1 ANTIRUST & ANEC-DATA § 1

Antitrust and Anec-data

Hon. Maureen K. Ohlhausen*

Ten years after the introduction of competition law in China, the country’s leading antirust

enforcers continue to establish their enforcement principles, and the State Council works to

reconcile the agencies’ draft antitrust-intellectual property (“IP”) guidelines. At a time when

fundamental policy decisions are being developed, this paper highlights the concerns of strict

anti-injunction rules for standard-essential patents (“SEPs”), and defends the value of strong

patent rights for an innovative economy. It questions criticisms that US antitrust enforcement is

currently too lax in this regard, on the basis of the wide evidence available pointing towards the

positive relationship between strong IP rights and innovation.

1. INTRODUCTION

It is an exciting time in the world of competition law and not least in China. The Chinese

Ministry of Commerce (“MOFCOM”), the National Development and Reform Commission

(“NDRC”), and the State Administration for Industry and Commerce (“SAIC”) continue to

develop their enforcement principles, the State Council is working to reconcile the agencies’

draft antitrust-intellectual property (“IP”) guidelines, and the ten-year anniversary of the

Anti-Monopoly Law (“AML”) is fast approaching. I continue to be impressed with the

progress I see when meeting Chinese antitrust enforcers, policymakers, and academics, and

appreciate the chance to continue our dialogue.

Last year in Beijing, I addressed the dangers of strict anti-injunction rules governing

standard-essential patents (“SEPs”).1 Since then, I have argued for the value of strong patent

rights for an innovative economy, questioned claims that the United States’ (“US”) antitrust

enforcement is too lax, and published articles on evidence of the positive relationship

between strong IP rights and innovation, and on the Federal Trade Commission’s (“FTC”)

administrative litigation procedure as a tool for developing competition policy.2 In this essay,

I build on that work to address my continuing concern that theories, divorced from evidence,

can skew antitrust enforcement.

* Acting Chairwoman, Federal Trade Commission. The views I express in this paper are mine alone and may

not represent the views of the FTC or its other Commissioners.

1 M.K. Ohlhausen, Antitrust Oversight of Standard-Essential Patents: The Role of Injunctions, 12 September

2015, available at https://www.ftc.gov/system/files/documents/public_statements/800951

150912antitrustoversight-1.pdf.

2 M.K. Ohlhausen, The Case for a Strong Patent System, 8 June 2016, available at https://www.ftc.gov/

public-statements/2016/06/case-strong-patent-system; M.K. Ohlhausen, Patent Rights in a Climate of Intellectual

Property Rights Skepticism, 30 HARV. J. L. & TECH. 1 (2016); M.K. Ohlhausen, Does the US Economy Lack

Competition?, 1 CRITERION J. INNOVATION 47 (2016) https://www.criterioninnovation.com/articles/ohlhausendoes-the-us-economy-lack-competition.pdf; M.K. Ohlhausen, The Elusive Role of Competition in the StandardSetting Debate, STAN. TECH. L. REV. (forthcoming 2017); M.K. Ohlhausen, Administrative Litigation at the FTC,

12 J. COMPETITION L. & ECON. 4 (2016).
§ 2 CHINA ANTITRUST LAW JOURNAL 2

2. ASSESSING PRO- AND ANTI- COMPETITIVE

EFFECTS THROUGH EMPIRICS NOT

ANECDOTES

2.1 EMPIRICS VS. ANECDOTES OVERVIEW

One of my central philosophies as a government official is regulatory humility, which

flow from the information problem that all government actors face.3 As Friedrich Hayek

famously observed, resolving public-policy issues often requires information that is held by

private economic actors.4

We often encounter such difficulties in antitrust policy. Other than in easy cases—like

hardcore cartels or mergers to monopoly—we must assess competitive effects. Sometimes,

that entails a retrospective examination, such as when enforcers review a consummated

acquisition.5 More often, though, we need to evaluate the effects of conduct which has not

run its course. In those cases, we need to predict the future based on a limited evidentiary

record. Many commercial practices limit competition in one respect, but increase it

elsewhere by promoting investment, or achieving efficiencies. Error risks are important,

which warrants caution in how we intervene.6 We also need the best tools available for

distinguishing pro- and anti-competitive practices.

