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Retooling the Patent-Antitrust Intersection: Insights from Behavioral Economics

 |  April 25, 2017

Posted by Social Science Research Network

Retooling the Patent-Antitrust Intersection: Insights from Behavioral Economics

By Daryl Lim (The John Marshall Law School)

Abstract:     Behavioral economics has been embraced in finance and implemented by the government. In IP law, scholars have argued it can inform non-obviousness analyses, decipher patent damages, and develop a more nuanced narrative for incentivizing innovation. In antitrust law, scholars have argued for a larger role for behavioral economics in antitrust law more generally. Yet to date, there has been no consideration of the role of behavioral economics at the patent-antitrust intersection.

In presenting pioneering work on the issue, this Article explains the role heuristics and biases play at the patent-antitrust intersection, and identifies specific ways that courts can take them into account. If antitrust law based on neoclassical economics were analogized to an app, behavioral economics would be a patch, not an overhaul of the status quo. A court that understands how patentees, licensees, consumers, and enforcers decide can more accurately contextualize and assess competing narratives and articulate more effective remedies. In other words, behavioral economics can help judges better understand how to use the rule of reason to achieve more dynamically efficient outcomes.

Through the lens of patents, Part II traces how the discretion given to courts in applying the rule of reason has empowered them to treat patents first with disdain, and then with veneration under antitrust law. This shift parallels the ascendance of the importance of IP industries to the national economy and the rise of neoclassical economics. It also explains how the quest for dynamic efficiency has resulted in antitrust ennui, before mounting three challenges to the belief that antitrust policy deference toward patent owners promotes innovation. These challenges are that (1) deference underestimates anticompetitive harm and undervalues the value of gains from intervention, (2) courts are inconsistent about their insecurities in regulating innovation through antitrust: they worry about getting it wrong in exclusionary abuses and yet approach vertical restraints and merger analysis with surprising confidence, and (3) patent deference is suspect as a matter of patent policy.

Part III explains how Actavis’s requirement to scrutinize permissible patent conduct through the rule of reason also creates the challenge of developing a coherent and predictable framework of doing so. It argues that Kimble empowers courts to incorporate insights from behavioral economics. In doing so, courts can become more aware of their own cognitive biases and those of the parties appearing before them, giving them a chance to reach more dynamically efficient outcomes.

Part IV addresses the three criticisms against behavioral economics most pertinent to the patent-antitrust intersection: (1) that irrational conduct is irrelevant to antitrust analysis, (2) that behavioral economics fails to provide predictability to antirust analysis, and (3) behavioral economics experiments are anecdotal and fail to provide antitrust with a generalizable organizing principle.

Part IV then identifies four areas where behavioral economics can help courts reach better outcomes: (1) analyzing anticompetitive harm and procompetitive justifications, by contrasting the Court of Appeals for the D.C. Circuit’s approaches in Microsoft and Rambus, as well as the Supreme Court’s approaches in Actavis and Kimble, (2) empowering judges by enlarging the role of intent, with lessons drawn from cases such as Aspen Skiing, McWane, and Intellectual Ventures, (3) determining market power and lock-ins in aftermarkets, with lessons drawn from Kodak and FRAND (fair, reasonable, and nondiscriminatory) litigation, and (4) crafting smarter remedies by looking at the EU’s Microsoft decision. The discussion draws on past, recent, and ongoing cases to illustrate each area. Part V identifies areas for future research and concludes.

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