Research

Erik Hovenkamp

Research Areas
  • Patents and IP policy
  • Antitrust and competition policy
  • Law and economics
  • Innovation

Selected Articles

(See my CV for a complete list of my research, or visit my SSRN page.)


Platform Antitrust, JOURNAL OF CORPORATION LAW (forthcoming, 2019
Abstract: Platforms like Uber, Google Search, and Hulu pervade the modern economic landscape. A platform caters to distinct but deeply-interdependent “sides” of customers that derive value or revenues from one another, such as the merchants and cardholders on a credit card network, or the advertisers and consumers on a social media platform. Platform economics has important implications for antitrust policy. A hallmark of two-sided markets—those in which platforms operate—is the need to get both sides on board. Each side’s demand for the platform’s service depends on active participation on the other side. As such, it is important to consider whether a platform’s restrictive practice might be reasonably necessary to maintain a critical mass of participating users on both sides of the market. But it is just as important not to overstate the novelties of platform commerce and their propensity to justify restraints on trade. 
       The Supreme Court did just that in its recent AmEx decision. The majority held that a plaintiff cannot make an initial (and rebuttable) showing of harm without demonstrating a net injury across both sides of the market. This kind of onerous balancing task is conventionally reserved for the last stage of antitrust’s rule of reason burden-shifting framework—after the defendant has demonstrated a countervailing efficiency that warrants balancing. The majority was also confused on the economic issues, characterizing a restraint on inter-platform “steering” as a courtesy to consumers, when in fact it deprives them of a valuable option while simultaneously undermining price competition market-wide.
       This paper considers the antitrust challenges presented by platforms and platform competition, with focus on conduct evaluated under the rule of reason. I conclude that, while platform economics does necessitate a number of important considerations, it does not warrant the upheaval of the antitrust laws that the AmEx majority prescribed. Rather, the established rule of reason framework already provides sufficient flexibility to address platform conduct. Moreover, by allocating burdens with reasonable parity, it is far better equipped to arrive at the right conclusions.

Antitrust Law and Patent Settlement Design, HARVARD JOURNAL of LAW & TECHNOLOGY (forthcoming, 2019).
Abstract: For competing firms, a patent settlement provides a rare opportunity to write an agreement that forestalls competition without transparently violating the antitrust laws. Problematically, such agreements are highly profitable for reasons that have nothing to do with resolving a patent dispute. Thus, even if the firms think the patent is very likely invalid or noninfringed, they prefer to restrain competition to monopoly and share in the proceeds. In response, antitrust has recently come to focus on how the settlement’s competitive effects compare to the expected result of foregone patent litigation, which seemingly requires some assessment of the likelihood that the patentee would have prevailed. But this “case-within-a-case” approach leads to major complications in practice. Indeed, outside of one well-known settlement format—so-called “pay-for-delay” agreements—how to administer this burgeoning antitrust standard remains an open question.
     Applying recent work in economics, this article argues that antitrust law should reframe its settlement analysis to focus entirely on the nature of the settlement agreement—the particular way it restrains competition or otherwise redistributes profits between the firms. That is because the settlement’s design is ultimately what determines how private bargaining outcomes will compare to the firms’ litigation expectations. Under this approach, the antitrust question can be addressed without inquiring into the likelihood that any particular patent is valid and infringed, making it much more administrable. Instead, the focus is on how the settlement design affects private bargaining generally. This disentangles the relevant antitrust violation from the extent of the resulting harm, and can be applied to all kinds of settlement agreements. Finally, this approach is broadly consistent with the Supreme Court’s recent Actavis decision. All of this points to a clear prescription for antitrust reform: evaluate the agreement, not the patent.

