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

Weak Market Power Presumption Contents Introduction Part One: Tension and History Part Two: Main Arguments concerning the Market Power Presumption Part Three: why is the Market Power Presumption Needed? Part Four: a "Weak" Market Power Presumption Summary

What is the Market Power Presumption ? Introduction

Weak Market Power Presumption 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

Weak Market Power Presumption 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

Weak Market Power Presumption The tension between IP law and Antitrust IP Law Maximizing social welfare through Innovation Monopoly over the invention Antitrust Law Maximizing 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 First period ( ) Second period (1910- late 1970s) Third period (late 1970s- nowadays) 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

Weak Market Power Presumption 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 presumption In 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

Weak 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 Monopoly

Weak Market Power Presumption 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

Weak Market Power Presumption 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 zero High 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.

Weak Market Power Presumption 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 ?

Weak Market Power Presumption 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

Weak Market Power Presumption 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

Weak Market Power Presumption 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

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

Weak Market Power Presumption 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

Weak Market Power Presumption 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

Weak Market Power Presumption 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

Weak Market Power Presumption Situation 4: The Case Involves a Patent without any Economic Value 95% of the patents have no economic value Even 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

Weak Market Power Presumption 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

Weak Market Power Presumption Summary Tension between IP and Antitrust Mutual goal – maximizing the social wealth A weak form of the market power presumption

Weak Market Power Presumption Details Guy Pessach… Itamar Morad…