Antitrust Law Daily Wrap Up, ANTITRUST NEWS: DOJ Official Reviews Considerations for Analyzing Patent Portfolio Acquisitions, (Oct 18, 2012)

By E. Darius Sturmer, J.D.

In a speech before the Fifth Annual Searle Conference on Antitrust Economics and Competition Policy at Northwestern University in Chicago on September 21, 2012, entitled “Patent Portfolio Acquisitions: An Economic Analysis,” Deputy Assistant Attorney General Fiona M. Scott Morton of the Department of Justice Antitrust Division discussed different considerations the agency takes into account when analyzing the legality of patent portfolio acquisitions under federal antitrust law. Scott Morton explained that the antitrust analysis of such transactions, undertaken from an economist’s perspective, depended on the business model of the buyer.

Scott Morton largely bypassed discussion of the “textbook” non-practicing entity (NPE) patent buyer, which operates in an economically efficient manner, in order to focus on what she dubbed a “troll”—a company that buys large quantities of patents from others in order to monetize that intellectual property (IP). By combining patents into large groups—particularly patents deemed weak or vague, such as those for software—trolls increase the likelihood that a licensee has infringed at least one valid patent in the portfolio. Scott Morton noted that “[i]n a world where (1) the transaction cost of determining infringement and validity are high, (2) practicing entities are already using the technology and will incur costs to design around it, and (3) a troll can threaten injunctions or exclusion orders, we will see trolls obtaining royalties in excess of the market value of the IP.”

With multiple trolls controlling parts of the IP that goes into a product, this can result in royalty stacking that raises costs for manufacturers, leading to higher prices for consumers and, in the longer run, reduced entry into and increased flight from the market by manufacturers. Also, the incomplete nature of contracts written on the IP a troll purchases further exacerbates the large differences in licensing outcomes between practicing entities and trolls. While trolls do have the potential to generate efficiencies that offset competitive concerns, the more general outcome of such transactions is that marginal costs of all industry participants will increase, Scott Morton concluded.

A second type of buyer, the practicing entity that competes in the product market of interest, shares the troll’s ability to extract more than the previous owner from its product market competitors. The same incomplete contracts that create leverage for the troll when it buys patents are present for the purchaser practicing entities (PPEs), too, and the PPE has an additional incentive for overpricing for its patent portfolio: distorting its competitive position or causing rival products to be withdrawn from the market. Such transactions amount to vertical mergers between product market competitors and critical inputs. Thus, there was potential harm to competition in this type of case using the standard antitrust vertical merger framework.

Third, Scott Morton considered the sale of IP portfolios to a joint venture between a troll and a PPE. In such a case, the joint venture combines two reasons for higher royalty rates: higher costs for many other PE firms in the broad industry, and even higher marginal costs for platform competitors who compete with the joint venture owner. Higher royalty rates again lead to higher prices and potentially less innovation, she said.

Finally, Scott Morton addressed sales to a joint venture between a troll and more than one PPE. Such a joint venture, Scott Morton pointed out, “may be helping product market competitors effectively coordinate or collude to disadvantage a rival.” This sort of transaction could be problematic under the antitrust laws for three reasons: the diversion incentive due to the vertical merger; higher costs and prices overall; and potential collusion by horizontal competitors.

News: Antitrust