The 1975 Xerox consent decree: Ancient artifacts and current tensions

Antitrust Law Journal

Volumn 68, Issue 3, 2001, Pages 967-989

  Tom, Willard K ^a  

^a NONE

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EID: 0348017018     PISSN: 00036056     EISSN: None     Source Type: Journal    
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References (91)

1. See Xerox Corp., 86 F.T.C. 364 (1975).
2. See Complaint, Xerox Corp., Docket No. 8909, reprinted in Xerox Corp., 86 F.T.C. 364, 364-68 (1975) [hereinafter Complaint].
3. See id. ¶¶ 12-17.
4. See Decision & Order, Xerox Corp., Docket No. 8909, reprinted in Xerox Corp., 86 F.T.C. 364, 369-86 (1975) [hereinafter Order].
5. See id. Part IV.A.
6. 463 F. Supp. 983 (D. Conn. 1978), remanded, 645 F.2d 1195, 1198-99 (2d Cir. 1981).
7. 15 U.S.C. §13(a).
8. The antitrust analyses applied to these types of claims have become much more similar. Compare Tampa Elec. Co. v. Nashville Coal Co., 365 U.S. 320, 328 (1961) (analysis of market foreclosure central factor in examining exclusive dealing arrangement) with Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 11-18 (1984) (analysis of defendant's market share and market power central to examination of tying claim).
9. See U.S. Department of Justice and Federal Trade Commission, Antitrust Guidelines for the Licensing of Intellectual Property § 5.5 (1995), reprinted in 4 Trade Reg. Rep. (CCH) ¶ 13,132 [hereinafter IP Guidelines] (contrasting procompetitive benefits of cross-licensing arrangements that integrate complementary technologies or clear blocking positions with arrangements that diminish competition among entities that would have been competitors in the absence of the cross-license).
10. See Complaint, supra note 2, ¶ 12(c).
11. See id. ¶¶ 12(a), (b), (d), (f), (h).
12. For a discussion of this subject, see, e.g., U.S. Department of Justice, Antitrust Enforcement Guidelines for International Operations, Case 10, text at n.258 (1988) [hereinafter 1988 Guidelines], reprinted in 4 Trade Reg. Rep. (CCH) ¶ 13,109 (royalty based on licensee's use of complementary input or on sale of downstream product); Willard K. Tom & Joshua A. Newberg, Antitrust and Intellectual Property: From Separate Spheres to Unified Field, 66 ANTITRUST L.J. 167, 210-12 (1997). In the intellectual property area, the 1988 Guidelines have been superseded by the IP Guidelines, supra note 9, but many of the principles of the 1988 Guidelines have been carried over into the IP Guidelines. See Richard J. Gilbert, The 1995 Antitrust Guidelines for the Licensing of Intellectual Property: New Signposts for the Intersection of Intellectual Property and the Antitrust Laws, Address at the ABA Section of Antitrust Law Spring Meeting (Apr. 6, 1995) ("The new Guidelines share the core principles expressed in the section on technology licensing in the U.S. Department of Justice 1988 Antitrust Enforcement Guidelines for International Operations.").
13. For a discussion of this subject, see, e.g., U.S. Department of Justice, Antitrust Enforcement Guidelines for International Operations, Case 10, text at n.258 (1988) [hereinafter 1988 Guidelines], reprinted in 4 Trade Reg. Rep. (CCH) ¶ 13,109 (royalty based on licensee's use of complementary input or on sale of downstream product); Willard K. Tom & Joshua A. Newberg, Antitrust and Intellectual Property: From Separate Spheres to Unified Field, 66 ANTITRUST L.J. 167, 210-12 (1997). In the intellectual property area, the 1988 Guidelines have been superseded by the IP Guidelines, supra note 9, but many of the principles of the 1988 Guidelines have been carried over into the IP Guidelines. See Richard J. Gilbert, The 1995 Antitrust Guidelines for the Licensing of Intellectual Property: New Signposts for the Intersection of Intellectual Property and the Antitrust Laws, Address at the ABA Section of Antitrust Law Spring Meeting (Apr. 6, 1995) ("The new Guidelines share the core principles expressed in the section on technology licensing in the U.S. Department of Justice 1988 Antitrust Enforcement Guidelines for International Operations.").
