The Limits of Antitrust and Patent Holdup : A Reply to Cary et al

In their recent article in this Journal, Cary et al. critique our prior article, Federalism, Substantive Preemption, and Limits on Antitrust: An Application to Patent Holdup. In that article, we assess the marginal costs and benefits of applying antitrust tools to the so-called patent holdup problem, contend that the costs of applying antitrust rules tools outweigh the benefits, and argue that our analysis is consistent with recent Supreme Court antitrust jurisprudence. Cary et al. focus on the question of how to apply antitrust analysis to the problem of patent holdup in the standard-setting context. However, we believe that the antecedent question of whether it makes economic sense to use antitrust rather than alternatives, such as contract and patent law, to police patent holdup is an important consideration that has received too little attention.We claim that when an alternative legal structure competently regulates the relevant activity, the marginal benefits of applying antitrust enforcement to this activity may be outweighed by the costs of doing so (including error and litigation costs). From a consumer welfare perspective, when applying antitrust enforcement will result in over-deterrence and decrease welfare, antitrust should be rejected in favor of those alternatives. We believe that a marginal analysis of the value of antitrust in the patent holdup context demonstrates that: (1) the costs of false positives are high because it is difficult to reliably identify anticompetitive conduct, (2) the benefits are small because competent alternative regulatory regimes exist in contract and patent law, and (3) shedding antitrust liability in favor of these alternative structures would move legal penalties for patent holdup closer to the de-trebled magnitude that optimal deterrence theory recommends. We also claim that the Supreme Court's recent antitrust jurisprudence embraces the type of marginal analysis we offer, including endorsing considerations of the costs associated with both judicial error and the direct costs of administration and litigation as inputs into analyses aimed at identifying the optimal scope and content of antitrust law. Moreover, notwithstanding Cary et al.'s claims to the contrary, the Supreme Court has expressly endorsed an analysis of the comparative advantages and costs of antitrust law relative to other regulatory structures. Thus, our analysis is consistent with the Supreme Court's interpretation of the Sherman Act