Predatory Innovation

Sophie Lawrance of Bristows has written a post on the US Department of Justice investigation into high frequency trading, a practice most recently brought into public view by Michael Lewis’s book Flash Boys.

In addition to saying nice things about this blog, Sophie drew my attention to the US Ninth Circuit Allied Orthopedic case which, although it came out a few months before my publication deadline for Competition Law and Regulation of Technology Markets, I’m afraid I missed at the time.

A Per Se Test for Legality

It’s an interesting case: the Ninth Circuit applied a per se legality test to issues of product redesign, an approach which was roundly – and rightly – criticised in this article by some very savvy tech lawyers (Jacobson, Sher and Holman).

My book has some other cases of predatory innovation where per se legality would clearly have led to the wrong results: Bard v M3, for example, is a particularly interesting US case, at least for EU lawyers. A manufacturer of surgical syringe guns redesigned its guns so that competitor needles would no longer work. The product redesign replaced the need for behavioural conduct of the kind employed by Hilti in the EU case involving nail guns and nails.

But a Balancing Test is Better

Overall, I can’t better the conclusion of the above article criticising Allied Orthopedic:

“While innovation is appropriately granted deference under the antitrust laws because of its ability to generate significant procompetitive benefits, courts must be wary of anticompetitive conduct dressed up as “innovation” that harms competition while providing no material benefit to consumers. When confronted with allegations of predatory innovation, courts should apply the D.C. Circuit’s consumer welfare balancing test in Microsoft, and not the per se rule protecting redesign established by the Ninth Circuit in Allied Orthopedic. While other tests also exist, such as the “profit sacrifice test” and the “no economic sense test,” both suffer from encouraging either over- or underenforcement. The Microsoft test applies a time-tested approach to ensuring that the focus of the inquiry is appropriately on consumer welfare, and thus should be applied to ensure that the significant potential benefits of innovation are appropriately weighed against any alleged competitive harms.”