its violation-but a rate not reflecting any incremental monopoly power derived from the violation.
43. See United States v. Broad. Music, Inc., 426 F.3d 91, 94 (2d Cir. 2005) ("A rate court's determination of the fair market value of the music is often facilitated by the use of benchmarks-agreements reached after arm's length negotiation between other similar parties in the industry.").
44. The history of the rate-setdng proceeding is recounted in id. at 92-93.
45. See Am. Soc'y of Composers, Authors & Publishers v. Showtime/The Movie Channel, Inc., 912 F.2d 563, 577 (2d Cir. 1990) (trial court opinion) (noting that "since there is no compeddve market in music rights, the parties and the Court lack any economic data that may be readily translated into a measure of competitive pricing for the rights in quesdon").
46. See Carl Shapiro & Hal Varian, Information Rules: A Strategic Guide to the Network Economy 299 (1999).
47. See William M. Landes & Richard A. Posner, The Economic Structure of Intel lectual Property Law 377 (2003).
48. See Daniel A. Crane, Patent Pools, RAND Commitments, and the Problematics of Price Discrimination, in Working Within the Boundaries of Intellectual Property Law (Rochelle Dreyfuss et al. eds., fordicoming) (draft on file with author).
49. Again, the defendant would be allowed to assume that amount of market power that it had before the alleged misconduct. For example, if prior to relevant conduct the defendant held a valuable patent that would allow it to charge $1 above a competitive level and after the relevant conduct it was able to charge $2 above the competitive level, the ratesetting court should allow it to charge $1, since the point of rate setting is to restore competitive pricing, not to penalize.
50. Copyright Act of 1909, Pub. L. No. 60-349, §§ 1 (e), 25 (e), 35 Stat. 1075, 1075-76, 1081-82 (1909).
51. See, e.g., Recording Indus. Ass'n of Am. v. Copyright Royalty Tribunal, 662 F.2d 1 (D. C. Cir. 1981) (reviewing rate-setting decision of Copyright Royalty Tribunal).
52. See http://www.loc.gov/crb/laws/.
53. Guido Calabresi & A. Douglas Melamed, Property Rules, Liability Rules, and Inalienability: One View of the Cathedral, 85 Harv. L. Rev. 1089 (1972).
54. See generally Mark A. Lemley & Philip J. Weiser, Should Property or Liability Rules Govern InformationT, 85 Tex. L. Rev. 783 (2007).
55. I explore these issues more fully in my forthcoming article, Daniel A. Crane, Intellectual Liability, 88 Tex. L. Rev. (forthcoming 2009). For additional discussion of these issues
56. see Lemley & Weiser, supra note 47;
57. Henry E. Smith, Intellectual Property as Property: Delineating Entitlements in Information, 116 Yale L. J. 1742 (2007) ;
58. Robert P. Merges, Of Property Rules, Coase, and Intellectual Property, 94 Colum. L. Rev. 2655 (1994).
59. Brief of United States, United States v. National Lead Co., 332 U. S. 319 (Jan. 20, 1947) (No. 89), available at 1947 WL 44, 396 [hereinafter U. S. Brief in National Lead].
60. United States v. Nat'l Lead Co., 332 U. S. 319, 328 (1947).
61. Id.
62. Id. at 335.
63. *69.
64. National Lead, 332 U. S. at 338.
65. z.ast;63.
66. *64 (internal citations omitted).
67. *65.
68. *66.
69. Id.
70. *71.
71. *77.
72. Id.
73. United States v. Trenton Potteries Co., 273 U. S. 392 (1927).
74. United States v. Socony-Vacuum Oil Co., Inc., 310 U. S. 150 (1940).
75. *77.
76. See Ellis W. Hawley, The New Deal and the Problem of Monopoly: A Study in Economic Ambivalence 35 (2d ed. 1995).
77. See Daniel A. Crane, The Story of United States v. Socony-Vacuum: Hot Oil and Antitrust in the Two New Deals, in Antitrust Stories 91, 94-97 (Eleanor M. Fox & Daniel A. Crane eds., 2007).
78. Id. at 118-19.
79. 332 U. S. at 350 n. 9.
80. Id. at 349 n. 8.
81. MercExchange, L. L. C. v. eBay, Inc. 401 F.3d 1323, 1339 (Fed. Cir. 2005)
82. rev'd, 547 U. S. 388 (2006).
83. eBay, Inc. v. MercExchange, L. L. C., 547 U. S. 388, 394 (2006).
84. Id. at 394-95 (Roberts, J., concurring).
85. Id. at 395-97 (Kennedy, J., concurring).
86. Andrew Beckerman-Rodau, The Aftermath of eBay v. MercExchange, 126 S. Ct. 1837 (2006) :
87. A Review of Subsequent Judicial Decisions, 89 J. Pat. & Trademark Off. Soc'y 631, 632 (2007).
88. See supra Part I. B.
89. See Daniel A. Crane, Antitrust Antifederalism, 96 Cal. L. Rev. 1, 35 n. 188 (2008) (citing 2001 to 2005 statistics, United States Courts, Director's Annual Reports, available at http://www.uscourts.gov/library/annualreports.htm.) .
90. See U. S. Dep't of Justice & Fed. Trade Comm'n, Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition 46 (2007), available at http://www.ftc.gov/reports/innovation/ P040101PromotingInnovationand Competitionrpt0704.pdf.
91. See generally Crane, supra note 41.
92. The history of the DVD Forum is recounted in Matsushita Electric Industrial Co., Ltd. v. Cinram International, Inc., 299 F. Supp. 2d 370, 373-74 (D. Del. 2004).
93. See http://www.usdoj.gov/atr/public/busreview/2121.pdf [hereinafter 3C Business Review Letter] for the 3C pool letter and http://www.usdoj.gov/atr/ public/busreview/2485.pdf for the 6C pool letter.
94. DVD 6C Multiformat License V3.0, ¶ 3.2 (in use beginning Jan. 1, 2005) (on file with author).
95. Id. ¶ 6.4.
96. See, e.g., 3C Business Review Letter, supra note 80, at 12 (expressing deep skepticism that experts retained and paid for by the pool to determine which patents were essential would be truly neutral).
97. See generally Crane, supra note 77, at 28-32.
98. Id.
99. See generally Richard A. Epstein, A Clear View of the Cathedral: The Dominance of Property Rules, 106 Yale L. J. 2091, 2093 (1997) (arguing that "[t]he risk of undercompensation in such situations [where courts employ liability rules] is pervasive").
100. I develop this point more fully in Intellectual Liability, supra note 48.
101. United States v. Am. Optical Co., 95 F. Supp. 771 (S. D. N. Y. 1950).
102. United States v. Gen. Elec. Co., 115 F. Supp. 835 (D. N. J. 1953).
103. United States v. Eastman Kodak Co., 853 F. Supp. 1454 (W. D. N. Y. 1994).
104. United States v. Western Elec. Co., 409 F.2d 1377 (3d Cir. 1969).
105. Final Judgment, United States v. IBM, No. 72-344 (S. D. N. Y. Jan. 25, 1956).
106. United States v. Mfrs. Aircraft Ass'n, 1975 WL 814 (S. D. N. Y. 1975).
107. United States v. Miller Indus., Inc., 2000 WL 33141220 (D. D. C. 2000).