Optimal Legal Standards for Refusals to license Intellectual Property: an Welfare Based Analysis

We adopt a welfare-based, in contrast to a decision-theoretic, approach to the choice of legal standards for refusals to license IPs. We show that if the presumption of legality is not strong, the Commission’s prior in the Microsoft interoperability information case, Decision Theoretic considerations are not helpful for deciding which type of standard is superior. Indeed, a “low false-acquittals ” rule, such as the Microsoft rule, may well be equally effective to a “low false-convictions ” rule, such as the “exceptional circumstances ” rule, in reducing the costs of decision errors – contrary to what is suggested by Ahlborn, Evans and Padilla (2005). In this sense we agree with the analysis on this issue of Ritter (2005). However, we show that the latter rule may still be welfare superior to the former rule due to its welfare improving deterrence effects. We also show that, when the presumption of legality is strong, both these rules are likely to be welfare inferior to Per Se Legality (the standard chosen in Xerox), even though the “exceptional circumstances ” test may be superior in decision error terms