Is innovation king at the antitrust agencies? The intellectual property guidelines five years later

Antitrust Law Journal

Volumn 69, Issue 1, 2001, Pages 43-86

  Gilbert, Richard J ^a   Tom, Willard K ^b  

^a UNIVERSITY OF CALIFORNIA   (United States)

^b NONE

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[No Author keywords available]

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EID: 0347032680     PISSN: 00036056     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (111)

1. U.S. Department of Justice and Federal Trade Commission Antitrust Guidelines for the Licensing of Intellectual Property (1995), reprinted in 4 Trade Reg. Rep. (CCH) ¶ 13,132 [hereinafter IP Guidelines].
2. Robert Solow first observed that traditional measures of capital and labor explained only a fraction of economic growth and concluded that technological progress was responsible for the remainder. See Robert M. Solow, Technical Change and the Aggregate Production Function, 39 REV. OF ECON. & STAT. 312 (1957). Denison concluded that advances in knowledge accounted for 28% of total U.S. economic growth over the period 1929-82 and more than half of the growth of national income per worker over that period. See Edward F. Denison, TRENDS IN AMERICAN ECONOMIC GROWTH 1929-1982 (1985). More recent estimates are consistent with these findings. See, e.g., CHARLES I. JONES, INTRODUCTION TO ECONOMIC GROWTH (1998).
3. Robert Solow first observed that traditional measures of capital and labor explained only a fraction of economic growth and concluded that technological progress was responsible for the remainder. See Robert M. Solow, Technical Change and the Aggregate Production Function, 39 REV. OF ECON. & STAT. 312 (1957). Denison concluded that advances in knowledge accounted for 28% of total U.S. economic growth over the period 1929-82 and more than half of the growth of national income per worker over that period. See Edward F. Denison, TRENDS IN AMERICAN ECONOMIC GROWTH 1929-1982 (1985). More recent estimates are consistent with these findings. See, e.g., CHARLES I. JONES, INTRODUCTION TO ECONOMIC GROWTH (1998).
4. Robert Solow first observed that traditional measures of capital and labor explained only a fraction of economic growth and concluded that technological progress was responsible for the remainder. See Robert M. Solow, Technical Change and the Aggregate Production Function, 39 REV. OF ECON. & STAT. 312 (1957). Denison concluded that advances in knowledge accounted for 28% of total U.S. economic growth over the period 1929-82 and more than half of the growth of national income per worker over that period. See Edward F. Denison, TRENDS IN AMERICAN ECONOMIC GROWTH 1929-1982 (1985). More recent estimates are consistent with these findings. See, e.g., CHARLES I. JONES, INTRODUCTION TO ECONOMIC GROWTH (1998).
5. For example, an increase in the rate of technological progress from 2% to 3% per year would offset a 5% reduction in economic welfare after 5.5 years, and would generate additional benefits after that time.
6. United States v. IBM Corp., Civil Action No. 69 (S.D.N.Y. filed Jan. 17, 1969).
7. Michael L. Katz & Carl Shapiro, Systems Competition and Network Effects, 8 J. ECON. PERSP. 93 (1994).
8. See, e.g., Carl Shapiro, Exclusivity in Network Industries, 7 GEO. MASON L. REV 1 (1999).
9. JOSEPH A. SCHUMPETER, CAPITALISM, SOCIALISM AND DEMOCRACY 81-106 (1942).
10. Among other things: (1) intellectual property is easier to misappropriate than other forms of property; (2) a patent grants the owner a power of exclusion that, in some respects, exceeds the powers that attach to tangible property; (3) the fixed costs are typically higher and the marginal costs lower than other forms of property; (4) to commercialize a product and earn a return, a larger number of complementary inputs with some degree of market power often must be brought together; and (5) the boundaries of intellectual property defy accurate survey to a much greater extent than do those of tangible property. Some implications of the last characteristic are discussed in Willard K. Tom, The 1975 Xerox Consent Decree: Ancient Artifacts and Current Tensions, 68 ANTITRUST L.J. 967, 987-89 (2001).
11. As stated by the IP Guidelines: "Intellectual property has important characteristics, such as ease of misappropriation, that distinguish it from many other forms of property. These characteristics can be taken into account by standard antitrust analysis, however, and do not require the application of fundamentally different principles." IP Guidelines §§ 2.0, 2.1.
