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Proceedings of the National Academy of Sciences of the United States of America
profits from invention and, therefore, enhance incentives for innovation. But such a blanket antitrust exemption for intellectual property would cause unacceptably large competitive distortions in the short run. Bowman (9) analyzes the patentantitrust tradeoff from the perspective of the one-monopoly-rent theory, which implies that there is a single profit inherent in the patent. Under this theory, efforts to leverage the patent grant into other markets do not provide the patentee with additional returns and would not be pursued except for efficiency gains. However, even under the one-monopoly-rent theory, a patentee may engage in acts that adversely affect competition (such as organizing a cartel in unrelated markets or agreeing with producers of substitute products to divide markets and raise prices).f Kaplow (11) pursues a cost-benefit test, comparing the costs of specific conduct to its benefits in enhancing investment in R&D.
Although each of these approaches generates interesting insights, none has proven adequate to provide a clear prescription for antitrust policy applied to intellectual property that differs significantly from policy in other areas of the economy. Thus, in 1988 the U.S. Department of Justice adopted the following enforcement policy: “[F]or the purpose of antitrust analysis, the Department regards intellectual property (e.g., patents, copyrights, trade secrets, and know-how) as being essentially comparable to any other form of tangible or intangible property” (12). A similar statement appears in the 1995 U.S. Department of Justice/Federal Trade Commission Antitrust Guidelines for the Licensing of Intellectual Property (13).
This paper focuses on one aspect of antitrust law, the so-called “essential facilities doctrine,” which may impose a duty upon firms controlling an “essential facility” to make that facility available to their rivals. The essential facilities doctrine has profound consequences for intellectual property protection and for competition in markets where firms own important inputs that are protected by patent, copyright, or trade secret. In the intellectual property context, an obligation to make property available is equivalent to a requirement for compulsory licensing. Some would argue that the essential facilities doctrine is one respect in which antitrust policy for intellectual property is clearly different from antitrust policy for other forms of tangible and intangible property. There is considerable case law concluding that a patentee is free to choose whether or not to license its intellectual property.g But the case law does not state that a failure to license cannot be the basis of an antitrust offense.h
Even if patents cannot be challenged under the essential facilities doctrine, the case law is much less settled in the area of copyright. Most of the recent legal battles over access to intellectual property have been in the context of computer software that is protected by copyright. Examples include cases where firms have sought access to proprietary vendor-supported diagnostic software for the servicing of the vendor’s hardware. Another example is the copying of computer software to obtain access to proprietary interface codes to facilitate the development of complementary application programs. Thus, the essential facilities doctrine, whether in the form of mandating access or in the related forms of requiring compulsory licensing or permitting copying without infringement, lies squarely at the intersection of antitrust and intellectual property law.
Section II introduces the legal concept of a unilateral refusal to deal, often addressed under the appellation of the essential facilities doctrine. Section III considers why a profit-maximizing firm might choose to deny access to an important input rather than permit open access at a monopoly price. There are many procompetitive justifications for a refusal to deal, such as contractual limitations that make it difficult for the owner of the input to ensure quality and avoid free-riding. A refusal to deal also may increase entry barriers (because competitors have to produce a substitute for the input that they cannot buy) and enhance price discrimination (if the owner of the input cannot discriminate among buyers for the sale of the input). In addition, a refusal to deal may permit higher profits because the owner of an important input may not be able to write a contract with an entrant that would compensate the firm for the loss of profits that would result from competitive entry.
Throughout this discussion, our emphasis is on the consequences of a refusal to deal for economic welfare. We argue that the welfare consequences of a refusal to deal are ambiguous and that the requirement of mandatory access may lower economic welfare in the short run as well as in the long run. Section IV discusses some recent approaches to the evaluation of demands for compulsory access that have been considered in U.S. courts and in the European Community. Section V concludes with the observation that the essential facilities doctrine does not provide a consistent legal or economic justification for the mandatory licensing of intellectual property.
The future battleground over refusals to deal is likely to be in the proper scope of intellectual property protection under the copyright laws, particularly for computer software. Rather than compel the owner of copyrighted software to license that software to others, the legal and economic issues are more likely to focus on the conditions under which the software should be protected by copyright in the first place. This is also likely to be a more productive inquiry than a policy of selective compulsory licensing.i
Refusals to Deal and the Essential Facilities Doctrine
Under the antitrust laws, conduct by a firm with market power may be illegal if the effect of that conduct is to tend to create or sustain a monopoly, and if that monopoly is not the consequence of superior skill, foresight, or business acumen, or historical accident. A firm with monopoly power does not violate the antitrust laws merely by charging a monopoly price.j Nonetheless, under some instances, a refusal to deal by a firm or a joint venture with monopoly power may be deemed an antitrust offense. In other words, although antitrust law permits a firm to charge the price it pleases, the firm may be required to set some price at which it will sell to others, including rivals.
The refusal to deal label has been applied to many cases with very different competitive circumstances (19). This discussion focuses on a situation in which an integrated firm (or joint venture) controls a factor of production that is costly to reproduce and competes in another market against one or
Baxter notes that “a promise by the licensee to murder the patentee’s mother-in-law is as much within the ‘patent monopoly’ as is the sum of $50; and it is not the patent laws which tell us that the former agreement is unenforceable and subjects the parties to criminal sanctions” (10).
See, for example, SCM Corp. v. Xerox Corp., 645 F.2d 1195 (2d Cir. 1981) cert, denied 455 U.S. 1016 (1982) and Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100 (1969). Furthermore §271(d) of the 1988 Amendments to the Patent Act specifies that a refusal to license a patent cannot be the basis for a patent misuse claim.
Indeed, the recent jury verdict in Image Technical Services v. Eastman Kodak Company (Civil No. C-87–1686 BAC, March 1995) finds Kodak’s unilateral refusal to sell patented parts to be an antitrust offense. C.S. testified on behalf of Kodak in this case. See ref. 14 for an analysis of the issues involved in this and related cases.
Farrell (15, 16), Farrell and Saloner (17), Menell (18), and R.H. Lande and S.M.Sobin (unpublished work) offer useful perspectives on the efficient scope of protection for computer software. A recent case that raises important issues on the scope of copyright protection is Lotus Dev. Corp. v. Borland Int’l, Inc., F.3d 807 (1st Cir. 1995).
See, for example, United States v. Grinnell Corp., 384 U.S. 563, 571 (1966) and United States v. Aluminum Co. of America, 148 F.2d 416, 430 (2nd Cir. 1945).