14. DAVID T. KEARNS & DAVID A. NADLER, PROPHETS IN THE DARK 34 (1992) [hereinafter PROPHETS].
15. 14See 1988 Guidelines, supra note 12, Case 10, text at n.258 (by metering differences in demand among different users, "the licensor may be able to disseminate its technology more widely than if it had to charge a fixed royalty") ; F.M. SCHERER, INDUSTRIAL MARKET STRUCTURE AND ECONOMIC PERFORMANCE 320-21 (2d ed. 1980).
16. As Kearns observed: The xerography development costs were mounting to stupendous levels. Between 1947 and 1960 [when the 914 copier was commercially introduced], [Xerox] exhausted about seventy-five million dollars on xerography, far more than it earned during those years. To keep up with these staggering expenses, it had to borrow heavily as well as try to sell newly issued shares of its stock to anyone who would purchase them. To say the least, it was not an obvious buy.... Meanwhile, Wilson and other company executives agreed to accept the bulk of their pay in stock rather than cash. Some of them made still further sacrifices. They lent the company money out of their personal savings accounts and even offered up the mortgages on their houses. PROPHETS, supra note 13, at 25.
17. See William F. Baxter, Comment, in ROBERT D. ANDERSON & NANCY T. GALLINI, COMPETITION POLICY AND INTELLECTUAL PROPERTY RIGHTS IN THE KNOWLEDGE-BASED ECONOMY 393, 394 (1998); see also Tom & Newberg, supra note 12, at 211. In theory, the output-expanding benefits of price discrimination could be achieved by compelling the monopolist to sell outright at some price, using the option of metered pricing to expand output to less intensive users who would not buy at that price. Such a solution would have serious practical difficulties, since the monopolist would have an incentive to set the sales price well above the profit-maximizing price, recapturing the lost sales revenues by leasing to those customers instead. The court or agency would therefore have to function as a price regulator, specifying the price at which the monopolist would be required to sell. More importantly, such a solution would capture only the static benefits of price discrimination. The scheme would effect a wealth transfer from the seller to intensive users of the product (or equivalently, prevent a wealth transfer to the seller from intensive users of the product). But such a wealth transfer (or prevention of transfer) would run counter to the very basis of the patent system, which is to reward inventors and thereby create an incentive for further invention. As Professor Kaplow has observed, we want a system that maximizes the reward to the patentee while minimizing the deadweight social loss that results from monopoly pricing. See Louis Kaplow, The Patent-Antitrust Intersection: A Reappraisal, 97 HARV. L. REV. 1813, 1829-31 (1984) (devising a "ratio test" that would maximize the ratio of patentee reward to monopoly loss). Consequently, price discrimination - which increases the patentee's reward through transfers of consumers' to producers' surplus, while decreasing, or at least not significantly increasing, deadweight loss - is generally desirable (all else equal) in the patent context. See id. at 1873-78 (noting, however, the potential for disproportionately high rewards, distributional and equitable implications, or adverse primary or secondary line effects).
18. See William F. Baxter, Comment, in ROBERT D. ANDERSON & NANCY T. GALLINI, COMPETITION POLICY AND INTELLECTUAL PROPERTY RIGHTS IN THE KNOWLEDGE-BASED ECONOMY 393, 394 (1998); see also Tom & Newberg, supra note 12, at 211. In theory, the output-expanding benefits of price discrimination could be achieved by compelling the monopolist to sell outright at some price, using the option of metered pricing to expand output to less intensive users who would not buy at that price. Such a solution would have serious practical difficulties, since the monopolist would have an incentive to set the sales price well above the profit-maximizing price, recapturing the lost sales revenues by leasing to those customers instead. The court or agency would therefore have to function as a price regulator, specifying the price at which the monopolist would be required to sell. More importantly, such a solution would capture only the static benefits of price discrimination. The scheme would effect a wealth transfer from the seller to intensive users of the product (or equivalently, prevent a wealth transfer to the seller from intensive users of the product). But such a wealth transfer (or prevention of transfer) would run counter to the very basis of the patent system, which is to reward inventors and thereby create an incentive for further invention. As Professor Kaplow has observed, we want a system that maximizes the reward to the patentee while minimizing the deadweight social loss that results from monopoly pricing. See Louis Kaplow, The Patent-Antitrust Intersection: A Reappraisal, 97 HARV. L. REV. 1813, 1829-31 (1984) (devising a "ratio test" that would maximize the ratio of patentee reward to monopoly loss). Consequently, price discrimination -which increases the patentee's reward through transfers of consumers' to producers' surplus, while decreasing, or at least not significantly increasing, deadweight loss - is generally desirable (all else equal) in the patent context. See id. at 1873-78 (noting, however, the potential for disproportionately high rewards, distributional and equitable implications, or adverse primary or secondary line effects).