12. See, e.g., MICHAEL PORTER, THE COMPETITIVE ADVANTAGE OF NATIONS (1990).
13. An example of the latter impact is United States v. General Motors, Civ. No. 93-530 (D.D.C. 1993) (innovation effects in markets where the parties are not actual or potential competitors).
14. According to the IP Guidelines, "[i]f a licensing arrangement may adversely affect competition to develop new or improved goods or processes, the Agencies will analyze such an impact either as a separate competitive effect in relevant goods or technology markets, or as a competitive effect in a separate innovation market." IP Guidelines § 3.2.3.
15. See Richard J. Gilbert & Steven C. Sunshine, Incorporating Dynamic Efficiency Concerns in Merger Analysis: The Use of Innovation Markets, 63 ANTITRUST L.J. 569 (1995).
16. See Robert J. Hoerner, Innovation Markets: New Wine in Old Bottles, 64 ANTITRUST L.J. 49 (1995); Richard T. Rapp, The Misapplication of the Innovation Market Approach to Merger Analysts, 64 ANTITRUST L.J. 19 (1995).
17. See Robert J. Hoerner, Innovation Markets: New Wine in Old Bottles, 64 ANTITRUST L.J. 49 (1995); Richard T. Rapp, The Misapplication of the Innovation Market Approach to Merger Analysts, 64 ANTITRUST L.J. 19 (1995).
18. December 20, 1995, available at http://www.ftc.gov/opa/1995/9512/jj.htm.
19. Id.
20. U.S. Dep't of Justice, Merger Guidelines (1984), reprinted in 4 Trade Reg. Rep. (CCH) ¶ 13,103.
21. These cases are (i) Boston Scientific Corporation, 119 F.T.C. 549 (1995); (ii) Hoechst AG, 120 F.T.C. 1010 (1995); (iii) ABB/Elsag Bailey Process Automation N.V., Dkt. No. C-3867 (complaint and settlement issued Jan. 11, 1999), complaint available at http:// www.ftc.gov/os/1999/9901/9910040cmp.htm; (iv) Zeneca Group plc/Astra AB, FTC File No. 991 0089 (complaint and settlement issued Mar. 25, 1999), complaint available at http://www.ftc.gov/os/1999/9903/zenecacmp.htm; (v) Hoechst AG/Rhone-Poulenc, C-3919 (complaint and settlement issued Dec. 7, 1999), complaint available at http:// www.ftc.gov/os/1999/9912/hoechstcmp.htm.
22. In some cases, it is difficult to make a confident judgment because the publicly available information is so sparse. In Monsanto/DeKalb, for example, we have only a press release on which to base a judgment because the Justice Department generally does not seek a consent decree when the relief it would seek has been fully implemented prior to the time a challenge would occur. Press Release, U.S. Dep't of Justice, Justice Department Approves Monsanto's Acquisition of DeKalb Genetics Corporation (Nov. 30, 1998), available at http://www.usdoj.gov/atr/public/press_releases/1998/2103.htm.
23. We say "in part" because in at least three of these cases, it appears that the merger would have elicited a challenge based on traditional goods market analysis with respect to at least some products, but the innovation analysis resulted in relief in markets that may otherwise have gone unchallenged.
24. See Sensormatic Elec. Corp., 119 F.T.C. 520 (1995); see also Analysis to Aid Public Comment, 60 Fed. Reg. 5428 (Jan. 27, 1995).
25. See Sensormatic Elec. Corp., 119 F.T.C. 520 (1995); see also Analysis to Aid Public Comment, 60 Fed. Reg. 5428 (Jan. 27, 1995).
26. Sensormatic, 119 F.T.C. at 522.
27. Id. at 523.
28. United States v. General Motors, Civil Action No. 93-530 (D.D.C. 1993). See Gilbert & Sunshine, supra note 15, at 587, for a discussion of the enforcement issues in this case.
29. 1984 Merger Guidelines § 4.11.
30. Roche Holding Ltd., 113 F.T.C. 1086 (1990) (market in which firms were far along in R&D, but no existing product). The case has been described as a "double potential competition" case. M. Howard Morse, The Limits of Innovation Markets, ANTITRUST & INTELL. PROP. (ABA. Intell. Prop. Comm. Newsl., Chicago, IL), Spring 2001, at 22, 23.
