Antitrust scrutiny over SEPs key to innovation.
Shapiro ’18 [Carl and Douglas Melamed; American economist and an academic who serves as the Transamerica Professor of Business Strategy at the University of California, Berkeley, Haas School of Business, American legal scholar specializing in antitrust law. Since 2014, Melamed has been a professor, first, visiting and then professor of the practice, at Stanford Law School; Yale Law Journal, “How Antitrust Law Can Make FRAND Commitments More Effective,” Nexis]
Restrictions on ex post opportunism are needed to prevent a wealth transfer from implementers and their customers to SEP holders as a result of monopoly pricing.17 But much more is at stake. A. Underlying Economic Principles Basic economic principles instruct that ex post monopoly pricing by SEP holders harms consumers by raising the cost of products that comply with the standard. Ex post monopoly pricing also creates welfare-reducing deadweight loss in three respects. First, it increases the cost of, and thus reduces the output of, standard-implementing products. Second, and perhaps more important, supracompetitive pricing by SEP holders increases the cost of follow-on inventions that build on or improve the technologies claimed by the SEPs. This cost acts as a tax on follow-on innovation, reducing such innovations and impairing the very process of invention that the patent laws are intended to promote. Third, the prospect of ex post monopoly pricing by SEP holders exaggerates incentives for firms to obtain patents that might become SEPs and, perhaps more important, to jockey for inclusion of their patented technologies in industry standards. The latter incentive in turn could cause delays and induce expensive rent-seeking conduct in the standard-setting process and distort the standards-development process away from optimal technical solutions in ways that further the interests of rent seekers. These concerns are not universally shared. Indeed, a heated debate regarding the desirability of efforts to prevent ex post opportunism by SEP holders has persisted for the past twenty years. Those who do not share these concerns argue that the greater risk lies in inhibiting monetization of the inventions claimed by SEPs and thus discouraging innovation by SEP holders and those who expect to become SEP holders. We believe that those who share our concerns have by far the stronger argument. The risk of ex post opportunism is very real. Implementation typically precedes resolution of patent issues, and for good reason. Deferring implementation until the patent issues are resolved would delay the commercialization and innovation process. Implementers are therefore usually locked in to the allegedly infringing technologies well before the issue of patent royalties is addressed. The 17. The implementers, which pay the royalties to the SEP holders, will in the first instance suffer the wealth transfer. Depending on competition in the markets in which implementers sell their standard-compliant products, some or all of the wealth transfer is likely to be passed on to final consumers. how antitrust law can make frand commitments more effective 2117 real question is thus how best to prevent opportunism, not whether it is a genuine danger. Absent rigorous enforcement of effective FRAND commitments or a suitable alternative, SEP holders could take advantage of lock-in to exploit their substantial ex post market power by charging royalties far above the ex ante value of the patented technology, tying non-SEPs to SEPs, and implementing other means discussed below.18 Economic theory predicts that SEP holders will exploit their positions, and both anecdotal evidence and litigated cases suggest that they have done so.19