Antitrust and intellectual property: From separate spheres to unified field

Antitrust Law Journal

Volumn 66, Issue 1, 1997, Pages 167-228

  Tom, Willard K ^a   Newberg, Joshua A ^a  

^a FEDERAL TRADE COMMISSION   (United States)

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EID: 21944452919     PISSN: 00036056     EISSN: None     Source Type: Journal    
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References (363)

1. United States v. Masonite Corp., 316 U.S. 265, 280 (1942).
2. U.S. Department of Justice and Federal Trade Commission Antitrust Guidelines for the Licensing of Intellectual Property (1995),
3. reprinted in 4 Trade Reg. Rep. (CCH) ¶ 13,132 [hereinafter 1995 Guidelines].
4. See, e.g., James B. Kobak, Jr., Running the Gauntlet: Antitrust and Intellectual Property Pitfalls on the Two Sides of the Atlantic, 64 ANTITRUST L.J. 341, 342-52 (1996);
5. Norman F. Rosen, Intellectual Property and the Antitrust Pendulum, 62 ANTITRUST L.J. 669 (1994);
6. Stephen A. Stack, Jr., Recent and Impending Developments in Copyright and Antitrust, 61 ANTITRUST L.J. 331 (1993);
7. Charles F. Rule, Patent-Antitrust Policy: Looking Back and Ahead, 59 ANTITRUST L.J. 729 (1991);
8. Gerald Sobel, The Antitrust Interface with Patents and Innovation, 53 ANTITRUST L.J. 681 (1984);
9. Stephen M. Hudspeth, Recent Developments in the Patent/Antitrust Interface - Response to a New Reality, 3 J.L. & COM. 35 (1983);
10. Joseph P. Griffin, Special Considerations Concerning International Patent and Know-How Licensing, and Joint Research and Development Activities: Problems Raised by Various Types of Restrictive Clauses, 50 ANTITRUST L.J. 499 (1981).
11. 1995 Guidelines, supra note 2.
12. The 1995 Guidelines superseded, in relevant part, a previous set of enforcement guidelines, issued by the Justice Department without FTC participation, that had addressed the application of antitrust to intellectual property. Antitrust Division, U.S. Department of Justice, Antitrust Enforcement Guidelines for International Operations § 3.6 (1988),
13. reprinted in 4 Trade Reg. Rep. (CCH) ¶ 13,109 [hereinafter 1988 Guidelines].
14. See, e.g., E. Bement & Sons v. National Harrow Co., 186 U.S. 70 (1902); National Folding-Box & Paper Co. v. Robertson, 99 F. 985 (C.C.D. Conn. 1900); cf. HANS B. THORELLI, THE FEDERAL ANTITRUST POLICY 47 (1955) ("[T]he common law background [governing restraints of trade] could furnish but little guidance when the courts were to be faced with the problem of drawing a reasonable borderline between the scope of the patent monopoly, on the one hand, and the scope of the antitrust law on the other.").
15. See, e.g., Heaton-Peninsular Button-Fastener Co. v. Eureka Specialty Co., 77 F. 288 (6th Cir. 1896); Bement, 186 U.S. 70; Henry v. A.B. Dick Co., 224 U.S. 1 (1912); see also Mark S. Massel, Antitrust and Patent Laws: Effects on Innovation, 56 AM. ECON. REV. 284, 285 (1966) ("the grant of a patent right was regarded merely as a logical extension of conventional rights in industrial property.").
16. On the expansive scope and significance of property rights and the freedom of contract during this period, see, e.g., THE POLITICAL ECONOMY OF THE SHERMAN ACT (E. Thomas Sullivan ed., 1991);
17. MORTON J. HORWITZ, THE TRANSFORMATION OF AMERICAN LAW: 1780-1860 at 31-62, 161-210 (1977);
18. ARNOLD M. PAUL, CONSERVATIVE CRISIS AND THE RULE OF LAW: ATTITUDES OF THE BAR AND BENCH, 1887-1895 (1960);
19. LAWRENCE M. FRIEDMAN, A HISTORY OF AMERICAN LAW (1973);
20. JAMES WILLARD HURST, LAW AND THE CONDITIONS OF FREEDOM IN THE NINETEENTH-CENTURY UNITED STATES (1956);
21. Herbert Hovenkamp, The Political Economy of Substantive Due Process, 40 STAN. L. REV. 379 (1988).
22. 186 U.S. 70 (1902).
23. The factual background of the National Harrow pool is discussed in National Harrow Co. v. Hench, 76 F. 667 (E.D. Pa. 1896), aff'd, 83 F. 36 (3d Cir. 1897). See also George L. Priest, Cartels and Patent License Arrangements, 20 J.L. & ECON. 309, 330-32 (1977).
24. Hench, 76 F. at 669.
25. Id.
26. Id.
27. Bement, 186 U.S. at 74-76.
28. Id. at 91 (emphasis added).
29. Significantly, the Court did not discuss the economic relationship of the patents - i.e., whether they were complementary, blocking, or competing - at any point in its opinion. In fact, the pooled patents appear to have included a combination of complementary and competing technologies. Since the pool members could only use the technology they had licensed to National Harrow, the pooling arrangement could not have integrated the complementary patents. See Priest, supra note 9, at 331 and authorities cited therein.
