The FTC, IP, and SSOs: Government hold-up replacing private coordination

In its recent report entitled, "The Evolving IP Marketplace," the Federal Trade Commission (FTC) proposes a far-reaching regulatory approach (Proposal) that is likely to interfere with the intellectual property (IP) marketplace, decreasing both the innovation and commercialization of new technologies. The FTC Proposal relies on non-standard and misguided definitions of economic terms of art such as "ex ante" and "hold-up," and advocates new inefficient rules for calculating damages for patent infringement. The Proposal would so reduce the costs of infringement that the rate of infringement would increase as potential infringers find it in their interest to abandon the voluntary market in favor of judicial pricing. As the number of nonmarket transactions increases, courts will play an ever larger role in deciding the terms on which the patented technologies of one party may be used by another party. That will do more than reduce the incentives for innovation; it will upset the current set of wellfunctioning private coordination activities in the IP marketplace that are needed to accomplish the commercialization of new technologies. And that would seriously undermine capital formation, job growth, competition, and the consumer welfare the FTC seeks to promote. Like the FTC Proposal, we focus here within the context of standard-setting organizations (SSOs), whose activities are key to bringing standardized technologies to market. If the FTC's proposed definitions of "reasonable royalties" and "incremental damages" become the rules for calculating patent damages the FTC and private actors will be well poised to attack, after the fact, all standard pricing methods.