31. Roche Holding Ltd., 113 F.T.C. 1086 (1990) (market in which firms were far along in R&D, but no existing product). The case has been described as a "double potential competition" case. M. Howard Morse, The Limits of Innovation Markets, ANTITRUST & INTELL. PROP. (ABA. Intell. Prop. Comm. Newsl., Chicago, IL), Spring 2001, at 22, 23.
32. Glaxo plc, 119 F.T.C. 815, 816-17 (1995).
33. William J. Baer, Antitrust Enforcement and High-technology Markets, Address Before the ABA Sections of Business Law, Litigation, and Tort and Insurance Practice (Nov. 12, 1998), available at http://www.ftc.gov/speeches/other/ipat6.htm [hereinafter Baer, Antitrust Enforcement].
34. Press Release, FTC, Glaxo to Settle FTC Charges Will Divest Wellcome Assets to Consummate Merger (Mar. 16, 1995), available at http://www.ftc.gov/opa/predawn/F95/ glaxo-wellcome.htm.
35. Baer, Antitrust Enforcement, supra note 30.
36. Id.
37. 121 F.T.C. 44 (1996).
38. 123 F.T.C. 905 (1997).
39. 119 F.T.C. 217 (1995).
40. 121 F.T.C. at 45.
41. Id. at 46.
42. 119 F.T.C. 217, 219-20.
43. Ciba-Geigy, 123 F.T.C. 842, 843-45 (1997).
44. See supra note 28.
45. IP Guidelines § 3.2.3.
46. See Analysis to Aid Public Comment, Ciba-Geigy, at 6 (premerger, Ciba and Chiron "had the incentive and did act as rival centers from which others could obtain needed intellectual property rights"), available at http://www.ftc.gov/os/1996/9612/ciba.pdf; Sheila F. Anthony, Antitrust And Intellectual Property Law: From Adversaries to Partners, 28 AIPLA Q.J. 1, Winter 2000, available at http://www.ftc.gov/speeches/other/aipla.htm ("What the competitors lacked were the patent rights to complementary technologies that they previously were able to obtain either through Ciba or Sandoz, but which, absent the Commission's order, would have been monopolized post-merger."); Willard K. Tom, Licensing and Antitrust: Common Goals and Uncommon Problems, Address Before the American Conference Institute 9th National Conference on Licensing Intellectual Property (Oct. 12, 1998), available at http://www.ftc.gov/speeches/other/aciippub.htm ("As long as they can play one off against the other, the potential rewards are so great that it pays the firms to continue their research. Post-merger, however, the combined entity becomes a single bottleneck. Since the research firms can no longer play one off against the other, the terms on which they can partner with the combined entity change markedly for the worse.").
47. Another case during the relevant period, Monsanto/DeKalb, appears to address similar concerns. While we have only a press release to go on, because the parties implemented the remedy immediately and obviated the need for a consent decree, that release indicates that the Justice Department was concerned about two types of competing intellectual property: (1) patents on competing methods of corn transformation, and (2) patents on competing types of corn germplasm. In each case, the concern was that "[b]iotechnology developers wanting to introduce improvements in corn require [d] access" to such patents. Press Release, U.S. Dep't of Justice, Justice Department Approves Monsanto's Acquisition of Dekalb Genetics Corporation (Nov. 30, 1998), available at http://www.usdoj.gov/atr/ public/press_releases/1998/2103.htm.
48. Willard K. Tom & Joshua A. Newberg, Antitrust and Intellectual Property: From Separate Spheres to Unified Field, 66 ANTITRUST L.J. 167, 218-19 (1997).
49. IP Guidelines § 3.1 ("[A]ntitrust concerns may arise when a licensing arrangement harms competition among entities that would have been actual or likely potential competitors in a relevant market in the absence of the license ('entities in a horizontal relationship')" (footnote omitted)).
50. Tom, supra note 8, at 987-88.
51. Press Release, FTC, FTC Accord in Ciba Geigy/Sandoz Merger to Prevent Slowdown in Gene Therapy Development & Preserve Competition in Corn Herbicides, Flea-Control Markets (Dec. 17, 1996), available at http://www.ftc.gov/opa/1996/9612/ciba.htm.