That brings me to a core point: the best tool is empirics. By discovering the facts we can

better discern the right outcome. We should be careful not to confuse anecdotes with facts,

creating what I like to call “anec-data.” One sparrow does not make a spring, and a few

complaints or concerns about market behavior do not make a competition case. We need

careful factual inquiry to make good competition decisions. But when we cannot directly

observe (or quantify) a practice’s net impact, theory comes into play. We need a coherent set

of principles with which to predict future effects and gauge the competitive implications of

business conduct.

Theories have always played a central role in antitrust policy, though they have, of course,

evolved over time.7 Our goal as enforcers is to develop theories that correctly predict the

market effects of conduct under review. Antitrust theories must remain grounded in factual

realities. If a theory becomes untethered from real-world validation, it risks becoming

dogma. This is not an academic concern. It is all too easy to become enamored with the

intellectual appeal of a clever theory. Sometimes a model can produce a narrative so

3 M.K. Ohlhausen, Regulatory Humility in Practice, 1 April 2015, available at https://www.ftc.gov/system/

files/documents/public_statements/6358 1/150401aeihumilitypractice.pdf.

4 Id. at 3–4.

5 See, e.g., In re Evanston Nw. Healthcare Corp., FTC Dkt. No. 9315, 28 April 2008, available at

https://www.ftc.gov/sites/default/files/documents/cases/2007/08/070806opinion.pdf

6 For the classic article on this point, see F.H. Easterbrook, The Limits of Antitrust, 63 TEXAS L. REV 1 (1984).

7 W.E. Kovacic and C. Shapiro, Antitrust Policy: A Century of Economic and Legal Thinking, 14 J. OF ECON.

PERSPECTIVES 43 (2000).
3 ANTIRUST & ANEC-DATA § 2.2.1

convincing that its adherents treat its predictions as truths that need not be verified That risk

is the focus of this short article.

2.2 EXAMPLES OF THEORIES WITHOUT EVIDENCE

2.2.1 Standard-essential patents and ‘hold-up’ theory

I believe that, in some recent actions, antitrust enforcers have embraced theory without

solid evidence. In certain instances, competition agencies embarked on hasty interventions to

solve a theorized problem. Two examples stand out.

First, competition agencies around the world have taken aggressive enforcement actions to

prevent owners of standard-essential patents (“SEPs”) from excluding technology users in

potential violation of RAND-licensing commitments.8 They have done so under the rubric of

hold-up theory that has yet to be substantiated in any of the industries said to suffer from

opportunistic patent assertion.9 Second, under a drumbeat of concern, policymakers have

rushed to condemn patent-assertion entities based—again—on theorized harm.10

Ultimately, the goal for applied antitrust should be to distinguish anticompetitive business

conduct from practices that promote, or do not affect, competition. To accomplish that goal,

theories must remain grounded in fact.

In my view, enforcers have sometimes improperly decoupled theory and empirical

validation. I will provide two examples, both of which flo from the theory of hold-up;

which posits that patent owners will behave opportunistically. That they will wait for third

parties to implement an infringing technology before demanding royalties exceeding what

the parties would have agreed upon ex ante.

11 And because it is expensive for a technology

user to abandon a technology, it may pay a sum reflectin not merely the merits of the

claimed technology, but the cost of redesigning its goods.