19. See William F. Baxter, Comment, in ROBERT D. ANDERSON & NANCY T. GALLINI, COMPETITION POLICY AND INTELLECTUAL PROPERTY RIGHTS IN THE KNOWLEDGE-BASED ECONOMY 393, 394 (1998); see also Tom & Newberg, supra note 12, at 211. In theory, the output-expanding benefits of price discrimination could be achieved by compelling the monopolist to sell outright at some price, using the option of metered pricing to expand output to less intensive users who would not buy at that price. Such a solution would have serious practical difficulties, since the monopolist would have an incentive to set the sales price well above the profit-maximizing price, recapturing the lost sales revenues by leasing to those customers instead. The court or agency would therefore have to function as a price regulator, specifying the price at which the monopolist would be required to sell. More importantly, such a solution would capture only the static benefits of price discrimination. The scheme would effect a wealth transfer from the seller to intensive users of the product (or equivalently, prevent a wealth transfer to the seller from intensive users of the product). But such a wealth transfer (or prevention of transfer) would run counter to the very basis of the patent system, which is to reward inventors and thereby create an incentive for further invention. As Professor Kaplow has observed, we want a system that maximizes the reward to the patentee while minimizing the deadweight social loss that results from monopoly pricing. See Louis Kaplow, The Patent-Antitrust Intersection: A Reappraisal, 97 HARV. L. REV. 1813, 1829-31 (1984) (devising a "ratio test" that would maximize the ratio of patentee reward to monopoly loss). Consequently, price discrimination - which increases the patentee's reward through transfers of consumers' to producers' surplus, while decreasing, or at least not significantly increasing, deadweight loss - is generally desirable (all else equal) in the patent context. See id. at 1873-78 (noting, however, the potential for disproportionately high rewards, distributional and equitable implications, or adverse primary or secondary line effects).
20. See, e.g., Willard K. Tom et al., Anticompetitive Aspects of Market-Share Discounts and Other Incentives to Exclusive Dealing, 67 ANTITRUST L.J. 615, 629 (2000); Tom & Newberg, supra note 12, at 208-10, 212.
21. See, e.g., Tom & Newberg, supra note 12, at 212-14.
22. Package leasing may be a somewhat different story. If, for example, Xerox had unquestioned dominance of high-end machines but was unable to field a low-end machine of equivalent quality and price to those of new upstarts, the low end of the market could give a foothold to those entrants. Over time, improvements in the sophistication of the low-end technology could give it the capability to serve high-end customers as well. This could pose a serious long-term threat to Xerox. See generally CLAYTON M. CHRISTENSEN, THE INNOVATOR'S DILEMMA (1997). If the purchasers of the high-end machines were also the major purchasers of the low-end machines, package leasing could prevent the entrants from securing enough customers to be viable in either of two senses: (1) the entrants might be unable to reach minimum viable scale or (2) the entrants might be unable to generate funds internally for innovation, and those funds might be unavailable in capital markets because of information asymmetries. However, this scenario does not seem particularly plausible either, given that the most likely customers of the low-end machines would be low-volume customers who would not be in the market for high-end machines.
