Optimal Legal Standards For Refusals To License Intellectual Property: A Welfare-Based Analysis

This article adopts a welfare-based, in contrast to a decision-theoretic (DT), approach to the choice of legal standards for refusals to license intellectual property. It is shown that if the presumption of legality is not strong, as was the European Commission's point of view in the Microsoft interoperability information case, DT considerations are not helpful for deciding which type of standard is superior. Indeed, a “low false-acquittals” rule, such as the Microsoft rule, may be equally effective as a “low false-convictions” rule, such as the “exceptional circumstances” rule, in reducing the costs of decision errors. However, it is also shown that the latter rule may well be welfare superior to the former rule because of its welfare-improving deterrence effects. Further, it is shown that when the presumption of legality is strong, both of 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.