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The FTC, IP, and SSOs: Government Hold-Up Replacing Private Coordination


Richard A. Epstein


New York University School of Law; Stanford University - Hoover Institution on War, Revolution and Peace; University of Chicago - Law School

F. Scott Kieff


George Washington University - Law School; Stanford University - Hoover Institution on War, Revolution and Peace

Daniel F. Spulber


Northwestern University - Kellogg School of Management

August 5, 2011

Journal of Competition Law & Economics, March 2012
Stanford Law and Economics Olin Working Paper No. 414
GWU Legal Studies Research Paper No. 578
GWU Law School Public Law Research Paper No. 578
NYU Law and Economics Research Paper No. 11-26
U of Chicago Law & Economics, Olin Working Paper No. 568
Northwestern Law & Econ Research Paper No. 11-23

Abstract:     
In its recent report entitled “The Evolving IP Marketplace,” the Federal Trade Commission (FTC) advances a far-reaching regulatory approach (Proposal) whose likely effect would be to distort the operation of the intellectual property (IP) marketplace in ways that will hamper the innovation and commercialization of new technologies. The gist of the FTC Proposal is to rely on highly non-standard and misguided definitions of economic terms of art such as “ex ante” and “hold-up,” while urging new inefficient rules for calculating damages for patent infringement. Stripped of the technicalities, the FTC Proposal would so reduce the costs of infringement by downstream users that the rate of infringement would unduly increase, as potential infringers find it in their interest to abandon the voluntary market in favor of a more attractive system of judicial pricing. As the number of nonmarket transactions increases, the courts will play an ever larger role in deciding the terms on which the patents of one party may be used by another party. The adverse effects of this new trend will do more than reduce the incentives for innovation; it will upset the current set of well-functioning private coordination activities in the IP marketplace that are needed to accomplish the commercialization of new technologies. Such a trend would seriously undermine capital formation, job growth, competition, and the consumer welfare the FTC seeks to promote.

In this paper, we examine how these consequences play out in the context of standard-setting organizations (SSOs), whose activities are key to bringing standardized technologies to market. If the FTC’s proposed definitions of “reasonable royalties” and “incremental damages” become the rules for calculating damages in patent infringement cases, the stage will be set to allow the FTC and private actors to attack, after the fact, all standard pricing methods through some combination of antitrust litigation or direct regulation on the ground that such time-honored royalty arrangements involve the use of monopoly power by patent licensors. In consequence, the FTC’s Proposal, if adopted, could well encourage potential licensees to adopt the very holdout strategies the FTC purports to address and that well-organized SSOs routinely counteract today. Simply put, the FTC’s proposal for regulating IP by limiting the freedom of SSOs to set their own terms would replace private coordination with government hold-up. The FTC should instead abandon its preliminary recommendations and support the current set of licensing tools that have fueled effective innovation and dissemination in the IP marketplace. FTC forbearance from its unwise Proposal will improve bargaining incentives, reduce administrative costs, and remove unnecessary elements of legal uncertainty in the IP system, thereby allowing effective marketplace transactions to advance consumer welfare.

Number of Pages in PDF File: 29

Keywords: IP, SSO, RAND, patent, intellectual property, antitrust, competition, standard setting organizations, hold-up, ex ante, innovation, property, contract, coordination, private ordering, new institutional economics

JEL Classification: A11, A12, B15, B25, D02, D04, D18, D23, D29, D40, D43, D61, D72, D78, D86, K11, K20, K21, K23, K29

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Date posted: August 9, 2011 ; Last revised: December 29, 2013

Suggested Citation

Epstein, Richard A. and Kieff, F. Scott and Spulber, Daniel F., The FTC, IP, and SSOs: Government Hold-Up Replacing Private Coordination (August 5, 2011). Journal of Competition Law & Economics, March 2012; Stanford Law and Economics Olin Working Paper No. 414; GWU Legal Studies Research Paper No. 578; GWU Law School Public Law Research Paper No. 578; NYU Law and Economics Research Paper No. 11-26; U of Chicago Law & Economics, Olin Working Paper No. 568; Northwestern Law & Econ Research Paper No. 11-23. Available at SSRN: http://ssrn.com/abstract=1907450 or http://dx.doi.org/10.2139/ssrn.1907450

Contact Information

Richard A. Epstein
New York University School of Law ( email )
40 Washington Square South
New York, NY 10012
United States
(212) 992-8858 (Phone)
(212) 995-4894 (Fax)
Stanford University - Hoover Institution on War, Revolution and Peace
Stanford, CA 94305-6010
United States
University of Chicago - Law School ( email )
1111 E. 60th St.
Chicago, IL 60637
United States
773-702-9563 (Phone)
773-702-0730 (Fax)
F. Scott Kieff (Contact Author)
George Washington University - Law School ( email )
2000 H Street, N.W.
Washington, DC 20052
United States
202-994-4644 (Phone)
Stanford University - Hoover Institution on War, Revolution and Peace ( email )
434 Galvez Mall
Stanford, CA 94305-6010
United States
650-723-3678 (Phone)
Daniel F. Spulber
Northwestern University - Kellogg School of Management ( email )
606 Leverone Hall
2001 Sheridan Road
Evanston, IL 60208
United States
847-491-8675 (Phone)
847-467-1777 (Fax)
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