23. See generally Tom & Newberg, supra note 12.
24. Complaint, supra note 2, ¶ 14(e).
25. IP Guidelines, supra note 12, ¶ 3.3.
26. See id.; see also Agreement Containing Consent Order to Cease and Desist, Summit Technology, Inc., & VISX, Inc., Docket No. 9286 (Aug. 21, 1998), available at http://www.ftc.gov/os/1998/9808/d09286viagr.htm.
27. In addition, although one would not be able to tell from the Complaint whether potential procompetitive benefits of cross-licenses were considered, one might hesitate to challenge a cross-license today until one was satisfied that those benefits were not present or were outweighed by anticompetitive effects. Cross-licenses are procompetitive to the extent that they integrate complementary technologies, reduce transaction costs, clear blocking positions, and avoid costly infringement litigation. See IP Guidelines, supra note 12, ¶ 5.5.
28. See Complaint, supra note 2, ¶¶ 14(f)-(h), (j).
29. IP Guidelines, supra note 12, ¶ 2.3.
30. See id. ¶ 3.4 Example 7.
31. See Complaint, supra note 2, ¶¶ 14(a)-(c), (i), 15. The other two allegations involved product preannouncements and disparagement of competitors. See id. ¶¶ 13(e), (g).These continue to be recognized as acts of monopolization, see ABA SECTION OF ANTITRUST LAW, ANTITRUST LAW DEVELOPMENTS 285-90 (4th ed. 1997), although distinguishing them from honest competition in particular factual circumstances is not always an easy exercise and occasionally generates spirited debate. See generally United States v. Microsoft Corp., Civ. No. 94-1564 (SS) (D.D.C.); Response of the United States to Public Comments Concerning the Proposed Final Judgment and Notice of Hearing, 59 Fed. Reg. 59,426 (1994).
32. See Complaint, supra note 2, ¶¶ 14(a)-(c), (i), 15. The other two allegations involved product preannouncements and disparagement of competitors. See id. ¶¶ 13(e), (g).These continue to be recognized as acts of monopolization, see ABA SECTION OF ANTITRUST LAW, ANTITRUST LAW DEVELOPMENTS 285-90 (4th ed. 1997), although distinguishing them from honest competition in particular factual circumstances is not always an easy exercise and occasionally generates spirited debate. See generally United States v. Microsoft Corp., Civ. No. 94-1564 (SS) (D.D.C.); Response of the United States to Public Comments Concerning the Proposed Final Judgment and Notice of Hearing, 59 Fed. Reg. 59,426 (1994).
33. See Part II, infra.
34. That is, to the extent that Rank, and Rank Xerox, could never have been in the xerography business without a license of Xerox's patents, it undoubtedly would have been lawful if Xerox had simply set up Rank Xerox as a wholly or majority owned subsidiary in the first place.
35. SCM Corp. v. Xerox Corp., 645 F.2d 1195, 1198-99 (2d Cir. 1981).
36. See IP Guidelines, supra note 12, ¶ 4.1.2. The IP Guidelines explain that: The antitrust principles that apply to a licensor's grant of various forms of exclusivity to and among its licensees are similar to those that apply to comparable vertical restraints outside the licensing context, such as exclusive territories and exclusive dealing. However, the fact that intellectual property may in some cases be misappropriated more easily than other forms of property may justify the use of some restrictions that might be anticompetitive in other contexts. Id.
37. See IP Guidelines, supra note 12, ¶ 4.1.2. The IP Guidelines explain that: The antitrust principles that apply to a licensor's grant of various forms of exclusivity to and among its licensees are similar to those that apply to comparable vertical restraints outside the licensing context, such as exclusive territories and exclusive dealing. However, the fact that intellectual property may in some cases be misappropriated more easily than other forms of property may justify the use of some restrictions that might be anticompetitive in other contexts. Id.
38. See, e.g., Richard Steuer, Exclusive Dealing in Distribution, 69 CORNELL L. REV. 101, 124 (1983); Lester Telser, Why Should Manufacturers Want Free Trade?, 3 J.L. & ECON. 86 (1960); Howard P. Marvel, Exclusive Dealing, 25 J.L. & ECON. 1 (1982).