A related theory known as royalty stacking predicts that, if a marketed good contains many

proprietary technologies that are diffusely owned, the total royalty burden will exceed what

8 See, e.g., In re Google Inc., FTC File No. 121-012, Statement of the Federal Trade Comm’n, 3 January 2013,

available at https://www.ftc.gov/enforcement/cases-proceedings/1210120/motorola-mobility-llc-google-incmatter; In re Robert Bosch GmbH, FTC File No. 121-0081, Statement of the Fed. Trade Comm’n, 24 April 2013,

available at https://www.ftc.gov/enforcement/cases-proceedings/1210081/bosch-robert-bosch-gmbh; European

Comm’n, Case AT.39939—Samsung—(29 April 2014) Enforcement of UMTS Standard Essential Patents;

European Comm’n, Case AT.39985—Motorola—(29 April 2014) Enforcement of GPRS Standard Essential

Patents.

9 For an example of my argument why claims of hold-up lack an empirical foundation, see Certain 3G Mobile

Handsets & Components Thereof, Reply Submission on the Public Interest of Federal Trade Commissioners

Maureen K Ohlhausen & Joshua D Wright, at 3 n.2 (20 July 2015), https://www.ftc.gov/public-statements/2015/

07/reply-submission-public-interest-federal-trade-commissioners-maureen-k.

10 See M. K. Ohlhausen, The FTC Patent Study in Context, at 8–9, 20 October 2016, available at

https://www.ftc.gov/public-statements/2016/10/prepared-remarks-commissioner-maureen-k-ohlhausenftc-pae-study-context.

11 See FED. TRADE COMM’N, THE EVOLVING IP MARKETPLACE: ALIGNING PATENT NOTICE AND REMEDIES

WITH COMPETITION 5 (2011).
§ 2.2.1 CHINA ANTITRUST LAW JOURNAL 4

a single fir owning all the infringed patents would charge.12 Some scholars argue that

hold-up may be especially pronounced when combined with a royalty-stacking problem.13

Hold-up theory only works if the patentee can credibly threaten to extract from an accused

infringer an expected cost exceeding the ex ante, benchmark royalty. This reflect the basic

insight that parties bargain in the shadow of law. So, if the courts (on average), award a

reasonable royalty equal to the ex ante value, hold-up would be impossible, assuming

symmetric litigation costs and appetite for risk. The principal way by which a patentee may

carry out hold-up, however, is by getting an injunction. That order, of course, subjects an

accused infringer to the full cost of redesigning its infringing product. Facing such an order,

a technology user would rationally pay an amount up to the full redesign cost to avoid

shut-down. That is the theory. But it is a theory that some antitrust enforcers have accepted

as reality without empirical validation or substantiation in their interventions against owners

of standard-essential patents who seek injunctions. Much attention has focused on the

lucrative and standards-dependent smartphone industry, where there has been recurring

concern that conditions are ripe for hold-up. Hundreds of thousands of patents, for instance,

potentially relate to telecommunications standards, while manufacturers invest huge sums in

implementing next-generation mobile devices.14 Theoretically, at least, a patent owner could

sit on its technology, wait for industry to adopt an infringing standard, and then demand

royalties exceeding the ex ante level.

I agree that hold-up could possibly materialize in real-life markets and that the courts and

agencies should consider that risk in fashioning relief for patent infringement.15 To date,

evidence of actual hold-up is exceedingly slim, especially in US markets.16 That is no

surprise. Since the Supreme Court’s 2006 decision in eBay, injunctions are increasingly rare

and especially so for standard-essential patents whose owners have promised to license on

reasonable and non-discriminatory terms.17 Today, a court would likely issue an injunction

for infringement of a RAND-encumbered SEP only if the infringer had strategically delayed

12 M.A. Lemley & C. Shapiro, Patent Holdup and Royalty Stacking, 85 TEX L. REV. 1991, 1993 (2007).

13 See id.

14 See, e.g., RPX Corp., (11 April 2011) Amd. No. 3 to Form S-1, 59; FTC, The Evolving IP Marketplace,

supra, at 221; Lemley & Shapiro, supra note 12, at 1992.