30. Standard Sanitary Mfg. Co. v. United States, 226 U.S. 20 (1912).
31. Motion Picture Patents Co. v. Universal Film Mfg. Co., 243 U.S. 502, 513 (1917).
32. Id.
33. Standard Sanitary Mfg., 226 U.S. at 49.
34. The tension between antitrust and intellectual property is not confined to older judicial opinions. A relatively recent Second Circuit decision notes as follows: While the antitrust laws proscribe unreasonable restraints of competition, the patent laws reward the inventor with a temporary monopoly that insulates him from competitive exploitation of his patented art. . . . When . . . the patented product is so successful that it evolves into its own economic market, . . . the patent and antitrust laws necessarily clash. SCM Corp. v. Xerox Corp., 645 F.2d 1195, 1203 (2d. Cir. 1981); see also Crucible, Inc. v. Stora Kopparbergs Bergslags AB, 701 F. Supp. 1157, 1160 (W.D. Pa. 1988) (following SCM analysis of § 7 of the Clayton Act and § 2 of the Sherman Act).
35. See, e.g., Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 135 (1969) (referring to patent as "lawful monopoly"); Crown Dye & Tool Co. v. Nye Tool & Mach. Works, 261 U.S. 24, 35-36 (1923) ("A patent confers a monopoly"); Continental Paper Bag Co. v. Eastern Paper Bag Co., 210 U.S. 405, 424 (1908) (same). But see United States v. Dubiher Condenser Corp., in which intellectual property is distinguished from monopoly: The term monopoly connotes the giving of an exclusive privilege for buying, selling, working, or using a thing which the public freely enjoyed prior to the grant. Thus, a monopoly takes something from the people. An inventor deprives the public of nothing which it enjoyed before his discovery, but gives something of value to the community by adding to the sum of human knowledge. 289 U.S. 178, 186 (1933) (citations omitted).
36. Bement, 186 U.S. at 91 ("[t]he very object of the [patent] laws is monopoly").
37. Motion Picture Patents, 243 U.S. at 510.
38. See, e.g., United States v. Univis Lens Co., 316 U.S. 243, 250 (1942) ("[a patent grants] to the inventor a limited monopoly, the exercise of which enable[s] him to secure the financial rewards for his invention"); United States v. Masonite Corp., 316 U.S. 265, 277 (1942) (referring to patent as a "limited monopoly"); Ethyl Gasoline Corp. v. United States, 309 U.S. 436 (1940) ("The patent law confers a limited monopoly"). The same point is made in some more recent cases. See, e.g., International Wood Processors v. Power Dry, Inc., 792 F.2d 416, 426 (4th Cir. 1986) (noting that courts often refer to the patent holder's rights "as either a limited or patent monopoly"); Glen Mfg., Inc. v. Perfect Fit Indus., Inc., 299 F. Supp. 278, 282 (S.D.N.Y. 1969) ("To promote scientific innovations and invention, the patent laws grant a monopoly to the patentee for a limited time, subject to strict limits of the patent.").
39. See generally U.S. Department of Justice and Federal Trade Commission Horizontal Merger Guidelines § 0.1 (1992),
40. reprinted in 4 Trade Reg. Rep. (CCH) ¶ 13,104 ("Market power to a seller is the ability profitably to maintain prices above competitive levels for a significant period of time.");
41. see also Warren G. Lavey, Patents, Copyrights, and Trademarks as Sources of Market Power in Antitrust Cases, 27 ANTITRUST BULL. 433, 435 (1982) ("In antitrust economics, a firm has market power if it can profitably price its products above the competitive level.")
42. (citing William M. Landes & Richard A. Posner, Market Power in Antitrust Cases, 94 HARV. L. REV. 937 (1981));
43. PHILLIP AREEDA & DONALD TURNER, ANTITRUST LAW ¶ 322 (1978)).
44. We use the term "formalistic" to denote mechanistic, static, theoretically self-contained judging in which an established rule or doctrine is apt to take precedence over concrete facts, where such facts might otherwise suggest the utility of reexamining the putatively applicable rule. On legal formalism, see generally Richard A. Posner, Legal Formalism, Legal Realism, and the Interpretation of Statutes and the Constitution, 37 CASE W. RES. L. REV. 179, 180 (1987) ("'Formalist' can mean narrow, conservative, hypocritical, resistant to change, casuistic, descriptively inaccurate . . . , ivory-towered, fallacious, callow, authoritarian - but also rigorous, modest, reasoned, faithful, self-denying, restrained.");
45. Steven M. Quevedo, Comment, Formalist and Instrumentalist Legal Reasoning and Inegal Theory, 73 CAL. L. REV. 119 (1985);
46. Thomas C. Grey, Langdell's Orthodoxy, 45 U. PITT. L. REV. 1 (1983);
47. MORTON J. HORWITZ, THE TRANSFORMATION OF AMERICAN LAW: 1780-1860, at 254-55 (1977) (characterizing legal formalism as "antiutilitarian" and giving "common law rules the appearance of being self-contained, apolitical, and inexorable");
48. GRANT GILMORE, THE AGES OF AMERICAN LAW 62, 70, 108-10 (1977) (legal formalism treats law as a closed logical system of "theoretical formulas assumed to be of universal validity," in which "[d]ecision becomes a mechanistic process in which it is forbidden to look beyond the letter of the statute and the holding of the last case");
49. H.L.A. HART, THE CONCEPT OF LAW 249 (1961) ("formalism" nearly synonymous with "mechanical" or "automatic" jurisprudence).