52. United States v. Lockheed Martin and Northrop Grumman (D.D.C. Mar. 23, 1998) (Complaint), available at http://www.usdoj.gov/atr/cases/f1600/1609.htm.
53. The Department of Defense also opposed the merger. Complaint ¶ 7 (quoting Letter from William S. Cohen, Secretary of Defense, to Janet Reno, U.S. Attorney General (Mar. 23, 1998)).
54. Daniel L. Rubinfeld & John Hoven, Innovation and Antitrust Enforcement (Jan. 19, 1999) (unpublished manuscript forthcoming in edited volume by Cambridge University Press) (on file with the authors) (emphasis added). Rubinfeld was Chief Economist and Hoven was staff economist at the DOJ during the investigation of the proposed Lockheed/ Northrop merger.
55. Lockheed/Northrop had pronounced effects on the structure of existing goods markets and therefore may not belong on the list of mergers for which innovation concerns were central to the enforcement decision. We err on the side of over-inclusion because technology plays a particularly important role in weapons systems and Department of Defense procurement policies may constrain the price effects from mergers. If Lockheed/ Northrop does belong on the list of innovation cases, so may other defense-related mergers in the relevant time period. These include Lockheed/Loral, Lehman Brothers/L-3 Communications, and Raytheon/Hughes. See Lockheed Martin Corp., 122 F.T.C. 161 (1996); United States v. Lehman Brothers, Civil Action No.: 1:98CV00796 (D.D.C. filed Mar. 27, 1998) (Complaint); United States v. Raytheon, Civ. No.: 1:97CV02397, (D.D.C. filed Oct. 16, 1997) (Complaint), available at http://www.usdoj.gov/atr/cases/f7100/7132.htm. However, the agencies alleged substantial price effects in all of these mergers, as well as in Lockheed/Northrop.
56. Susan S. DeSanti & Dennis A. Yao, Innovation Issues Under the 1992 Merger Guidelines, 61 ANTITRUST L.J. 505 (1993).
57. Rubinfeld & Hoven, supra note 51, at 31.
58. Constance K. Robinson, Leap-Frog and Other Forms of Innovation: Protecting the Future for High-Tech and Emerging Industries Through Merger Enforcement, Address Before the American Bar Association (June 10, 1999), available at http://www.usdoj.gov/ atr/public/speeches/2482.htm.
59. One of the authors (Gilbert) consulted for the Department of Justice in the Microsoft case.
60. United States v. Microsoft, Civil Action No. 98-1232 (D.D.C. filed May 18, 1998) (Complaint), available at http://www.usdoj.gov/atr/cases/f1700/1763.htm. See Richard J. Gilbert and Michael L. Katz, An Economist's Guide to United States v. Microsoft (Univ. of California Working Paper 2001), for a more detailed discussion of the economic consequences of the alleged anticompetitive conduct in the Microsoft case.
61. IP Guidelines § 5.3 (footnotes omitted).
62. Id. § 5.4.
63. In markets for intellectual property, where the marginal cost is close to zero, there is some ambiguity about whether giving a product away for free constitutes pricing below cost. Consequently, the DOJ focused on other aspects of Microsoft's bundling strategy, including prohibiting computer manufacturers from uninstalling Microsoft's browser and engaging in other conduct that increased the cost to consumers of obtaining the Netscape browser.
64. Dell Computer Co., 121 F.T.C. 616 (1996), discussed infra at note 68 and accompanying text.
65. Recognizing that the issue was one of ensuring that consumers reaped the benefits of competition for the monopoly, rather than one of avoiding monopoly altogether, the DOJ explicitly conceded that charging a zero price for Internet Explorer was not anticompetitive in and of itself. See, e.g., Brief for Appellees United States and the State Plaintiffs at 63-64, United States v. Microsoft, Nos. 00-5212, 00-5213 (D.C. Cir. filed Jan 12, 2001) ("Had Microsoft stopped there, it would not have violated the antitrust laws.").
66. Mr. Tom's law firm represented Visa International in this litigation, although Mr. Tom was not personally involved. Because the matter remains in litigation as of this writing, Mr. Tom played no role in the drafting of this section.