Competition, Inalienability, and the Economic Analysis of Patent Law21 STANFORD TECHNOLOGY LAW REVIEW 33 (2018).
Abstract: Most influential economic theories about private disputes, including the Coase theorem, assume that there are no legal restraints on alienability. However, the parties to a patent dispute are often competing firms, and their private dealings may thus be constrained by the antitrust laws. Antitrust prohibits private transactions that allocate commercial rights in ways that unreasonably subvert competition between the parties. This creates an asymmetry between (1) the allocations of rights that the parties can effect through contract; and (2) those a court can effect through its judgment. For example, antitrust may condemn a “reverse payment” settlement in which a monopolist-patentee pays an accused infringer to stay off the market for several years. But if the dispute were litigated to judgment, a court could produce the same exclusionary outcome by issuing an injunction. The result is ultimately that, in contrast to familiar Coasean logic, a court’s delimitation of patent rights can influence the final allocation of such rights, even if the parties can bargain. Further, the parties may (rationally) litigate to judgment even if they have common expectations about litigation, and even if they are perfectly capable of entering into a lawful settlement ex ante.
      Antitrust limits on alienability may thus critically alter the nature of a private dispute, distinguishing it from the more conventional property conflicts studied in classical law and economics. Aside from altering the parties’ incentives and behavior, it changes the appropriate normative policies toward settlement and litigation. The parties may be settling not simply to avoid litigation costs, but rather to avoid a procompetitive judgment they cannot lawfully bargain around (e.g. patent invalidation), or to obtain a judicial stamp on what would otherwise be an unenforceable contract. As such, when a proposed settlement concerns rights that are not entirely alienable, the court should carefully review its terms to ensure they do not defy the relevant inalienability rule. Unfortunately, the patent courts have missed this important point (although it has been recognized implicitly in some other areas of law). They continue to treat patent suits as ordinary private conflicts over fully-alienable rights, approving virtually all settlement proposals as a matter of course. I explain the benefits of reviewing patent settlements in certain cases, and I offer a detailed account of how such review ought to operate in practice.

Proportional Restraints in Horizontal Patent Settlements, (with Jorge Lemus) [Online Appendix].
* Winner of the 2018 Young Economist Award, JEL Conference on Industrial Organization, Barcelona (Sept., 2018).
Abstract: When rivals settle a patent dispute, they prefer to preserve monopoly profits, even if the patent is very likely invalid or noninfringed. Antitrust has come to embrace a policy that requires horizontal settlements to restrain competition by no more than the expected result of counterfactual patent litigation. But this creates serious difficulties in practice, and has only been effectively applied to one type of settlement. However, we show that a settlement's design necessarily determines how "proportional" private bargaining outcomes will be: how closely their competitive effects will compare to the expected result of litigation. Using our approach, one can identify settlement designs that will always induce bargaining outcomes generating the same profits---and greater consumer welfare---than litigation would provide in expected value. More generally, our approach enables one to discern any settlement's proportionality (or lack thereof) without having to estimate the expected outcome of counterfactual patent litigation.


Tying, Exclusivity, and Standard-Essential Patents.  19 COLUMBIA SCIENCE & TECHNOLOGY LAW REVIEW 79 (2018).
Abstract: When a technological standard is adopted, implementers must pay to license all “standard-essential” patents (SEPs)—those covering core features of the standard—although the particular price terms usually cannot negotiated beforehand. To allay implementers’ fear of being “held up,” SEP owners usually make commitments to offer licenses on “fair, reasonable, and nondiscriminatory” (FRAND) terms. Among other things, this acts as a contractual price control for SEP licenses—albeit an imprecise one that is subject to judicial interpretation.
       Aside from licenses, an SEP holder may further supply an important “collateral input”—one that is not subject to the FRAND pledge, but which implementers nevertheless require in order to market a viable product. For example, this might be a physical component of the final product. The SEP holder might tie its SEP rights to the collateral input. It might also engage exclusive dealing or related practices, such as a “loyalty discounting” arrangement that imposes larger royalties on implementers who buy the input from competing providers. Importantly, FRAND’s operation as a price control significantly alters the economic analysis: here the primary impetus for tying may be to circumvent the price control by shifting the desired overcharge to the tied good—a concern that does not arise when a seller has complete autonomy over its pricing (as is usually the case). The natural result may be to foreclose competitors’ input sales.
       Such restraints have received little attention in the FRAND literature, but they are an emerging concern for innovation and competition policy. They have recently been attacked in two high-profile complaints filed against Qualcomm—one by the Federal Trade Commission, and the other by Apple. Against this backdrop, this article provides a legal and economic evaluation of tying and exclusive dealing arrangements in FRAND licensing. Such practices may act to undermine the FRAND price control, potentially violating the SEP holder’s commitment. The case for antitrust intervention is harder to make, but in principle the arrangement could act to exclude actual or potential competition in the collateral input market, bringing it within antitrust’s reach. I conclude by offering several policy recommendations for how courts and standard setting organizations might address these tying and exclusivity arrangements.