39. See, e.g., Richard Steuer, Exclusive Dealing in Distribution, 69 CORNELL L. REV. 101, 124 (1983); Lester Telser, Why Should Manufacturers Want Free Trade?, 3 J.L. & ECON. 86 (1960); Howard P. Marvel, Exclusive Dealing, 25 J.L. & ECON. 1 (1982).
40. See, e.g., Richard Steuer, Exclusive Dealing in Distribution, 69 CORNELL L. REV. 101, 124 (1983); Lester Telser, Why Should Manufacturers Want Free Trade?, 3 J.L. & ECON. 86 (1960); Howard P. Marvel, Exclusive Dealing, 25 J.L. & ECON. 1 (1982).
41. See PROPHETS, supra note 13, at 25.
42. See Tracy R. Lewis & Dennis A. Yao, Symposium on Post- Chicago Economics: Some Reflections on the Antitrust Treatment of Intellectual Property, 63 ANTITRUST L.J. 603 (1995).
43. SCM Corp., 645 F.2d at 1197.
44. See id. at 1208.
45. See SCM Corp., 463 F. Supp. at 990-91.
46. See id. at 1020.
47. See SCM Corp., 645 F.2d at 1197.
48. SCM Corp., 463 F. Supp. at 1001.
49. See SCM Corp., 645 F.2d at 1205-11.
50. See, e.g., id. at 1208; SCM Corp., 463 F. Supp. at 1002.
51. See Baxter Int'l Inc., FTC No. 971-0002, 62 Fed. Reg. 408 (Jan. 3, 1997); Upjohn Co., 5 Trade Reg. Rep. (CCH) ¶ 23, 914 (Feb. 8, 1996); Hoechst AG, 5 Trade Reg. Rep. (CCH) ¶ 23,895 (Dec. 5, 1995); Glaxo, pic., 5 Trade Reg. Rep. (CCH) ¶ 23,784 (June 14, 1995); American Home Prods., 5 Trade Reg. Rep. (CCH) ¶ 23,712 (Feb. 14, 1995), reopened and modified, 5 Trade Reg. Rep. (CCH) ¶ 23,996 (Jan. 16, 1996); cf. Roche Holdings, Ltd. 113 F.T.C. 1086 (1990); Boston Scientific, FTC No. C-3573 (Consent Order, Apr. 28, 1995); Wright Medical Technology, Inc., File No. 951-0015 (Consent Order, Dec. 8, 1994); American Home Products Corp., File No. 941-0116 (Consent Order, Nov. 10, 1994).
52. For the Second Circuit's expression of that concern, see SCM Corp., 645 F.2d at 1208.
53. See IP Guidelines, supra note 12, ¶ 3.3.
54. Id. ¶ 2.0.
55. See generally Tom & Newberg, supra note 12, at 170-73, 187-89.
56. PROPHETS, supra note 13, at 63, 67.
57. Id. at 68.
58. Id. at 123.
59. Id. at 274-75.
60. Roundtable Discussion on Competition Policy, Intellectual Property and Innovation Markets, in ANDERSON & GALLINI, supra note 16, at 448-49 (remarks of Professor F.M. Scherer, chief economist at the Federal Trade Commission from 1974-1976) [hereinafter Roundtable Discussion].
61. Roundtable Discussion on Competition Policy, Intellectual Property and Innovation Markets, in ANDERSON & GALLINI, supra note 16, at 448-49 (remarks of Professor F.M. Scherer, chief economist at the Federal Trade Commission from 1974-1976) [hereinafter Roundtable Discussion].
62. The effects, of course, have classically included inducing lethargy on the part of the monopolist. "Many people believe that possession of unchallenged economic power deadens initiative, discourages thrift and depresses energy; that immunity from competition is a narcotic, and rivalry is a stimulant, to industrial progress; that the spur of constant stress is necessary to counteract an inevitable disposition to let well enough alone." United States v. Aluminum Co. of Am., 148 F.2d 416, 427 (2d Cir. 1945) (L. Hand, J.) (Alcoa).
63. Id. at 430 ("The successful competitor, having been urged to compete, must not be turned upon when he wins ...."); Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263,273 (2d Cir. 1979) ("Such a wooden rule, it was feared, might also deprive the leading firm in an industry of the incentive to exert its best efforts. Further success would yield not rewards but legal castigation. The antitrust laws would thus compel the very sloth they were intended to prevent. We must always be mindful lest the Sherman Act be invoked perversely in favor of those who seek protection against the rigors of competition.").