50. The analogy between the scope of the intellectual property holder's rights and the physical metes and bounds delineating the boundaries of real property has long been recognized: The scope of every patent is limited to the invention described in the claims contained in it . . . . These so mark where the progress claimed by the patent begins and where it ends that they have been aptly likened to the description in a deed, which sets the bounds to the grant which it contains. Motion Picture Patents, 243 U.S. at 510; accord Ethyl Gasoline, 309 U.S. at 456; see also T.C. Weygandt v. Van Emden, 40 F.2d 938, 939 (S.D.N.Y. 1930) ("Though the most intangible form of property, [the patent right] still, in many characteristics, is closer in analogy to real than to personal estate."). In the "separate spheres" model, however, these metes and bounds became the boundary, not of the property right, but of antitrust liability: any attempt by the patentee to restrict a licensee's conduct in some respect that went beyond the boundaries of the patent grant became, ipso facto, an antitrust violation.
51. See, e.g., Bement, 186 U.S. at 91 ("the general rule is absolute freedom in the use or sale of rights under the patent laws of the United States").
52. See, e.g., United States v. Line Material Co., 333 U.S. 287, 309-10 (1948); Ethyl Gasoline, 309 U.S. at 452; United States v. Univis Lens Co., 316 U.S. 241(1942).
53. See, e.g., Q-Tips, Inc. v. Johnson & Johnson, 109 F. Supp. 657, 661 (D.N.J. 1951), modified, 207 F.2d 509 (3d Cir. 1953).
54. See, e.g., WARD S. BOWMAN, JR., PATENT & ANTITRUST LAW: A LEGAL & ECONOMIC APPRAISAL (1973);
55. William F. Baxter, Legal Restrictions on Exploitation of the Patent Monopoly: An Economic Analysis, 76 YALE L.J. 267 (1966).
56. 1988 Guidelines, supra note 4.
57. BOWMAN, supra note 31, at 1 (emphasis added).
58. See, e.g., Atari Games Corp. v. Nintendo of Am., Inc., 897 F.2d 1572, 1576 (Fed. Cir. 1990) ("the aims and objectives of patent and antitrust laws may seem, at first glance, wholly at odds. However, the two bodies of law are actually complementary, as both are aimed at encouraging innovation, industry and competition.").
59. This should not be understood to mean that there are no differences at all between intellectual property and other forms of property. For one thing, intellectual property is much easier to misappropriate than the typical item of tangible property. The owner of a factory can prevent others from using that factory, not only by relying on the legal system, as does the intellectual property owner, but also by putting up fences, installing locks, and hiring security guards. Moreover, such a factory owner can hardly help but notice a break-in. By contrast, the intellectual property owner may not even know that it has been robbed until its sales start to plummet. Moreover, the high fixed costs and near-zero marginal costs of intellectual property mean that price discrimination (e.g., Ramsey pricing) may be essential to achieve an efficient result. See generally F.M. SCHERER & DAVID ROSS, INDUSTRIAL MARKET STRUCTURE AND ECONOMIC PERFORMANCE 496-98 (3d ed. 1990). The principle that intellectual property is like other forms of property for antitrust purposes means only that the normal antitrust principles of the rule of reason already take into account these differences in assessing the competitive benefits and harms of a practice in a particular market circumstance.
60. Compare 1995 Guidelines, supra note 2, § 2.2, with Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 16 (1984) (stating in dictum that owner of a patented product presumptively has market power).
61. The principles are set out in § 2.0 of the 1995 Guidelines, supra note 2.
62. W. §§ 2.3, 3.1, 3.3, 4.1.
63. Id. §§ 2.0, 2.3.
64. Id. § 3.3; cf. Thomas G. Krattenmaker & Steven C. Salop, Anticompetitive Exclusion: Raising Rivals' Costs to Achieve Power over Price, 96 YALE L.J. 209, 226 (1986) (noting that it is somewhat arbitrary whether to treat a manufacturer's product as an input to downstream distribution or instead to treat distribution as an input into the manufacturer's overall process of making the product and getting it into the hands of the ultimate consumer).
65. See supra note 26.
66. An instrumentalist legal rule is directed toward the achievement of a policy goal. By "instrumentalism" we mean an approach that focuses on the practical consequences or effects of legal decisions in furthering or hindering the realization of such a goal. On legal instrumentalism, see generally ROBERT S. SUMMERS, INSTRUMENTALISM AND AMERICAN LEGAL HISTORY (1982);
67. Steven Cherensky, A Penny for Their Thoughts: Employee-Inventors, Preinvention Assignment Agreements, Property, and Personhood, 81 CAL. L. REV. 597, 635-36 (1993) (discussing legal instrumentalist basis of intellectual property law);
68. Herbert Hovenkamp, Positivism in Law & Economics, 78 CAL. L. REV. 815, 826-10 (1990) (critique of law and economics analysis as legal instrumentalism); Quevedo, supra note 26.
