Profit Neutrality in Licensing: The Boundary Between Antitrust Law and Patent Law

Intellectual Property, Competition Policy and Antitrust and Patents

Article Snapshot


Stephen M. Maurer and Suzanne Scotchmer


American Law and Economics Review, Vol. 8, No. 3, pp.476-522, 2006


This paper looks at how patent deals between firms affect competition.

Policy Relevance

Courts considering the legality of patent deals should adopt economic ideas to make cases more consistent and protect consumers.

Main Points

  • In most competition cases in the United States, courts use a “rule of reason,” deciding on a case-by-case basis if a business practice helps consumers more than it harms them.

  • In cases with patents, licensing deals are sometimes assessed using a rule of reason, but some licenses are always allowed. The cases are inconsistent. Always using a rule of reason might not help, because courts and agencies apply it inconsistently.

  • These three ideas makes sense in asking how patent licensing deals affect competition:
    • The just-reward principle means that profits should come from the patented innovation, not from a cartel or collusion.
    • The profit neutrality principle means that the owner of the patent should get the same profit even if he cannot manufacture the invention himself.
    • The minimalist principle that extra terms not needed for profit neutrality should be disallowed, because firms could use these as a sham to harm competition.

  • Sometimes, all the patent owner needs to give him proper incentives to innovate are simple per-unit royalties or fees. Price-setting can be harmful and is not necessary.

  • In other cases, depending on factors such as the cost of production, the patent owner might need to fix the prices of the products the licensee sells, offer an exclusive license, impose quality restrictions, or use royalties that vary with supply.

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