Delayed Entry Settlements at the Patent Office, 54 INTERNATIONAL REVIEW OF LAW & ECONOMICS 30 (2018) (with Jorge Lemus). 
Abstract: The Patent Trial and Appeal Board (PTAB) is a recently-formed division of the Patent Office in which patents can be challenged as invalid, and which differs from federal courts in a number of respects. We investigate whether monopolist-patentees and their prospective rivals are using the PTAB — which has not previously received antitrust attention — as a platform for striking settlements that delay the rivals’ entry. Such settlements are common in pharmaceutical markets, and are typically antitrust violations in cases where the patentee pays the challenger (“pay for delay”). However, badly-designed statutory inducements lead to excessively-delayed competition even in lieu of such payments. Our empirical findings suggest that delayed entry settlements are now commonly executed in the PTAB, and that they comprise a large majority of all PTAB settlements reached between pharmaceutical rivals. Further, nearly half of the delayed entry settlements were reached after the relevant patent claims were deemed “reasonably likely” to be invalid.

Vertical Mergers and the MFN Thicket in Television, ANTITRUST CHRONICLE (forthcoming, 2018) (with Neel Sukhatme)
Abstract:  Increasingly, cable and satellite TV services (known as “MVPDs”) seek to acquire upstream programming creators, as illustrated by AT&T’s recent merger with Time-Warner. At the same time, the pay-TV industry is rife with “most-favored nation” (MFN) agreements, which can sharply constrict the competitive process. The most problematic variety, so-called “unconditional” MFNs, raise serious antitrust concerns, as they may forestall effective entry by new streaming-based platforms; penalize procompetitive deviations from the status quo; and facilitate de facto coordination among integrated MVPDs.
     While vertical mergers in the industry have received significant antitrust attention, the MFN concerns are interrelated. Problematic MFNs may naturally induce a double marginalization problem, even if the parties are otherwise capable of contracting around it. This creates a strong motivation for integration, but it also raises a question as to whether a merger is the only way to avoid double marginalization. Further, MFNs might compel a problematic form of reciprocal dealing that generates de facto price fixing between integrated rivals. Consequently, the industry’s trend toward integration may trigger other kinds of anticompetitive conduct.


Anticompetitive Patent Injunctions. 100 MINNESOTA LAW REVIEW 871 (2016) (with Tom Cotter).
Abstract: The current approach for determining when courts should award injunctions in patent disputes involves a myopic focus on the hardships an injunction might impose on the litigants and the public. This article demonstrates, however, that courts sometimes could rely instead on a consideration far more relevant to the patent system's goal of promoting innovation: the extent to which the right to exclude was actually a necessary quid pro quo for the plaintiff's decision to bring its products to market. We illustrate the value of this approach with a critique of a recent Federal Circuit decision, Trebro Mfg. Inc. v. FireFly Equipment, LLC, which held that injunctive relief may be appropriate when a defendant infringes a patent that the plaintiff-competitor does not practice, and against which it lacked any legal protection when it entered the relevant downstream market. These circumstances — which are increasingly common in industries with rich markets for secondhand patents, result in the formation of what we refer to as a “diagonally integrated” nonpracticing entity (NPE) — a producer who owns a patent it does not practice, and who competes with downstream rivals who use (or would like to use) the patented technology. 
            We develop a simple model showing that if such a firm acquired the unpracticed patent after entering the relevant product market, an injunction poses a threat to competition and consumer welfare that is not offset by any plausible benefit to innovation. Further, diagonally integrated NPEs have a perverse incentive to exclude or substantially limit all use of the patented technology, making them more likely to seek excessive licensing fees and aggressively seek injunctive relief than are conventional, “unintegrated” NPEs. This effort to foreclose all use of a technology is novel in the patent literature, but the spirit of this tactic is well known in antitrust: a dominant firm acquires patents that it has no intent to use simply in order to deny the technology to rivals, thus perpetuating its dominant position. The model’s implications also extend to a range of topics at the core of contemporary patent policy debates, including patent privateering, FRAND-encumbered patents, and preemptive patenting. It also suggests that in considering appropriate remedies the court should weigh competition concerns more seriously, particularly when there is little or no tradeoff with innovation concerns.