69. 332 U.S. 392 (1947).
70. Id. at 394.
71. Id. at 395-96.
72. 1995 Guidelines, supra note 2, §§ 2.2, 5.3.
73. Id. § 5.3.
74. Id.
75. 333 U.S. 287 (1948).
76. Id. at 290 n.4.
77. After an interference proceeding, the Patent Office had awarded "dominant claims to Southern and subservient claims to Line." Id. at 291 n.5 ("Only when both patents could be lawfully used by a single maker could the public or the patentees obtain the full benefit of the efficiency and economy of the inventions.").
78. Id. at 292-93, 297.
79. Id. at 293-97.
80. Id. at 307.
81. Id. at 309 ("The Sherman Act was enacted to prevent restraints of commerce but has been interpreted as recognizing that patents were an exception" (citing Bement, 186 U.S. at 92)).
82. Id. at 307 (footnotes omitted).
83. Id. at 308 (emphasis added).
84. Id. at 291, 297. See also Priest, supra note 9, at 356-58 (discussing Line Material and procompetitive aspects of cross-licensing complementary and blocking patents).
85. Line Material, 333 U.S. at 311.
86. Id. at 312.
87. Id.
88. 1995 Guidelines, supra note 2, § 2.3.
89. Id. § 5.5.
90. Id. § 3.3.
91. "Double marginalization" refers to the fact that if monopolists of complementary products cannot coordinate their pricing, each will seek to take a monopoly markup that maximizes its own profits without regard to the impact that the decrease in quantity will have on the profits of the other. The result will be a price that is even higher, and more harmful to consumers, than would be set by a single monopolist. See, e.g., SCHERER & Ross, supra note 35, at 489.
92. 1995 Guidelines, supra note 2, § 5.5.
93. Bruce B. Wilson, Patent and Know-How License Agreements: Field of Use, Territorial, Price and Quantity Restrictions, Address Before the Fourth New England Antitrust Conference (Nov. 6, 1970). Although the Nine No-No's were not announced to the public until 1970, the Nine No-No's era dates from 1968 to 1981, the period during which the Antitrust Division's enforcement policy was guided by the Nine No-No's view of the intellectual property-antitrust interface.
94. Id. at 3.
95. See, e.g., Rule, supra note 3, at 732 ("The Antitrust Division took the position in the early 1970s that nine [No-No's] practices were per se unlawful"); Griffin, supra note 3, at 508 n.38 (same). In the judgment of one Division official, speaking toward the end of the Nine No-No's period, the Antitrust Division typically evaluated intellectual property licensing restraints under the rule of reason. Ky P. Ewing, Jr., Antitrust Enforcement and the Patent Laws: It Is as Craftsmen that We Get Our Satisfactions and Our Pay, Remarks Before the San Francisco Patent Law Ass'n (May 5, 1979),
96. reprinted in [Current Comment Transfer Binder 1969-1983], 5 Trade Reg. Rep. (CCH) ¶ 50,398, at 55,886.
97. In the same speech, Ewing implied that the core No-No's are numbers 1, 4, 6-8. Id. at 55,887; see also Richard H. Stern, What Ever Happened to the Nine No-No's, Address Before ABA Section of Patent, Trademark, and Copyright Law at 1-2, 5-6 (Aug. 10, 1993) (maintaining that the Division did not treat most of these practices as necessarily unlawful, but rather regarded the Nine No-No's as a checklist of practices that, if encountered, would lead a prosecutor to consider further investigation);
98. Bruce B. Wilson, Myth or Reality? Or Straight Talk from "Alice in Wonderland," Remarks Before American Patent Ass'n 11 (Jan. 21, 1975) ("Even some of the 'nine no-no's,' . . . are not totally susceptible to a wooden application.").
99. See Wilson, supra note 69.
100. See Wilson, supra note 67, at 3 (citing International Salt, 332 U.S. 392); see also Rex Chainbelt, Inc. v. Harco Prods., Inc, 512 F.2d 993 (9th Cir. 1975).
101. See id. at 4-5. But see Transparent-Wrap Corp. v. Stokes & Smith Co., 329 U.S. 637, 644 (1947) (compulsory exclusive grantback held tobe lawful "use of one legalized monopoly to acquire another legalized monopoly"; not an unlawful extension of the patentee's monopoly) (emphasis added).
102. See Wilson, supra note 67, at 5 ("the Department believes it is unlawful to attempt to restrict a purchaser of a patented product in the resale of that product"); cf. United States v. Ciba Geigy Corp., 508 F. Supp. 1118 (D.N.J. 1976), 1980-81 Trade Cas. (CCH) ¶ 63,813 (D.N.J. 1981) (final judgment) (license restricting purchasers of bulk form of drug from reselling it in finished dosage form, unless approved by the seller, constitutes per se violation of § 1 of the Sherman Act); Hensley Equip. Co. v. Esco Corp., 383 F.2d 252, 262-64 (5th Cir.) (license provision restricting the use and sale of patented parts purchased from licensor constitutes per se violation of § 1 of the Sherman Act), modified per curiam, 386 F.2d 442 (5th Cir. 1967).