64. Roundtable Discussion, supra note 53, at 449 (remarks of Professor William Baxter, former Assistant Attorney General, Antitrust Division, U.S. Department of Justice).
65. Id at 448 (Scherer).
66. See Thomas G. Krattenmaker & Steven C. Salop, Anticompetitive Exclusion: Raising Rivals' Costs to Achieve Power over Price, 96 YALE L.J. 209, 236-37 (1986).
67. See, e.g., Kobe, Inc. v. Dempsey Pump Co., 198 F.2d 416 (10th Cir.) (monopolization claim); Automated Bldg. Components, Inc. v. Trueline Truss Co, Inc., 318 F. Supp. 1252 (D. Or. 1970) (unlawful acquisition claim).
68. See generally Daniel L. Rubinfeld, Econometrics in the Courtroom, 85 COLUM. L. REV. 1048, 1051 (1985) ("Type 1 errors involve the cost of concluding that an activity was illegal ... when in fact it was not. Type 2 errors involve the cost of wrongly concluding that an activity was not illegal, when in fact it was.") (citations omitted). The total cost of a Type 1 or Type 2 error is affected not only by the seriousness of one or another consequence, but also by number of such errors likely to be produced by any particular decisional rule. That number, in turn, is a function not only of the error rate of a particular test, but also of the frequency of positives and negatives in the population. See 283 SCIENTIFIC AMERICAN No. 4, at 82-87 (Oct. 2000). The sheer volume of inventive and patenting activity that could be discouraged by Type 1 errors must be vastly greater than the relatively few opportunities for successful predatory patenting strategies that might be left unscathed by Type 2 errors. Thus, despite the fact that Type 2 errors may result in dynamic, not merely static, harm, see Tom & Newberg, supra note 12, at 198-203, it would be very difficult to attack predatory patenting without doing net harm.
69. See generally Daniel L. Rubinfeld, Econometrics in the Courtroom, 85 COLUM. L. REV. 1048, 1051 (1985) ("Type 1 errors involve the cost of concluding that an activity was illegal ... when in fact it was not. Type 2 errors involve the cost of wrongly concluding that an activity was not illegal, when in fact it was.") (citations omitted). The total cost of a Type 1 or Type 2 error is affected not only by the seriousness of one or another consequence, but also by number of such errors likely to be produced by any particular decisional rule. That number, in turn, is a function not only of the error rate of a particular test, but also of the frequency of positives and negatives in the population. See 283 SCIENTIFIC AMERICAN No. 4, at 82-87 (Oct. 2000). The sheer volume of inventive and patenting activity that could be discouraged by Type 1 errors must be vastly greater than the relatively few opportunities for successful predatory patenting strategies that might be left unscathed by Type 2 errors. Thus, despite the fact that Type 2 errors may result in dynamic, not merely static, harm, see Tom & Newberg, supra note 12, at 198-203, it would be very difficult to attack predatory patenting without doing net harm.
70. For example, Denmark, Portugal, and Spain require that a patent holder use its patent in the respective country not more than three years from the issuance of the patent or four years from the filing of the patent application. See INTERNATIONAL PATENT LITIGATION: A COUNTRY-BY-COUNTRY ANALYSIS §§ DK:12, PT:11,ES:6-7 (Michael N. Meller ed., 1999). Failure to use a patent within these limits may result in a compulsory license being awarded to a potential infringer. See id.
71. For example, Denmark, Portugal, and Spain require that a patent holder use its patent in the respective country not more than three years from the issuance of the patent or four years from the filing of the patent application. See INTERNATIONAL PATENT LITIGATION: A COUNTRY-BY-COUNTRY ANALYSIS §§ DK:12, PT:11,ES:6-7 (Michael N. Meller ed., 1999). Failure to use a patent within these limits may result in a compulsory license being awarded to a potential infringer. See id.
