Thursday, August 27, 2015

Apple loses appeal in e-books antitrust case - Part 2

This is the second in a series of comments on the Second Circuit’s June 30 decision in the Apple e-books antitrust case.

The Second Circuit has upheld a federal trial court finding that Apple, together with five of the so-called "Big Six" publishing companies, fixed prices for e-book editions of new issues and New York Times best sellers. The e-book reader market had been (and continues to be) dominated by Amazon's Kindle platform, first introduced in 2007; Kindle is an e-bookstore, an e-book format (including a digital rights management system), a cloud-based storage system, and a suite of e-readers. When Apple introduced its more general purpose iPad in 2010, it commenced competing with Amazon's Kindle across all these dimensions. Importantly, Apple sought to distribute e-books and so required access to the major publishers' catalog.

Amazon had been selling most new release and New York Times bestseller e-books below cost, attracting legions of readers to the Kindle ecosystem with its $9.99 pricing. Apple cleverly upset Amazon's $9.99 pricing policy by positioning itself as a sales agent (and not a retailer) of e-books, taking a 30% commission on sales. Apple thus generally restored retail pricing authority to the publishers. Apple's agency contracts, however. required e-book retail prices on iPad to match those offered on Amazon. This 'most favored nation' obligation drove the publishers to renegotiate their distribution deals with Amazon. Collectively (and with Apple playing an active coordinating role), the book publishers placed Amazon on an agency basis as well. The publishers then immediately raised e-book retail prices across both platforms - a surprising result in a market that appeared to be growing more competitive through the introduction of the iPad.

Thursday, August 13, 2015

Apple loses appeal in e-books antitrust case

This is the first of a series of comments on the Second Circuit’s June 30, 2015 decision in the Apple e-books antitrust case.

Through a series of spectacular commercial moves, Apple succeeded in disrupting the e-book space upon its 2009 release of the iPad, sweeping away Amazon Kindle’s popular $9.99 pricing for new releases and for New York Times best-sellers. The iPad brought meaningful competition to Amazon’s wildly successful Kindle as an e-book platform; the emergence of this new distribution channel raised e-book prices, whether purchased on iPads or Kindles, seemingly defying an economic law of gravity. It was a coup that only a Steve Jobs could pull off. The e-book price shift attracted the attention of federal and state antitrust authorities. In 2012, the government brought a civil antitrust action against Apple and five major publishers. The book publishers settled, and the government proceeded in a price fixing claim against Apple. On June 30, a panel of the Second Circuit Court of Appeals upheld a federal trial court’s finding that Apple violated Section 1 of the Sherman Act.

Tuesday, September 30, 2014

Flash Boys - A Wall Street Revolt by Michael Lewis

Flash Boys is the latest from Michael Lewis; it's a pointedly literary business book featuring arresting characters, punchy (though not always credible) dialogue, and a comforting good versus evil story line. It’s the kind of financial journalism that could trigger movie royalties. The Flash Boys themselves don’t appear in the book. They are the shadowy ‘high frequency traders’ (HFTs) found within dark pools and hedge funds. HFTs use computer power and unfathomable speed to score the tiny transactional profits that form the bases of great fortunes. And – in the view of Lewis’ characters – the Flash Boys aren’t playing fairly.

High frequency trading occurs so fast that ‘after’ becomes ‘before’ in a way that seems to challenge our conventional sense of time. The Flash Boys appear able to mysteriously know what we intend to carry out in the market before we do it – and it is almost so. In the simplest case described by Lewis, a conventional purchaser of a large block of shares will see its order fragmented into small transactions arrayed at various (usually escalating) prices. The lowest price attracts the first execution. An offer is dangled by the high frequency trader as bait – small quantities of shares (often the minimum 100 share order) at alluring prices. As the trap snaps closed, that is, as the token trade is executed and reported, it signals to the high frequency trader that an active buyer has likely entered the market. The high frequency trader (which has just sold the unwitting purchaser a small quantity of shares) then uses speed (built literally on proximity to stock exchange servers) to outrun the execution of the greater bulk of the purchaser’s order – buying up shares at available prices and then reselling these to the purchaser at higher prices – all within a tiny fraction of a second. The unwitting market participant betrays herself; revealing in one instant what will likely follow in the next.

So this is the market behavior Lewis has uncovered – he then proceeds to build story around it. In the first story, a mysterious entrepreneur lays fiber cable in the straightest possible line between the commodities markets in Chicago and the trading desks (that is, computers) in New Jersey, resulted in the fastest possible electronic connection. The second – and main – story involves a host of good-guy bankers attached to the New York outpost of the Royal Bank of Canada. They are a motley crew of outsiders, including Brad Katsuyama, the Japanese-Canadian (“of all things”) leader of the band, and Ronan Ryan, an Irish (not Irish-American) techie turned trader, who uncover and counter the traps laid by the Flash Boys. Their solution to HFT predation is in part technical (they gain better pricing by slowing things down), but is largely premised on creating a trading space called IEX with fairer rules.

Tuesday, May 20, 2014

Licensing Notes - introduction to the essential facilities doctrine

In this note, we prepare for our coverage of the Trinko case with an introduction to the essential facilities doctrine.

