To License or Not to License?

Virgil Cojocaru is a JD candidate at Osgoode Hall Law School.

In a recent paper, Michael Jacobs and Alan Devlin discuss the debate in forcing monopolists to license their IP. By licensing their IP, monopolists would increase market innovation and create a competitive environment. However, these advantages come with a significant drawback. They can decrease the IP monopolists’ motivation to invent. Ultimately, this shows tension between the short term and long term. The advantages are short term gains, while the decreased incentive is a long term phenomenon.

This complicated picture has led to the European Court of First instance and Courts in the United States to part ways on the subject. The latter are against compulsory licensing, while the former view it as within their purview. Ideals also play a significant role. The Americans believe that a judge is not in a good position to determine the terms of a compulsory license. On the other hand, Europe is all about administrative frameworks and believes market forces cannot always be trusted. From an economic standpoint, neither approach is superior. To put it bluntly, we do not know which yields better results.

Setting context aside, why would the European Courts need to interfere? A dominant firm can charge monopoly prices for licensing its IP.  A lot of money could be made. By refusing to license, others could simply invent around the technology, eventually outclassing the monopolist. While there are risks with licensing, these can be reduced through license terms. Furthermore, by licensing, a dominant IP firm can ensure that its IP is firmly entrenched in the next generation of inventions.

Even so, there are reasons why a monopolistic firm might prefer, at least for now, not to license its IP. It could be due to an uncertainty over the monopoly price. Although the IP would have a certain value in one market, it might have an even greater price in a yet unexplored/unknown setting. Hence, a monopoly price set today would allow a competitor time to find another market where it could charge a higher price. Alternatively, the firm might know the right price to charge, but might consider that the benefits are outweighed by the costs, whether in terms of enforcing the license or perhaps any advantage its competitors might receive from licensing. Jacobs and Devlin use these arguments to come to the conclusion that the monopolistic firm is in the best position to determine whether or not it should grant licenses. Courts or government agencies should have little to do with it.