72. See, e.g., 2 PHILLIP E. AREEDA & HERBERT HOVENKAMP, ANTITRUST LAW ¶ 312f (rev. ed. 1995) [hereinafter AREEDA & HOVENKAMP] ("There are important practical differences between criminal and civil suits, treble damage actions and equity suits, and between equitable suits initiated by the government and those initiated by private parties. In a few types of cases, these differences are sufficient to warrant the application of different substantive rules."); id. ¶ 345 ("Because it controls future behavior rather than punishing past acts, the equity action has proved an admirable vehicle for the expansion and development of antitrust law."); cf. 3 AREEDA & HOVENKAMP, supra, ¶ 651d at 79 (rev. ed. 1997) ("The FTC Act was clearly conceived as a supplement to the Sherman Act, a vehicle for evolving, through administrative expertness, prohibitions of conduct not formerly thought unlawful or contrary to good business morals."); 2 AREEDA & HOVENKAMP, supra, ¶ 307c at 25 ("The Commission should feel free to 'enjoin' any unjustified behavior that tends to impair competition and is capable of being differentiated adequately from permissible behavior."). Applying different substantive standards is particularly appropriate in situations in which the reluctance to find damage liability under the Sherman Act springs from concerns about second-guessing and retrospectively punishing behavior that was within the bounds of reasonableness at the time the business person was called upon to decide on the behavior. Cf. American Motor Inns v. Holiday Inns, 521 F.2d 1230, 1248, 1249 (3d Cir. 1975) (test is not whether the conduct is the "least restrictive alternative," but whether it is reasonable).
73. See, e.g., 2 PHILLIP E. AREEDA & HERBERT HOVENKAMP, ANTITRUST LAW ¶ 312f (rev. ed. 1995) [hereinafter AREEDA & HOVENKAMP] ("There are important practical differences between criminal and civil suits, treble damage actions and equity suits, and between equitable suits initiated by the government and those initiated by private parties. In a few types of cases, these differences are sufficient to warrant the application of different substantive rules."); id. ¶ 345 ("Because it controls future behavior rather than punishing past acts, the equity action has proved an admirable vehicle for the expansion and development of antitrust law."); cf. 3 AREEDA & HOVENKAMP, supra, ¶ 651d at 79 (rev. ed. 1997) ("The FTC Act was clearly conceived as a supplement to the Sherman Act, a vehicle for evolving, through administrative expertness, prohibitions of conduct not formerly thought unlawful or contrary to good business morals."); 2 AREEDA & HOVENKAMP, supra, ¶ 307c at 25 ("The Commission should feel free to 'enjoin' any unjustified behavior that tends to impair competition and is capable of being differentiated adequately from permissible behavior."). Applying different substantive standards is particularly appropriate in situations in which the reluctance to find damage liability under the Sherman Act springs from concerns about second-guessing and retrospectively punishing behavior that was within the bounds of reasonableness at the time the business person was called upon to decide on the behavior. Cf. American Motor Inns v. Holiday Inns, 521 F.2d 1230, 1248, 1249 (3d Cir. 1975) (test is not whether the conduct is the "least restrictive alternative," but whether it is reasonable).
74. 463 F. Supp. at 1020.
75. Or exclusive licenses; see IP Guidelines, supra note 12, " 5.7.
76. See Ciba-Geigy, Ltd., 123 F.T.C. 842 (1997).
77. See Analysis to Aid Public Comment, Ciba-Geigy, Ltd., FTC No. 961-0055 (Dec. 17, 1996), available at http://www.ftc.gov/os/1996/9612/ciba.pdf.
78. The merged firm would still have an incentive to allow independent researchers to capture some of the gain from the invention, so that the supply of such potentially profitable inventions would not disappear entirely. But just as a firm in a static model would equilibrate marginal revenue to marginal cost, resulting in a deadweight loss from increased price and reduced output, so the merged firm here would demand more favorable terms in any joint venture or other contract, thus discouraging independent research at the margin.