103. See Wilson, supra note 67, at 5 ("a patentee may not restrict his licensee's freedom to deal in products or services not within the scope of the patent"). If A says, "I will license my product to you [B] if you agree not to carry competing products," A is proposing a "tie-out agreement" with B. See, e.g., McCullough v. Kammerer Corp., 166 F.2d 759, 761 (9th Cir. 1948) (where licensee agreed "not to manufacture or use or rent any device . . . in competition with the . . . devices covered by [the] licens[ing] agreement," Ninth Circuit held that "there [was] no difference in principle between extending the monopoly of the patent by suppressing the manufacture or use of competitive devices, patented or unpatented," and other practices previously held to constitute patent misuse); see also Stewart v. Motrim, Inc., 1975-2 Trade Cas. (CCH) ¶ 60,531 (S.D. Ohio 1975) (tie-out provision in licensing agreement constitutes patent misuse). According to one commentator, even at the Justice Department during the mid-1970s, there was little support for this No-No. See Griffin, supra note 3, at 511 n.55.
104. See Wilson, supra note 67, at 6 ("the Department believes it to be unlawful for a patentee to agree with his licensee that he will not, without his licensee's consent, grant further licenses to any other person"); see also United States v. Krasnov, 143 F. Supp. 184, 199 (E.D. Pa. 1956), aff'd per curiam, 355 U.S. 5 (1957). In Krasnov two companies, which accounted together for 62% of the ready-made furniture slipcover market in the United States, entered into a cross-licensing arrangement in which they agreed, inter alia, to refrain from licensing others without each other's consent. Finding violations of § 1 and § 2 of the Sherman Act, the district court concluded that the terms of the cross-licensing agreement "were well beyond the protection afforded by patent grants" and that "their combined effect was to stifle competition." Id. at 199; see also United States v. Ciba Geigy Corp., 1978-1 Trade Cas. (CCH) ¶ 62,123 (D.N.J. 1978) (two drug manufacturers barred by consent decree from entering into licensing agreements for the manufacture, use, or sale of drug, where the licensor's grant of a license would require prior approval of a third party other than the prospective licensee).
105. See Wilson, supra note 67, at 6 ("the Department believes that mandatory package licensing is an unlawful extension of the patent grant").
106. See id. ("the Department believes that it is unlawful for a patentee to insist, as a condition of the license, that his licensee pay royalties in an amount not reasonably related to the licensee's sales of products covered by the patent [e.g., royalties calculated on combined sales of patented and unpatented products]"); cf. Glen Mfg., Inc. v. Perfect Fit Indus Inc., 324 F. Supp. 1133 (S.D.N.Y. 1971); Glen Mfg., Inc. v. Perfect Fit Indus., Inc., 299 F. Supp. 278 (S.D.N.Y. 1969), remanded, 420 F.2d 319 (2d Cir. 1970). In Glen Manufacturing the district court found patent misuse where royalties were paid by the licensee to the patentee-licensor for toilet tank covers not within the scope of the patent held by the patentee-licensor. Condemning the licensing agreement requiring royalties on all toilet tank covers manufactured or sold by the licensee, regardless of whether the toilet tank covers came within the scope of the patentee-licensor patent, the court wrote that "[w]here the patentee seeks to use its patent monopoly to suppress the manufacture and sale of non-patented competing items in any manner other than that of free competition, the courts have a duty to protect the public interest and restrain the patentee." Glen Mfg., 299 F. Supp. at 282. See also La Peyre v. FTC, 366 F.2d 117 (5th Cir. 1966) (discriminatory royalties held to violate § 5 of the FTC Act).
107. See Wilson, supra note 67, at 7 ("it is pretty clearly unlawful for the owner of a process patent to attempt to place restrictions on his licensee's sales of products made by the use of the patented process") (citing Cummer-Graham Co. v. Straight Side Basket Corp., 142 F.2d 646, 647 (5th Cir. 1944)).
108. See id. ("the Department of Justice considers it unlawful for a patentee to require a licensee to adhere to any specified or minimum price with respect to the licensee's sale of the licensed products"). Special Assistant Wilson articulated the Nine No-No's view on this licensing practice as follows: I do not believe that it has been demonstrated that the dangerous power to control the price at which a licensee may sell must be added to the benefits of a patent in order to provide adequate incentive for invention, disclosure or licensing. The patentee obtains the full value of his patent when he exacts all the traffic will bear in the way of royalties or where he exercises his privilege to be the sole maker or seller. Royalties, or profits from exclusive exploitation, are the marketplace's impersonal way of evaluating the worth of an invention. To be sure, the patent owner might reap even greater rewards were he able to set the prices charged by his licensees. But those additional rewards would reflect not the value of the invention itself but rather the value of price fixing. Id. at 8-9 (emphasis added).
