DOJ’s “New Madison” approach to antitrust and intellectual property law dictates that antitrust should stay out of disputes over patents, even when market power and anticompetitive effects are apparent. Herbert Hovenkamp explains how this policy distorts innovation and undermines collaborative dissemination of technology.
Since the 1980s, the US patent system has been increasingly divided in two directions. On one side are what might be called “rust belt” patents, mainly on machinery and chemicals; on the other are information technology patents. Technological progress has been much greater in the latter group, even though its patent owners lose a much higher percentage of patent cases.
In 2018, however, the Department of Justice’s Antitrust Division announced the Trump administration’s “New Madison” approach to antitrust and intellectual property law. This policy, which was reflected in the Justice Department’s successful intervention against the FTC in the Qualcomm case, locks patents and competition policy into an obsolete framework that undermines collaborative dissemination of technology. The policy will do no good in traditional patent areas and a great deal of harm in new technologies.
The New Madison doctrine states that antitrust should stay out of disputes over patents, expressly referencing patents governing information technology standards. These patents have been declared by their owners to be essential to some technology that typically requires interoperability on a common network among multiple firms, such as cellular phones. Further, antitrust should stay out even when market power and anticompetitive effects are apparent. This policy tips the scales against collaborative standard setting and against any rule that requires licensing, which is essential to multi-firm networking, even when the patentee has made a contractual commitment to do so. While competitive firms on a network generally favor competition and interconnection, dominant firms or cartels prefer to keep other firms off.
Antitrust policy concerning patents centers on two issues. One is low patent quality: our non-adversarial process for granting patents produces too many bad ones. The development of a more adversarial review procedure under the America Invents Act in 2012 has reduced but hardly eliminated this problem. Simply obtaining a weak patent is not usually an antitrust issue, however, although enforcement of a patent known to be unenforceable can be.
The New Madison doctrine is not concerned with patent issuance but with a second antitrust issue: anticompetitive uses of existing patents. For this reason, “Madison” is a misnomer. James Madison played an important but ambiguous role in the development of the Constitution’s intellectual property clause. His own notes on the Constitutional Convention, plus his later revisions (which are not entirely consistent), suggest that Madison proposed the language that became the copyright portion of the IP clause, while Charles Pinckney from South Carolina proposed the patent portion. Madison clearly supported the Clause, however, and briefly defended it in Federalist No. 43 (Jan. 23, 1788). He also believed that any restriction on monopolies in the Bill of Rights should include an exception for patents. However, he also argued strenuously against overuse of patents because they would give “exorbitant gains” to their owners unless they were construed narrowly.
Other than this generalized concern about excessive monopoly, Madison had nothing to say about abuses of issued patents. The Constitution is also silent on the topic. The Patent Act, originally passed in 1790 and revised many times, subjects issued patents to the ordinary rules that govern personal property and creates no antitrust immunity. In fact, at various times both Congress and the Supreme Court have expressed strong concerns about anticompetitive patent use, and did so through both patent and antitrust legislation as well as judicial decisions.
The New Madison doctrine clearly cannot be justified as incentivizing innovation in new technologies. Quite the contrary. It is justifiable only if compelled by the Constitution or the relevant statutes. On the innovation point, the doctrine imagines a process in which standard setting organizations “hold out,” compelling patentees to commit their patents to universal licensing requirements if they want to have them adopted. Faced with this threat the patentees have no choice but to commit to licensing their patents at oppressively low royalties.
But patent law does not work that way, and the holdout problem is completely imagined. To the contrary, patentees egregiously over declare their patents as standard essential, and for a good reason: once patents are declared they become more valuable. By default, they will be included in the licensing package governing that technology. For this reason, holders of standard essential patents must accept independent royalty determinations, usually by either arbitration or a federal court, that assess the value of the patent prior to its incorporation into a standard. This procedure applies a simple law and economics principle that the New Madison doctrine ignores: when multiple inventors are competing for a standard, one way to ensure competitive outcomes is to make them bid up front to be the provider. As for the holdout threat, if a group of manufacturers employ a technology without paying, they will be guilty of patent infringement and their damages will be based on the patent’s current value.
One argument against using antitrust to police this process is that the standard-setting system is contractual. Antitrust should not be contract law by another name. That is true, but when market power and anticompetitive effects are present the fact that a practice is contained in a contract is no defense. Indeed, Section 1 of the Sherman Act expressly applies to contracts that restrain trade. The antitrust trick is to identify contracts where anticompetitive outcomes are likely.
The second defense of the “New Madison” doctrine is that, even if it is bad innovation policy, it is compelled by existing law. But that is both historically and currently untrue. Patent decisions expressed concerns about anticompetitive abuses since long before the Sherman Act was passed, through such doctrines as patent exhaustion, which prohibits the use of patent law to enforce restraints on a patented good that has been sold.
When the Supreme Court narrowed the exhaustion rule in 1912 and upheld an exclusionary patent agreement, Congress intervened with §3 of the Clayton Act, an antitrust law that makes it unlawful to sell a good, “whether patented or unpatented,” on a condition that anticompetitively excludes a competitor. After that, the Supreme Court took an excessively aggressive position condemning patent agreements. When pushback rightfully occurred, however, it was modest, even during the major neoliberal anti-enforcement wave of the 1980s. A 1988 amendment to the Patent Act did not make such agreements lawful, but rather required proof of “market power.” The statute did not even use the phrase “monopoly power,” which refers to dominant firms, but rather the lesser requirement of market power. Its target was a series of Supreme Court decisions holding that market power would simply be presumed in cases involving patented products. The same statute said that a refusal to license could not be “misuse” or “illegal extension of the patent right,” although it did not mention antitrust liability. Most recently in its Actavis decision (2013) the Supreme Court held that an anticompetitive patent agreement could violate the Sherman Act.
The New Madison doctrine, in fact, contradicts existing law: it is a reactionary statement of what some people would like the law to be, but without making their case to Congress. It also ignores what we know about how innovation works in networked information technologies. As a result, it cannot be justified on either policy or statutory grounds.
Disclosure: Herbert Hovenkamp serves in an unpaid capacity on the international board of advisors for the Global Antitrust Institute (GAI) at the Antonin Scalia Law School at the George Mason University, where he debates against the Federalist Society on antitrust issues. GAI has received funding from tech companies, including Google, Amazon and Qualcomm.
Editor’s note: The author’s disclosure has been updated after publication.