Bargaining over Loyalty

Daniel A. Crane

92 Texas L. Rev. 253

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Contracts between suppliers and customers frequently contain provisions rewarding the customer for exhibiting loyalty to the seller.  For example, suppliers may offer customers preferential pricing for buying a specified percentage of their requirements from the supplier or buying minimum numbers of products across multiple product lines.  Such loyalty-inducing contracts have come under attack on antitrust grounds because of their potential to foreclose competitors or soften competition by enabling tacit collusion among suppliers.  In this Article, Professor Crane defends loyalty inducement as a commercial practice.  Although it can be anticompetitive under some circumstances, rewarding loyal customers is usually procompetitive and price-reducing.  The two most severe attacks on loyalty discounting—that loyalty discounts are often disguised disloyalty penalties and that loyalty clauses soften competition—are unlikely to hold as a general matter.  Nor are arguments that customers only accede to loyalty inducements because of collective action problems generally true.  Dominant buyers who face few collective action problems frequently use loyalty commitments to leverage their buying power and obtain lower prices.

Beyond the Patents–Prizes Debate

Daniel J. Hemel & Lisa Larrimore Ouellette

92 Texas L. Rev. 303

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Intellectual property scholars have vigorously debated the merits of patents versus prizes for encouraging innovation, with occasional consideration of government grants.  But these are not the only options.  Perhaps most significantly, the patents-versus-prizes (or patents-versus-prizes-versus-grants) debate has largely neglected the role of tax incentives in innovation policy, despite the tens of billions of dollars spent globally on tax breaks for R&D activities each year.  How should R&D-related tax incentives figure into this debate, and what criteria are relevant for policymakers selecting among the various tools?

In this Article, Mr. Hemel and Ms. Ouellette develop a new taxonomy of innovation policies that allows direct comparisons among patents, prizes, grants, and tax incentives.  This taxonomy highlights the overlooked efficiency benefits of tax credits: like patents, they elicit privately held information about the expected value of R&D projects; like grants, they reduce the social-welfare costs of frictions in imperfect capital markets.  Mr. Hemel and Ms. Ouellette’s taxonomy also sheds new light on non-efficiency dimensions of R&D policy.  Grants, tax credits, and prizes generally require all taxpayers to subsidize R&D regardless of whether they use the resulting products, whereas the patent system imposes R&D costs primarily upon the consumers who purchase patented products.  In some contexts (e.g., life-saving drugs), the user-pays aspect of the patent system is difficult to defend on distributive justice grounds.  In other contexts (e.g., luxury goods), the user-pays aspect of the patent system may make patents normatively preferable in comparison to alternative incentive mechanisms.

Ultimately, optimal innovation policy will depend on a range of factors that are likely to vary across contexts.  For example, grants may be optimal where the government has a comparative advantage in evaluating potential projects, while tax credits may be optimal where potential innovators have private information about project prospects and limited access to outside capital.  Mr. Hemel and Ms. Ouellette argue for a pluralistic approach to innovation policy that incorporates each of the four main incentive mechanisms, and they provide examples of this pluralistic approach in practice.

Did Formalism Never Exist?

Alfred L. Brophy

92 Texas L. Rev. 383

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Brophy reviews Brian Z. Tamanaha’s Beyond the Formalist-Realist Divide: The Role of Politics in Judging. 

Aligning the Incentives to Disclosure of Relevant Information to the USPTO: How the Jury Instruction Standards in Microsoft Corp. v. i4i Could Aid the Examination Process

Michael C. Deane

92 Texas L. Rev. 439

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The United States Patent and Trademark Office (USPTO) relies on applicant-submitted disclosures to aid examiners in deciding whether a patent should issue from a patent application.  However, the legal doctrines governing those disclosures have not resulted in an ideal system.  The problem stems from the fact that both underdisclosure, resulting from no duty to actively search for prior art, and overdisclosure, resulting from the constantly shifting standards of inequitable conduct, have come to be legally accepted.

Mr. Deane proposes a rule change in the Manual of Patent Examining Procedure (MPEP) that harnesses the patent applicant’s private incentives related to disclosure as seen in the recent Supreme Court decision, Microsoft Corporation v. i4i Ltd. Partnership. That decision held that if the USPTO had no opportunity to review a prior art reference during prosecution, a defendant opposing a patent in litigation will be afforded a jury instruction that tells the jury of this fact and further suggests to the jury that the presumption of validity is harder to sustain if the USPTO had not considered a new reference presented by the defendant.

Mr. Deane proposes a system that attempts to tie this jury instruction to the practice of disclosure at the USPTO and deny a defendant opposing the patent the jury instruction for certain references, chosen and marked by the patent holder during the prosecution of the patent application.  Mr. Deane proposes that the USPTO could have an optional rule whereby patent applicants point out a certain number of prior art references (Mr. Deane proposes up to three) that the examiner will guarantee to scrutinize.  Those references, along with other references actually used by the examiner, as evidenced by the patent prosecution history, would not be subjected to the otherwise factually-determined jury instruction proffered by i4i.  Therefore, for those references the applicant chooses, the patent holder would reduce uncertainty in litigation, obtain summary judgment more easily, and facilitate pretrial settlement discussions.  By increasing the patent applicant’s incentives to disclose prior art through these procedural mechanisms, the USPTO can achieve a better system of disclosure that potentially results in shorter prosecution time and stronger patents that can survive litigation.