109. Id. at 3 (emphasis added).
110. See supra notes 43-44 and accompanying text.
111. Wilson, supra note 67, at 6. The distinction between mandatory and voluntary package licensing paralleled the Supreme Court's contrasting holdings in Automatic Radio Co. v. Hazeltine Research, Inc., 339 U.S. 827, 834 (1950), and Zenitli Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 135, 139-40 (1969). In the former, the Court rejected a licensee's challenge to a package license that covered hundreds of radio technology patents owned by HRI, reasoning that the package licensing was a convenience to the parties and "does not create another monopoly." Automatic Radio, 339 U.S. at 833. In the latter case, the Court condemned mandatory package licensing as patent misuse, holding that "conditioning the grant of a patent license upon payment of royalties on products which do not use the teaching of the patent amounts to patent misuse." Zenith Radio, 395 U.S. at 135 (emphasis added). Cf. American Securit Co. v. Shatterproof Glass Corp., 268 F.2d 769, 777 (3d Cir. 1959) (observing that "[m]andatory package licensing is no more than the exercise of the power created by a particular patent monopoly to condition the licensing of that patent upon the acceptance of another patent . . . . The protection, or monopoly, which is given to the first patent stops where the monopoly of the second begins.").
112. 329 U.S. 637 (1947).
113. Id. at 639.
114. Id. at 644 (emphasis added). When presented with a similar licensee claim some thirty years later, the Ninth Circuit relied on the same Transwrap language cited above to uphold the challenged grantback. See Santa Fe-Pomeroy, Inc., v. P. & Z. Co., 569 F.2d 1084, 1101 (9th Cir. 1978) ("the improvement patents must be viewed as simply a species of property given as consideration for the right to use the basic patent"). Some lower courts, applying the Transwrap analysis of grantback provisions, have considered factors, such as the duration of the license, scope of the grantback obligation, and its effect on competition, when assessing the legality of a grantback provision. See, e.g., id.; Duplan Corp. v. Deering Milliken, Inc., 444 F. Supp. 648, 671 (D. S.C. 1977), aff'd in part and rev'd in part, 594 F.2d 979 (4th Cir. 1979). Carving out a more sharply defined exception to the Transwrap rule, a few lower courts have also held that grantback provisions may violate the Sherman Act when "[s]uch agreements . . . which effect a restraint of trade or create monopolies" have been "designed for that purpose." Kobe, Inc. v. Dempsey Pump Co., 198 F.2d 416, 422 (10th Cir. 1952); accord United States v. Associated Patents, Inc., 134 F. Supp. 74 (E.D. Mich. 1955), aff'd per curiam, 350 U.S. 960 (1956).
115. Wilson, supra note 67, at 4 n.7 (citing Transwrap as contrary authority).
116. Modern antitrust analysis of grantbacks is informed by recent scholarship on the economics of incremental or sequential innovation. See, e.g., John H. Barton, Patents and Antitrust: A Rethinking in Light of Patent Breadth and Sequential Innovation, 65 ANTITRUST L.J. 449 (1997);
117. Jerry R. Green & Suzanne Scotchmer, On the Division of Profit in Sequential Innovation, 26 RAND J. ECON. 20 (1995);
118. Howard F. Chang, Patent Scope, Antitrust Policy, and Cumulative Innovation, 26 RAND J. ECON. 34 (1995);
119. Robert P. Merges & Richard R. Nelson, Market Structure and Technical Advance: The Role of Patent Scope Decisions, in ANTI-TRUST, INNOVATION, & COMPETITIVENESS 82 (Thomas M. Jorde & David J. Teece eds., 1992) [hereinafter JORDE & TEECE]. A central and vigorously debated issue in this literature is the socially optimal division of returns among initial innovators and follow-on innovators; an economic question that is of considerable relevance to the legal evaluation of grantbacks. See Barton, supra, at 450-53 (summarizing sources). The Nine No-No's approach asserts without evidence that exclusive grantback provisions stifle follow-on innovation and that nonexclusive grantbacks are always sufficient to compensate initial inventors. But if, as some of the sequential innovation literature suggests, the optimal division of returns among initial and follow-on innovators is neither self-evident nor necessarily the same in all circumstances, the rigid No-No's approach cannot be justified. Cf. id. at 461 ("[in the antitrust analysis of grantbacks] it seems clear that there is the need to balance the licensor's market position, the impacts of the grantback on the licensee's innovation incentives to innovate in the first place, along with any special efficiencies").
120. See 1995 Guidelines, supra note 2, § 5.3.
121. Id. § 5.6.
122. Id.
123. Id.
124. Item five on the No-No's list. See supra note 75.
125. 1995 Guidelines, supra note 2, § 4.1.2.
126. Item seven on the No-No's list. See supra note 77 and accompanying text.
127. 159 F.R.D. 318 (D.D.C.), rev'd, 56 F.3d 1448 (D.C. Cir. 1995).
128. See 1995 Guidelines, supra note 2, § 4.1.2.
129. See James B. Kobak, Jr., The Misuse Doctrine: An Introduction, Address Before ABA Antitrust Section, Intellectual Property Committee 1-2 (Mar. 28, 1996) (available from ABA Antitrust Section).
130. For recent economic analysis of patent misuse, see generally Edward F. Sherry & David J. Teece, The Patent Misuse Doctrine: An Economic Reassessment, Address Before ABA Antitrust Section, Intellectual Property Committee (Mar. 28, 1996) (available from ABA Antitrust Section);
131. Mark A. Lemley, Comment, The Economic Irrationality of the Patent Misuse Doctrine, 78 CAL. L. REV. 1599 (1990).
132. See supra notes 24-30 and accompanying text.
133. Morton Salt Co. v. G.S. Suppiger, 314 U.S. 488 (1942).
134. Id. at 494.
135. 320 U.S. 680 (1944).