15 See In re Certain Wireless Commc’ns Devices, Inv. No. 337-TA-745 (6 June 2012) Third-Party US Fed.

Trade Comm’n, Statement on the Public Interest.

16 See A. Galetovic, S. Haber, & R. Levine, An Empirical Examination of Patent Holdup, 11 J. COMPETITION

L. & ECON. 1 (2015); G. Sidak, The Antitrust Division’s Devaluation of Standard-Essential Patents, 104

GEORGETOWN L. J. ONLINE 48, 61 (collecting studies at note 49) (2015) (“By early 2015, more than two dozen

economists and lawyers had disapproved or disputed the numerous assumptions and predictions of the patent

holdup and royalty stacking conjectures.”), https://www.criterioneconomics.com/docs/antitrust-divisionsdevaluation-of-standard-essentialpatents.pdf; ANNE LAYNE-FARRAR, PATENT HOLDUP AND ROYALTY STACKING: WHERE DO WE STAND AFTER 15 YEARS OF HISTORY? (2014), http://www.oecd.org/officialdocuments/

publicdisplaydocumentpdf/?cote=DAF/COMP/WD%282014%2984&doclanguage=en (surveying the economic

literature and concluding that the empirical studies conducted thus far have not shown that holdup is a common

problem); D.H. Ginsburg, K.W. Wong-Ervin, & J.D. Wright, The Troubling Use of Antitrust to Regulate FRAND

Licensing 10 COMPETITION POL’Y INT’L ANTITRUST CHRON., 2, 4–5 (15 October 2015).

17 C.B. Seaman, Permanent Injunctions in Patent Litigation After eBay: An Empirical Study, 101 IOWA L.

REV. 1949 (2016).
5 ANTIRUST & ANEC-DATA § 2.2.2

to avoid good-faith licensing negotiations and to suppress royalty rates below their ex ante

level. Absent such opportunistic conduct on the buying side of the market, injunctions are

largely off the table for RAND-limited SEPs. Without that weapon, it is not evident that

patentees can credibly hold-up standard implementers.

One possible, albeit less severe, form of hold-up could nevertheless occur if courts

systematically inflate royalty rewards ex post. However, recent Federal Circuit decisions

make that situation unlikely. The court has held that a reasonable royalty for infringement of

a SEP—whether RAND-encumbered or not—excludes any value caused merely by the

patent’s inclusion in the standard.18 In other words, lock-in value is not a proper component

of the royalty calculation. Furthermore, the Federal Circuit has guarded against possible juror

overestimation of royalties by forbidding use of the entire-market-value rule when the

infringed technology is not the basis for consumer demand.19

Other than a decision of the International Trade Commission (“ITC”) awarding an

exclusion order against Apple—which the ITC issued following a careful, factual assessment

of the public-interest factors under Section 337 and which the US Trade Representative

subsequently vetoed—I know of no US injunction entered to prohibit infringement of a

RAND-encumbered SEP.20 Nor have I seen any evidence that a product has been excluded

from the US market. Last, but not least, the markets said to suffer from hold-up are

flourishing producing countless new products and technologies under fierc competition.21

The FTC has intervened, however, to prevent the possibility of hold-up, without asking

whether the theory meets fact. That is problematic because evidence-free enforcement risks

unintended consequences. That shortcoming is all the more pronounced because the FTC has

recently focused on challenging broken RAND licensing promises—i.e., theorized hold-up

in breach of contract—rather than antitrust violations like deceiving an SSO to induce it to

adopt a proprietary technology over substitutes that the SSO would otherwise have chosen.

2.2.2 Patent-assertion entities

The second example where policy proposals have relied on theory with little evidentiary

basis involves patent-assertion entities (“PAEs”). PAEs are non-practicing firm that

aggregate patents through market acquisitions and license them on threat of suit. The

argument against PAEs is that they engage in targeted hold-up by purchasing patents

covering lucrative products that are already on sale. Because accused infringers cannot

cheaply redesign their products ex post, the concern is that PAEs extract sums exceeding

what they could have obtained via ex ante technology transfer.