67. United States v. Visa USA, Inc., Civ. No. 98-Civ.7076 (S.D.N.Y. Oct. 7, 1998).
68. See Zvi Griliches, The Search for R&D Spillovers, 94 SCANDINAVIAN J. ECON. 29 (1992); Charles Jones & John Williams, Measuring the Social Return to R&D, 113 Q.J. ECON. 1119 (1998).
69. See Zvi Griliches, The Search for R&D Spillovers, 94 SCANDINAVIAN J. ECON. 29 (1992); Charles Jones & John Williams, Measuring the Social Return to R&D, 113 Q.J. ECON. 1119 (1998).
70. See James J. Anton & Dennis A. Yao, Standard-Setting Consortia, Antitrust, and High-Technology Industries, 64 ANTITRUST L.J. 247 (1995).
71. Dell Computer Co., 121 F.T.C. 616, 617-18 (1996).
72. David A. Balto, Standard Setting in a Network Economy, Address Before Cutting Edge Antitrust, Law Seminars International (Feb. 17, 2000), available at http://www.ftc.gov/ speeches/other/standardsetting.htm.
73. Gilbert was an expert witness for Intel in this litigation and Tom was Deputy Director of the FTC's Bureau of Competition. This discussion avoids any judgment as to the underlying facts of the case, and concentrates only on the theoretical frameworks used by each side.
74. Intel Corp., FTC Dkt. No. 9288, (June 8, 1998) (Complaint).
75. Id. ¶¶ 13, 19, 29, 35.
76. Id. ¶ 39.
77. Complaint Counsel's Pretrial Brief at 42-44, Intel Corp., Dkt. 9288 (Feb. 25, 1999).
78. Intel Corporation's Trial Brief at 20-25, Intel Corp., Dkt. 9288 (Feb. 25, 1999).
79. Id. at 26.
80. Id. at 28-29.
81. Id. at 29.
82. IP Guidelines § 4.3.
83. Intel Corporation's Trial Brief at 32-34.
84. While disagreeing that its conduct interfered with the ability of computer manufacturers to differentiate their products, Intel noted that such differentiation could result in higher prices to consumers and lower economic welfare.
85. Intel Corporation's Trial Brief at 41-42.
86. Intel and Digital settled their patent dispute. Intel paid Digital a total of $1.6 billion in cash and product discounts. See Tom Davey, Digital Equipment Settles Patent Dispute with Intel, INFORMATION WK., Oct. 27, 1997, available at http://www.techweb.com/wire/news/ 1997/10/1022dispute.htm.
87. IP Guidelines § 2.1.
88. Id. § 3.1 (footnote omitted)
89. Supra note 8.
90. IP Guidelines § 5.5.
91. See, e.g., Sheila F. Anthony, Riddles and Lessons from the Prescription Drug Wars: Antitrust Implications of Certain Types of Agreements Involving Intellectual Property, Address Before ABA Antitrust and Intellectual Property Sections: The Crossroads Program (June 1, 2000), available at http://www.ftc.gov/speeches/anthony/sfip000601.htm, Thomas B. Leary, Antitrust Issues in Settlement of Pharmaceutical Patent Disputes, Address Before Sixth Annual Health Care Antitrust Forum (Nov. 3, 2000), available at http:// www.ftc.gov/speeches/leary/learypharma.htm.
92. See, e.g., Sheila F. Anthony, Riddles and Lessons from the Prescription Drug Wars: Antitrust Implications of Certain Types of Agreements Involving Intellectual Property, Address Before ABA Antitrust and Intellectual Property Sections: The Crossroads Program (June 1, 2000), available at http://www.ftc.gov/speeches/anthony/sfip000601.htm, Thomas B. Leary, Antitrust Issues in Settlement of Pharmaceutical Patent Disputes, Address Before Sixth Annual Health Care Antitrust Forum (Nov. 3, 2000), available at http:// www.ftc.gov/speeches/leary/learypharma.htm.
93. Hoechst Marion Roussel, Inc., FTC Dkt. No. 9293 (Complaint Mar. 16, 2000) (Consent Order accepted for public comment Apr. 2, 2001) (Agreement Containing Consent Order, available at http://www.ftc.gov/os/2001/04/hoechstagr.pdf).