How Patent Damages Skew Licensing Markets. 36 REVIEW OF LITIGATION 379 (2017) (with Jonathan Masur).  
Abstract: If a litigated patent has previously been licensed to a third party, the courts generally adopt the terms of the prior agreement as the best measure of damages. However, while administratively convenient, this “licensing-based damages” standard creates problematic incentives and undermines the efficient commercialization of patented inventions. It rests on the trivialized (and generally false) presumption that a patent license is like a commodity, with the patentee charging a common price to all comers. As a consequence, patentees distort their future recovery prospects – and by extension the outcomes of future licensing negotiations – whenever they license their patents, whether or not today’s agreement will be a good proxy for tomorrow’s dealings or disputes. Knowing this, patentees are discouraged from licensing at anything less than a high royalty rate, even if they could reach many additional mutually-beneficial agreements on more modest terms. The result is that patent holders rationally cut off the bottom segment of the licensing market, creating substantial deadweight loss. This injures not only patentees, but also prospective licensees and their consumers. The standard creates additional problems by encouraging secrecy and “gamesmanship” in patent licensing. We propose that the licensing-based damages standard be abandoned, and that damages should instead be awarded ad hoc. That this necessitates some speculation does not suggest it is the less desirable approach, for it is better that damages be speculative but unbiased than systematically problematic.

Challenge Restraints and the Scope of the Patent.  1 ANTITRUST CHRONICLE 46 (2016).    
Abstract: Patent rights are not the only important legal entitlements conferred by the Patent Act. It also vests challenge rights in third parties, permitting them to challenge granted patents as invalid or uninfringed, and potentially clearing a path for privileged competition. These classes of rights perform opposite policy functions, with patent rights providing an inducement for invention and challenge rights providing a check against unwarranted or overbroad patent enforcement. And, unlike patent rights, the Patent Act never provides that challenge rights are alienable – i.e. that they may be transacted or restrained through contract. As such, challenge restraints – contractual restrictions on a party’s challenge rights – are not within “the scope of the patent.” This suggests not that they are categorically unlawful, but simply that they do not enjoy safe harbor from antitrust attack.
       Challenge restraints are utilized within a variety of different patent agreements – ranging from ordinary “vertical” licensing arrangements to reverse payment settlements – with varying competitive effects. However, the courts have failed to recognize challenge restraints as a standalone, broadly-applicable antitrust issue. This brief article explains why they ought to be viewed as such.


Buying Monopoly: Antitrust Limits on Damages for Externally Acquired Patents. Texas Intellectual Property Law Journal (2017) (with Herbert Hovenkamp)
Abstract: Most patent assignments are procompetitive and serve to promote the efficient commercialization of patented inventions. However, patent acquisitions may also be used to combine substitute patents from external patentees, giving the acquirer an unearned monopoly position in the relevant technology market. A producer requires only one of the substitutes, but by acquiring the combination it can impede product market rivals by limiting their access to important technological inputs. Similarly, a patent assertion entity may acquire substitute patents to eliminate inter-licensor competition, enabling it to charge supra-competitive license fees, much like a merger or cartel. For example, by acquiring two or more substitute patents that collectively dominate a market a PAE can effectively monopolize the technology for that market. Such anticompetitive practices are regularly condemned in conventional product contexts, but the courts have not yet applied the same antitrust logic to patent markets. And they passively encourage anticompetitive patent acquisitions by awarding large damages when such patents are infringed.
        We propose that infringement damages for an externally acquired patent be denied if the acquisition served materially to expand or perpetuate the plaintiff’s dominant position in the relevant technology market. By weakening enforcement, this limits the patent holder’s ability to use such acquisitions to anticompetitive ends. We do not suggest that a dominant patent holder should be prohibited from securing external patent rights in the relevant technology market, but simply that it should obtain them through nonexclusive licensing, not transactions that restrict third party access. This is as valuable to patent policy as it is to antitrust, for it will tend to increase innovation by discouraging systematic monopoly in technology markets.