But there is an alternative theory that is more favorable to the PAE business model.

Specificall , in aggregating complementary patents, PAEs may reduce royalty stacking and

also remedy a market failure by connecting downstream technology users to upstream

18 CSIRO v. Cisco, 809 F.3d 1295 (Fed. Cir. 2015).

19 Ericsson, Inc v. D-Link Sys, Inc, 773 F.3d 1201 (Fed. Cir. 2014).

20 Letter fr. US Trade Representative to Int’l Trade Comm’n re: Disapproval of the US International Trade

Commission’s Determination, 3 August 2013, available at https://ustr.gov/sites/default/files/08032013

20Letter_1.PDF.

21 See Ohlhausen & Wright, supra note 9; see also Galetovic et al., supra note 16.
§ 2.2.3 CHINA ANTITRUST LAW JOURNAL 6

inventors, ultimately creating a market for patents that would not otherwise exist. The result

could be enhanced incentives to invent patentable technologies.

However, the hold-up narrative became the dominant one. Policymakers soon viewed that

theoretical concern as established fact. In 2013, former President Obama condemned PAEs,

saying that they “hijack somebody else’s idea and see if they can extort some money out of

them.”22 Op-eds and law reviews featured claims that PAEs harm innovation and must be

stopped. Congress responded with draft bills that would have significantl altered rights for

all patent holders.23

In a speech in late 2013, I urged caution and advocated for empirical work on PAEs before

passing legislation that could materially affect the value of all patents, whether or not owned

by PAEs.24 I am proud that the FTC recently finishe a comprehensive study of 22 PAEs and

over 2,500 related entities. While I lack the space here to discuss the report’s finding in

detail, the distinction between two kinds of entities—Portfolio PAEs and Litigation

PAEs—was especially interesting.25 The study found that Litigation PAEs’ conduct was

consistent with nuisance litigation, raising the prospect that modest, incremental policy

changes to the litigation process could have benefits 26

By contrast, the conduct of Portfolio PAEs was consistent with a legitimate aggregation

service.27 Such PAEs generally licensed without firs suing, employed sophisticated IP

professionals to negotiate deals, and agreed upon royalties that exceed the cost of litigation.28

All of which suggests that Portfolio PAEs might be an efficient way to facilitate licensing on

the merits.29

2.2.3 FTC’s position regarding PAEs

The FTC’s finding should not mark the end of empirical work surrounding PAEs. But

they are an important milestone in grounding expansive theories in real-world data. As the

FTC’s modest proposals for reform suggest, the evidence to date does not warrant major

legislation, such as mandatory cost-shifting in patent cases. This example shows the benefit

of empirical testing. Whether one builds a theory inductively from market observations, or

reasons deductively to a model whose predictions one then tests, empirics remain

indispensable.

22 President Obama Participates in a Fireside Hangout on Google+, YouTube (14 February. 2013)https://

www.youtube.com/watch?v=kp_zigxMS-Y.

23 M.K. Ohlhausen, A Pragmatist’s Approach to Navigating the Intersection of IP and Antitrust, at 18–20 (4

December 2013) https://www.ftc.gov/public-statements/2013/12/pragmatists-approach-navigating-intersectionip-antitrust.

24 Id.

25 FED. TRADE COMM’N, PATENT ASSERTION ENTITY ACTIVITY: AN FTC STUDY (2016), available at

https://www.ftc.gov/system/files/documents/reports/patent-assertion-entity-activity-ftc-study

p131203_patent_assertion_entity_activity_an_ftc_study_0.pdf.