Let’s start will two fairly clear propositions about patent and copyright law in the United States. The first is that the proprietor of a patent or a copyright controls the extent to which she exploits her intellectual property. She need never manufacture or publish; there is no working requirement in U.S. law. And the proprietor may assign all or part of her IP rights to others. But there is no obligation to do so. A patent or copyright holder need not share her IP with anyone. To use the language of antitrust, there is no duty to deal, no duty to license.

Now the second proposition. A proprietor of a patent or copyright who chooses to exploit her intellectual property right -- whether directly or by means of a license to another -- may charge ‘what the market will bear.’ There are no limits -- imposed by either intellectual property law or antitrust law -- on the amount of license royalties that can be demanded.

Both of these propositions -- the freedom to license (or not) and the freedom to set royalties -- are seen to flow naturally from the very monopolies that patent and copyright law establish. A patent or copyright generates a set of exclusive rights. To require the proprietor to license to another is inconsistent with those exclusivities and undercuts the monopoly the intellectual property creates. A limit on royalties reduces the economic reward conferred by Congress on authors and inventors.

Monday, April 28, 2014

TTIP's IP Chapter: Nothing to be Gained (Part 2)

It would not be difficult to convince the various constituencies arrayed against the expansion of intellectual property rights to support the removal of the IP chapter from the projected U.S.-European Union free trade agreement (known as TTIP, the Transatlantic Trade and Investment Partnership). Open source advocates, First Amendment partisans, pirates and free riders, as well as ordinary American consumers, see little to be gained from yet another international commitment to strong IP. Eliminating the IP chapter from TTIP should appeal to the U.S. IP industries as well. There is little to gain, and perhaps much to lose, in including an IP component to TTIP. IP zealots (and I'm talking to you, Hollywood) might be better served to await a better day.

As I argued in part 1 of this essay, there is little ground the European counterparty is politically willing or able to give in any TTIP IP negotiations. The TTIP IP chapter is a lightning rod for anti-globalists - and the European Parliament will guard the populist victory it won in quashing ACTA. And neither the United States nor the European Union seem ready to undertake the extremely difficult task of harmonizing substantive IP law across the Atlantic. The Americans and the Europeans seem to share a resignation to let "vivre la différence” in substantive IP rules; each of course would be satisfied by a wholesale capitulation to its respective IP model, yet each recognizes the impossibility of such an outcome. Impending EU substantive IP harmonization - in patent and copyright - pursued through the EU legislative process might be a more favorable opportunity to highlight (with a light touch, of course) the gains to be achieved through transatlantic IP convergence (admittedly moving EU IP law closer to U.S. models).

Leaked reports suggest some Europeans see possibilities for U.S. movement in TTIP with regard to geographical indications (GIs). Perhaps. But the United States clearly recognizes the intense desire of certain European interests for a stronger GI regime (especially with regard to wines). The United States will likely make painful demands of the European Union before making concessions on GIs.

In the end, there is not much new nor important that can form the IP chapter of TTIP beyond simply restating the ongoing general commitment of the United States and the European Union to a high standard of IP protection. And there is a downside to a modest agreement (again from the perspective of those U.S. industries seeking a global advancement in the protection and enforcement of IP rights).

Monday, April 7, 2014

TTIP’s IP Chapter: Nothing to be Gained (Part 1)

President Obama announced in his 2013 State of the Union address that negotiations for the Transatlantic Trade and Investment Partnership (TTIP), a United States-European Union free trade agreement, were on. There is something silly about calling a trade agreement a 'partnership;' the on-going Trans-Pacific Partnership uses this same label. But the folks in Washington are more clever than you and me: they know that the older style ‘free trade agreement’ (FTA) would be DOA in Congress.

TTIP’s central features follow the FTA model. Little thought seems to have been applied to fixing the provisional TTIP agenda: TTIP would provide for zero-level tariffs for U.S.-EU trade, an address various non-tariff barriers between the United States and the EU, introduce a misbegotten investor-state arbitration mechanism, and include an intellectual property chapter. It appears now that little positive can be achieved from inserting an IP chapter into TTIP. It is at best a waste of time -- and could undercut U.S. and EU IP efforts in other fora. What were they thinking?

In this first post, I examine the constraints faced by European Union negotiators. The EU has precious little room for maneuver on the IP front; IP provisions can only attract and intensify opposition to the entire TTIP package. These political limits are clear to the Europeans; they are perhaps underappreciated by the U.S. proponents of TTIP's IP coverage.

Thursday, January 23, 2014

Federal conviction for trade secret theft? A comment on Nosal by Karl Manheim and Jeffery Atik

Stealing a trade secret (reprehensible though this may be) has generally not attracted federal criminal liability. Yet in the recent prosecution of David Nosal, the Justice Department applied a computer hacking statute to convict a departing employee for a rather run-of-the-mill trade secret theft: the unauthorized taking of customer lists. Many if not most trade secrets -- like the customer lists involved in Nosal -- are stored on computers. As such, aggressive use of the federal Computer Fraud and Abuse Act could convert many trade secret misappropriations -- traditionally civil offenses and a state law matter -- into federal crimes. And this policy shift -- criminalizing and federalizing -- results from the determinations of prosecutors and judges, and not from Congress.

For more of this comment, see Theft of Trade Secrets Brings Federal Conviction on Loyola Law School's faculty blog, Summary Judgments.