79. See Decision & Order, Ciba-Geigy, Ltd., Part IX, reprinted in 123 F.T.C. 842 (1997).
80. Of course, there would be some disincentive at the margin. See discussion supra note 67.
81. See generally PROPHETS, supra note 13.
82. See Catherine Fazio & Scott Stern, Innovation Incentives, Compatibility, and Expropriation as an Antitrust Remedy: The Legacy of the Borland/Ashton-Tate Consent Decree, 68 ANTITRUST L.J. 45, 59 & n.52 (2000).
83. This issue has a variety of ramifications outside the "killer patent portfolio" context. In particular, the imprecision with which the boundaries and validity of many pieces of intellectual property can be determined often promotes the settlement of infringement litigation. These settlements, although often used as a means of avoiding the costly expense of litigating an infringement suit where the validity of a patent is arguably questionable, present additional antitrust concerns because they may eliminate competition that would have occurred either between the settling parties or from third parties if noninfringement or invalidity were proved. See, e.g., In re Cardizem CD Antitrust Litigation, 105 F. Supp. 2d 682, 695-707 (E.D. Mich. 2000) (granting plaintiff's motion for summary judgment and holding per se unlawful an agreement by an alleged infringer, in exchange for a payment of $40 million per year, not to commence commercial sale of a product pending adjudication of a patent infringement complaint on the merits); Biovail Corp. Int'l v. Hoechst Aktiengesellschaft, 49 F. Supp. 2d 750 (D.N.J. 1999) (denying defendant's motion to dismiss plaintiff's Section 1 and Section 2 claims with respect to the same settlement). But cf. Mylan Pharm., Inc. v. Shalala, 81 F. Supp. 2d 30, 42 & n.14 (D.D.C. 2000) (in dictum, citing the parties' settlement agreement with apparent approval).
84. See Complaint, supra note 2, ¶ 14(c).
85. See Carl Shapiro, Deputy Assistant Attorney General, Antitrust in Network Industries, Address Before American Law Institute and American Bar Ass'n 6-7 (text released Mar. 7, 1996), available at http://www.usdoj.gov/atr/public/speeches/shapir.mar.htm.
86. See Tom & Newberg, supra note 12, at 218-19, wherein the authors describe the following example: [S]uppose that, prior to [a] merger or pooling agreement, both the technology claimed by A's patents and the technology claimed by B's patents are required to produce a commercially marketable product. But each set of patents are also associated with a certain probability that either the other patent owner or a third party will be able to invent around the patent or have the necessary claims declared invalid. Thus, even without acquisition, pooling, or cross-licensing, the two parties are potentially horizontal competitors, and there is some possibility that a third party will be able to enter by obtaining a license from one and inventing around or challenging the patent claims of the other. The prices for licenses will reflect the perceived probabilities. After the acquisition or pooling, the probability of competition is greatly reduced. A potential entrant will have to invent around or declare invalid a much greater array of patents. This is potentially anticompetitive in the same way that a two-level entry problem is anticompetitive under Section 4.21 of the 1984 Merger Guidelines.
87. See Michael A. Heller & Rebecca S. Eisenberg, Can Patents Deter Innovation? The Anticommons in Biomedical Research, 280 SCIENCE 698, 698-701 (1998).
88. See id.
89. See, e.g., Seth Shulman, Software Patents Tangle the Web, 103 TECH. REV., Mar.-Apr. 2000, at 68.
90. See AT&T Corp. v. Excel Communications, Inc., 172 F.3d 1352, 1356 (Fed. Cir.), cert. denied, 120 S. Ct. 368 (1999); State Street Bank & Trust Co. v. Signature Fin. Group, Inc., 149 F.3d 1368, 1374-75 (Fed. Cir. 1998), cert. denied, 525 U.S. 1093 (1999).
91. It may be, of course, that other changes to patent law and policy could also improve social welfare in these situations. For a thought-provoking discussion of the merits of making it harder for patentees to get injunctions, preserving a measure of uncertainty and delay for patentees to get even monetary relief, and trading a degree of compulsory licensing in exchange for longer patent life, see Ian Ayres & Paul Klemperer, Limiting Patentees' Market Power Without Reducing Innovation Incentives: The Perverse Benefits of Uncertainty and Non-Injunctive Remedies, 97 MICH. L. REV. 985 (1999). Evaluating the merits or these or other suggestions is well beyond the scope of this article.