26 Id. at 43, 47–53.

27 Ohlhausen, supra note 10.

28 Id. See also FTC PAE Study, supra note 25, at 46–47, 91–92.

29 Ohlhausen, supra note 10.
7 ANTIRUST & ANEC-DATA § 2.3

2.3 ANAYLSING REMEDIES IN THE REALM OF

EMPIRICS AND THEORY

I finis with one last example of the relationship between empiricism and theory.

Remedies are a critical part of the agencies’ toolkit. As we know, some otherwise-efficient

mergers create problematic horizontal overlaps in some relevant antitrust markets. Based on

the theory that divesting one side of the overlapping business to a suitable buyer should

maintain the pre-merger level of competition, the FTC and Department of Justice (“DOJ”)

often use divestitures in consents to resolve competitive issues. The premise behind the

remedy, however, requires empirical substantiation. Of course, that does not mean that all

empirical work is accurate or that a single study tells the whole story. In 2014, for instance,

Professor Kwoka argued that the agencies’ use of divestitures had failed to protect

competition.30 That work attracted much attention, but it appears to suffer from significan

deficiencies 31

Nevertheless, the FTC is committed to testing its theoretical predictions, which is why it

undertook to study all of its remedial orders between 2006 and 2012, variously using a

case-study method, questionnaires, and data.32 The study’s examination of these eighty-nine

remedies showed that the FTC’s remedies work well in most cases but also identifie

imperfections in the remedy process.

Three finding of the study warrant particular attention. First, every divestiture of an

ongoing business successfully maintained competition at the pre-merger level or returned it

to that point.33 Second, although only a few vertical mergers featured in the study, all

remedies in those matters succeeded.34 Third, it wasn’t a perfect success story. The study

reveals that divestitures of limited asset packages were less successful; nevertheless they

restored or maintained competition in roughly seventy percent of cases.35 This information

is very valuable as the Commission and staff use these finding to guide future remedies,

most notably reviewing proposed divestitures of partial asset packages even more closely,

and addressing the process challenges that at times created obstacles or issues that buyers of

divested assets had to overcome. The Commission’s studies have been invaluable in guiding

the agency’s work, and signal the right way forward for all antitrust agencies: test your

suppositions.

30 J. KWOKA, MERGERS, MERGER CONTROL, AND REMEDIES: A RETROSPECTIVE ANALYSIS OF US POLICY

(MIT Press 2014).

31 See Edith Ramirez, Keynote Remarks at Tenth Ann. Global Antitrust Symposium, Georgetown Univ. Law

Center, 20 September 2016, at 9, available at https://www.ftc.gov/public-statements/2016/09/keynote-remarksftc-chairwoman-edith-ramirez; M. Vita and F.D. Osinski, J. Kwoka’s Mergers, Merger Control, and Remedies:

A Critical Review (21 December 2016). Available at SSRN: https://ssrn.com/abstract=2888485

32 FED. TRADE COMM’N, REMEDY STUDY, available at https://www.ftc.gov/policy/studies/remedy-study.

FED. TRADE COMM’N, THE FTC’S MERGER REMEDIES 2006–2012: A REPORT OF THE BUREAUS OF

COMPETITION AND ECONOMICS (2017), available at https://www.ftc.gov/reports/ftcs-merger-remedies-2006-

2012-report-bureaus-competition-economics.

33 Id.

34 Id. at 2.

35 Id. at 1–2.
§ 3 CHINA ANTITRUST LAW JOURNAL 8

3. CONCLUSION

We antitrust enforcers must ask hard questions. We need to remember that theories exist

to predict the future but do not control in the few cases where we can observe the relevant

competitive effects. In other matters, we employ theories as part of our methodological

toolkit to understand the likely impact of a challenged restraint, practice, or merger. But

while those theories are the product of sophisticated thinking, their ultimate litmus test lies

in the accuracy of their predictions. Sometimes, policymakers have a propensity to accept

theoretical claims of harm without an evidentiary basis. As we work through our various

antitrust guidelines, publish guidance documents, and analyze competitive effects in real

cases, we should be mindful of that risk.