136. 320 U.S. 661 (1944).
137. See, e.g., Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 135 (1969) (holding that "conditioning the grant of a patent license upon payment of royalties on products which do not use the teaching of the patent amounts to patent misuse"); B.B. Chems. Co. v. Ellis, 314 U.S. 495, 497 (1942) (following Morton Salt, to find misuse); American Securit Co. v. Shatterproof Glass Corp., 268 F.2d 769, 777 (3d Cir. 1959) (owner of several patents barred from claiming infringement after refusing to license any patent, except as part of a package of patents).
138. See, e.g., Mallinckrodt v. Medipart, Inc., 976 F.2d 700, 708 (Fed. Cir. 1992) ("Patent owners should not be in a worse position, by virtue of the patent right to exclude, than owners of other property used in trade."); Windsurfing Int'l, Inc. v. AMF, Inc., 782 F.2d 995, 1001-02 (Fed. Cir. 1986) (patent misuse defense will not be sustained absent "a factual determination . . . that the overall effect of the license tends to restrain competition unlawfully in an appropriately defined relevant market"); USM Corp. v. SPS Technologies, Inc., 694 F.2d 505, 511-14 (7th Cir. 1982) (upholding dismissal of misuse claim after evaluating the claim "under antitrust principles" and finding no anticompetitive effect attributable to the alleged misuse).
139. See, e.g., Patent Misuse Reform Act of 1988, Pub. L. 100-703, 102 Stat. 4676 (codified at 35 U.S.C. § 271 (d) (5)) (claim of misuse mil not lie against patent owner who "conditioned the license of any right to the patent or the sale of the patented product on the acquisition of a license to rights in another patent or purchase of a separate product, unless . . . the patent owner has market power in the relevant market for the patent or patented product on which the license or sale in conditioned") (emphasis added).
140. See generally L. Peter Farkas, Can a Patent Still Be Misused?, 59 ANTITRUST L.J. 677 (1991) (discussing the Patent Misuse Reform Act of 1988 and recent cases); Kobak, supra note 97, at 3:8 (noting "trend of incorporating antitrust principles into misuse law").
141. Patent Misuse Reform Act of 1988, Pub. L. 100-703, 102 Stat. 4676 (codified at 35 U.S.C. § 271(d)(5)). See also Farkas, supra note 107, at 683 ("Morton Salt and its progeny have thus been legislatively overruled [by the Patent Misuse Reform Act]"); Lemley, supra note 98, at 1624 ("[Section (d)(5) of the PMRA, codified at 35 U.S.C. § 271(d)(5)] . . . clearly reverses existing patent misuse law in the case of tying arrangements and brings that law into rough conformity with antitrust law, which also requires proof of market power in tying cases.").
142. Business Elecs. Corp. v. Sharp Elecs. Corp., 485 U.S. 717, 723, 726 (1988) (Ordinarily, whether particular concerted action violates § 1 of the Sherman Act is determined through case-by-case application of the so-called rule of reason. . . . [T]here is a presumption in favor of a rule-of-reason standard."); Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36 49 (1977) ("Since the early years of this century a judicial gloss on this statutory language has established the 'rule of reason' as the prevailing standard of analysis.").
143. Chicago Bd. of Trade v. United States, 246 U.S. 231, 238 (1918).
144. Northern Pac. Ry. Co. v. United States, 356 U.S. 1, 5 (1958).
145. See generally White Motor Co. v. United States, 372 U.S. 253, 259-60 (1962) (listing types of per se unlawful business arrangements).
146. See generally Heatransfer Corp. v. Volkswagenwerk, A.G., 553 F.2d 964, 977 (5th Cir. 1977).
147. See McCarran-Ferguson Act, 15 U.S.C. § 1012 (antitrust immunity for "the business of insurance" where regulated by state law).
148. 98 Stat. 72, 46 U.S.C. app. § 1706(a).
149. A number of other industries once enjoyed such exemptions. See, e.g., Reed-Bulwinkle Act of 1948, 49 U.S.C. § 5b(9) (1976), partially repealed by Pub. L. No. 95-473, § 4(b), (c), 92 Stat. 1377, 1466-70 (1978) (codified as amended at 49 U.S.C. § 10706 (b)) (trucking);
150. Federal Aviation Act of 1958, 49 U.S.C. § 1394,
151. partially repealed by Airline Deregulation Act of 1978, Pub. L. No. 95-504, 92 Stat. 1705 (1978) (codified at 49 U.S.C. § 1551).
152. See, e.g., Brown v. Pro Football, Inc., 116 S. Ct. 2116 (1996) (non-statutory labor exemption); Gordon v. New York Stock Exch., 422 U.S. 659 (1975) (securities).
153. FMC v. Seatrain Lines, 411 U.S. 726, 733 (1973).
154. Silver v. New York Stock Exch., 373 U.S. 341, 357 (1963); see also Otter Tail Power Co. v. United States, 410 U.S. 366, 372 (1973).
