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

Richard 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, and Daniel Spulber, Northwestern University - Kellogg School of Management

11/10/2011
(Original Publish Date: 8/5/2011)

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.