94. Schering-Plough Corp., FTC Dkt. No. 9297 (Apr. 2, 2001 Complaint), available at http://www.ftc.gov/os/2001/04/scheringpart3cmp.pdf.
95. Brief of Federal Trade Commission as Amicus Curiae, American Bioscience, Inc. v. Bristol-Myers Squibb Co., Case No. CV-00-08577 WMB (AJWx) (C.D. Cal. Sept. 1, 2000), available at http://www.ftc.gov/os/2000/09/amicusbrief.pdf.
96. See Notice and Request for Comment, http://www.ftc.gov/os/2000/10/frngeneric-drugstudy.htm; http://www.ftc.gov/os/2001/02/v000014.htm.
97. Comment of the Staff of the Bureau of Competition and Policy Planning of the Federal Trade Commission, 64 Fed. Reg. 42,882 (Nov. 4, 1999).
98. Joel I. Klein, Cross-Licensing and Antitrust Law, Address Before the American Intellectual Property Law Ass'n (May 2, 1997), available at http://www.usdoj.gov/atr/public/ speeches/1123.htm.
99. To the extent that the judicial system would grant a preliminary injunction to prevent generic sales if the patent is likely to be valid, permitting the patentee to settle with the generic challenger may err too far in the direction of sustaining invalid patents. Note that similar arguments apply to suits where the issue is infringement rather than validity.
100. Answer to the Complaint, Aventis Pharmaceuticals Inc., Hoechst Marion Roussel, Inc., FTC Dkt. No. 9293 (Apr. 10, 2000).
101. Summit Technology, Inc., FTC Dkt. No. 9286 (Mar. 24, 1998) (Complaint), available at http://www.ftc.gov/os/1998/9803/summit.cmp.htm.
102. Summit Technology, Inc., FTC Dkt. No. 9286 (Feb. 23, 1999) (Agreement Containing Consent Order to Cease and Desist, available at http://www.ftc.gov/os/1999/9903/ d09286visxd%26o.htm).
103. VISX, Inc., FTC Dkt. No. 9286 (May 27, 1999) (Initial Decision), available at http:// www.ftc.gov/os/1999/9906/visxid.pdf. While the rejection was pending on appeal to the full Commission, the Patent and Trademark Office issued a reexamination certificate rejecting all of VISX's original patent claims but allowing 65 new claims that, in complaint counsel's view, rendered the fraud and inequitable conduct count against VISX moot. Complaint Counsel's Memorandum in Support of Motion to Dismiss the Complaint and in Response to VISX's Motion to Reopen the Record to Receive New Evidence, available at http://www.ftc.gov/os/adjpro/d9286/991201dismiss.pdf. Accordingly, complaint counsel moved for, and Commission ordered, dismissal of the complaint. Complaint Counsel's Motion to Dismiss the Complaint, available at http://www.ftc.gov/os/adjpro/d9286/ 991201dismiss.pdf; Order Reopening the Record and Dismissing the Complaint, available at http://www.ftc.gov/os/2001/02/summitvisxorder.htm (February 7, 2001).
104. Analysis, available at http://www.ftc.gov/os/1998/9808/d09286ana.htm (quoting IP Guidelines § 5.5).
105. Id. (quoting IP Guidelines § 5.5).
106. The dismissal of the fraud and inequitable conduct count raises an interesting question about the basis for this finding. The FTC's conclusion that Summit could have competed absent a license to the patents challenged in the fraud and inequitable conduct count could only have been based upon four possibilities: (1) Summit's technology did not infringe the patent, (2) Summit could have invented around the patent, (3) the patent was unenforceable due to fraud upon, or inequitable conduct before, the Patent and Trademark Office, or (4) the patent was invalid or unenforceable for other reasons. Complaint Counsel's Motion to Dismiss the Complaint casts some doubt upon (1), (2), and (3).
107. MPEG stands for Motion Picture Entertainment Group.
108. Business Review Letter from Joel I. Klein to Garrad R. Beeney (June 26, 1997), available at http://www.usdoj.gov/atr/public/busreview/1170.htm.
109. Business Review Letter from Joel I. Klein to Garrad R. Beeney (Dec. 16, 1998), available at http://www.usdoj.gov/atr/public/busreview/2121.htm.
110. IP Guidelines § 3.2.
111. Id. § 2.2.