Abstract: Despite their expertise in patent law, the most litigious patent assertion entities (PAEs) frequently file dubious infringement claims on which they are ostensibly very unlikely to turn a profit. Thus one might conjecture that these PAEs are mistaken to follow through on their litigation threats when their chances of coming out ahead are so scant. To the contrary, this paper demonstrates that this is in fact a calculated strategy of predatory patent litigation: by following through on its threats of seemingly irrational litigation, the PAE develops a litigious reputation that convinces other producers that these threats are credible, leading them to accept licensing offers they would ordinarily rebuff. This allows the PAE to garner substantial licensing revenues using low quality patents that would otherwise be difficult or impossible to monetize.
         This paper develops a novel dynamic model of patent assertion and reputation building by a PAE with low quality patents. The model has a unique equilibrium that involves predatory patent litigation, and in which the PAE intermittently forfeits and rebuilds its litigious reputation over time. Predatory patent litigation generates substantial social costs, and creates a perverse incentive for patent applicants to seek coverage of technologies so obvious or non-novel that they are likely to be widely unintentionally infringed by unsuspecting producers. Importantly, fee shifting will not solve the problem. Rather, it will lead predatory PAEs to focus their ire on small, vulnerable targets, such as technology startups, for whom litigation may be crippling even if attorney’s fees are ultimately recouped. Potential defendants could better deter predatory PAEs by entering a litigation cost-sharing agreement in which members jointly pay one another’s litigation costs and litigate all meritless claims to judgment. If properly limited in scope, such an arrangement is lawful and will not materially undermine meritorious infringement actions.

Profitable Double Marginalization.  revisions in progress (With Kevin Bryan)..
Abstract: When successive monopolies transact through noncooperative linear pricing, the resulting double markup decreases their joint profits relative to vertical integration. However, if there are downstream rivals (which are not double marginalized), the same noncooperative interaction often inadvertently raises their joint profits. Profit effects depend on how the well-understood harm from misaligned interests compares to the value of the resulting strategic effect. When profitable, vertical noncooperation incidentally approximates strategic delegation a la Bonanno & Vickers (1988), but avoids its credibility problem, suggesting an inability to bargain may be indirectly beneficial. The "conjectural consistency" concept helps to explain the disparate profit effects, and to synthesize the literature on strategic delegation and vertical control. The optimal way to "distort" a downstream firm's behavior is always to make it behave as if it has a consistent conjecture, no matter the distortion mechanism. If upstream competitors do this in parallel, they induce a "consistent conjectures equilibrium" (CCE) -- or else a close analogue -- evincing a strong link between ordinary Nash games and the CCE.



Biography
  • I was born in Iowa City, Iowa, in 1988.  I attended Iowa City High School, where I played football and threw shot-put.  I went to college at the University of Iowa, where I majored in mathematics and economics.  While enrolled, I wrote editorials for the Daily Iowan newspaper for two years, and I spent one ill-advised year on the Iowa rugby club team.                                                                                                                                                                                                                                                             
  • I've been an avid piano player for more than 15 years.  I like virtually all kinds of music; I even like Neil Diamond.                                                                                                                                                                                                                                                                                                                        
  • I'm a big sports fan--mainly football and basketball.  I root mostly for the Hawkeyes, but I'm also a Patriots fan, after climbing on the bandwagon when I was about 13.                                                                                                                                                                                                                         
  •  I am 100% Dutch, despite having been to the Netherlands only twice.                                                                                                                                        
  •  I have a cat named Carl, who is deeply indifferent to most things that are not food.