Buchanan v. Warley and the Limits of Substantive Due Process as Antidiscrimination Law

Brent M. Rubin

92 Texas L. Rev. 477

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In Buchanan v. Warley, the Supreme Court struck down a Louisville, Kentucky ordinance mandating residential segregation in the heart of the Lochner era.  Rather than rely on the Equal Protection Clause, as our modern antidiscrimination jurisprudence most often does, the Court employed substantive due process and found that the ordinance violated both African-Americans’ and whites’ right to own, use, and dispose of property.

Mr. Rubin begins by briefly reviewing the relevant libertarian and segregationist jurisprudence that came into conflict in Buchanan and outlining the history of residential segregation ordinances from their inception in Baltimore to the Supreme Court’s decision in Buchanan.  Mr. Rubin continues by examining several scholars’ perspectives on Buchanan.  Next, he presents his criticism on substantive due process as antidiscrimination law by arguing that while the libertarian thrust of the theory proved helpful in combatting discrimination via statute, its emphasis on contractual freedom advanced the restrictive covenants that perpetuated residential segregation.  Further, doctrinal weaknesses in substantive due process aided cities that enacted segregation ordinances after Buchanan.  Finally, Mr. Rubin attempts to sketch the foundations of a social history of Buchanan that examines its impact on and the role of socioeconomic class within the contemporary African-American community.  He argues that Buchanan and its emphasis on property rights dovetailed with certain African-American social institutions and forces, such that all but the direst legal needs of working-class blacks were left unattended.  In contrast, the legal and economic needs of middle- and upper-class blacks received a relatively greater deal of attention during this era.  Thus, Mr. Rubin concludes that the events following Buchanan show that while substantive due process can, in some cases, provide relief from discriminatory legislation, the doctrine as a whole has significant weaknesses as antidiscrimination law.

The Anti-Injunction Act and the Problem of Federal–State Jurisdictional Overlap

James E. Pfander & Nassim Nazemi

92 Texas L. Rev. 1

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Ever since Congress decided in 1789 to confer jurisdiction on lower federal courts over matters that the state courts could also hear, the nation has faced the problem of how to allocate decision-making authority between the two court systems.  Central to this body of concurrency law, the federal Anti-Injunction Act of 1793 (AIA) was enacted to limit the power of the federal courts to enjoin state court proceedings.  Justice Felix Frankfurter decisively shaped our understanding of those limits, concluding in Toucey v. New York Life Insurance Co. that the statute absolutely barred any such injunction.  Much of the law of federal–state concurrency has been predicated on Toucey’s account.

In this Article, Professor James E. Pfander and Ms. Nassim Nazemi offer a new account of the AIA that challenges prior interpretations.  Rather than a flat ban on injunctive relief, they show that the AIA was drafted against the backdrop of eighteenth century practice to restrict “original” federal equitable interference in ongoing state court proceedings but to leave the federal courts free to grant “ancillary” relief in the nature of an injunction to protect federal jurisdiction and to effectuate federal decrees.  It was this ancillary power that gave rise to the exceptions that Toucey decried and Congress restored in its 1948 codification.

Professor Pfander and Ms. Nazemi draw on their new account of the 1793 and 1948 versions of the Act to address current problems of jurisdictional overlap.  Among other things, they raise new questions about the much maligned RookerFeldman doctrine; offer a new statutory substitute for the judge-made doctrine of equitable restraint; and suggest new ways to harmonize such abstention doctrines as Burford and Colorado River.  Curiously, answers to these (and other) puzzles were hiding in the careful decision of the 1793 drafters to restrict only the issuance of “writs of injunction” and otherwise to leave federal equitable power intact.

Regulating Ex Post: How Law Can Address the Inevitability of Financial Failure

Iman Anabtawi & Steven L. Schwarcz

92 Texas L. Rev. 75

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Unlike many other areas of regulation, financial regulation operates in the context of a complex interdependent system.  The interconnections among firms, markets, and legal rules have implications for financial regulatory policy, especially the choice between ex ante regulation aimed at preventing financial failure and ex post regulation aimed at responding to that failure.  Regulatory theory has paid relatively little attention to this distinction.  Were regulation to consist solely of duty-imposing norms, such neglect might be defensible.  In the context of a system, however, regulation can also take the form of interventions aimed at mitigating the potentially systemic consequences of a financial failure.  Professors Anabtawi and Schwarcz show that this dual role of financial regulation implies that ex ante regulation and ex post regulation should be balanced in setting financial regulatory policy, and they offer guidelines for achieving that balance.

Self-Government and the Judicial Function

David Rudenstine

92 Texas L. Rev. 161

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Rudenstine reviews J. Harvie Wilkinson III’s Cosmic Constitutional Theory: Why Americans Are Losing Their Inalienable Right to Self-Governance.