155. United States v. Masonite Corp., 316 U.S. 265, 280 (1942).
156. Sylvania, 433 U.S. at 50.
157. 388 U.S. 365 (1967).
158. Id. at 377.
159. White Motor Co. v. United States, 372 U.S. 253 (1963).
160. 35 U.S.C. § 261 (1994).
161. Of course, implied repeal, under traditional doctrine, was to be granted only "to the minimum extent necessary." Silver v. New York Stock Exch., 373 U.S. 341, 357 (1963) (stating standard for implied repeal of antitrust laws).
162. United States v. Grinnell Corp., 384 U.S. 563, 570-71 (1960); United States v. Aluminum Co. of Am., 148 F.2d 416, 429-30 (2d Cir. 1945).
163. Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263, 273 (2d Cir. 1979), cert. denied, 444 U.S. 1093 (1980) (quoting United States v. United Shoe Mach. Corp., 110 F. Supp. 295, 345 (D. Mass. 1953), aff'd per curiam, 347 U.S. 521 (1954)).
164. See, e.g., National Cooperative Production Amendments of 1993, Pub. L. 103-42, 107 Stat. 117 (codified at 15 U.S.C. §§ 4301-305);
165. Patent Misuse Reform Act of 1988, supra note 106;
166. National Cooperative Research Act of 1984, Pub. L. 98-462, 98 Stat. 1815 (codified at 15 U.S.C. §§ 4301-4305).
167. On developments in the economic analysis of antitrust that have contributed to the fall of the Nine No-No's and to the rise of the Guidelines, see generally William G. Shepard, Theories of Industrial Organization, in REVITALIZING ANTITRUST IN ITS SECOND CENTURY 37 (Harry First et al. eds., 1991);
168. Thomas M. Melsheimer, Economics and Ideology: Antitrust in the 1980s, 42 STAN. L. REV. 1319 (1990)
169. (reviewing ROBERT J. LARNER & JAMES W. MEEHAN, JR., ECONOMICS AND ANTITRUST POLICY (1989)) (discussing the Chicago School's influence on antitrust merger and vertical restraint law during the 1980s);
170. Herbert Hovenkamp, The Antitrust Movement and the Rise of Industrial Organization, 68 TEX. L. REV. 105 (1989) (chronicling parallel development of antitrust law and the economics of industrial organization);
171. Franklin M. Fisher, Games Economists Play: A Noncooperative View, 20 RAND J. ECON. 113 (Papers & Proc. 1989) (discussing developments in industrial organization; concluding that, since the 1970s and 1980s, "[oligopoly theory in particular . . . [has been] totally dominated by the game theoretic approach");
172. George J. Stigler, The Economists and the Problem of Monopoly, 72 AM. ECON. REV. 1, 9 (1982) ("Competition is now much more vigorously supported than it was in 1890 primarily because we understand it much better today.");
173. ROBERT H. BORK, THE ANTITRUST PARADOX 90-91 (1993) (influential critique of traditional antitrust advocating economic analysis to achieve allocatively efficient results to be evaluated under a single "enhancement-of-consumer-welfare" standard).
174. Sylvania, 433 U.S. at 58-59.
175. Broadcast Music, Inc. v. CBS, Inc., 441 U.S. 1 (1979).
176. See supra notes 122-23 and accompanying text.
177. Schwinn, 388 U.S. at 41.
178. Sylvania, 433 U.S. at 51.
179. Id. at 54.
180. Id. at 57-58 ("[t]here is substantial scholarly and judicial authority supporting their [i.e., vertical nonprice restraints'] economic utility") (emphasis added).
181. Id. at 54-55.
182. Id.
183. Id. at 57-59. See also BORK, supra note 130, at 287 ("The great virtue of Sylvania is not so much that it preserves a method of distribution valuable to consumers . . . but that it displays a far higher degree of economic sophistication . . . and introduces an approach that, generally applied, is capable of making antitrust a rational, proconsumer policy"). Although the Sylvania decision dramatically narrowed the applicability of the per se rule to vertical nonprice restraints, including vertical nonprice restraints in the licensing of intellectual property, subsequent decisions have indicated that Sylvania did not abolish per se condemnation of some tying arrangements. See generally Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 9-10, 15-16 (1984) (five-member majority reasserting applicability of the per se rule to "certain tying arrangements"); see also ABA ANTITRUST SECTION, ANTITRUST LAW DEVELOPMENTS 176-77 (4th ed. 1997) ("Although the Supreme Court continues to classify tying arrangements as per se violations, the test courts now use to determine whether the per se rule should be applied to a particular arrangement increasingly resembles a rule of reason inquiry").
184. 441 U.S. 1 (1979).
185. CBS v. ASCAP, 400 F. Supp. 737, 742 (S.D.N.Y. 1975) ("As a practical matter virtually every domestic copyrighted composition is in the repertory of either ASCAP . . . or BMI"), rev'd, 562 F.2d 130 (2d Cir. 1977), rev'd sub. nom., Broadcast Music, Inc. v. CBS, Inc., 441 U.S. 1 (1979).
186. Id. at 743. Cf. Automatic Radio, 339 U.S. at 833, and supra note 82 and accompanying text.
187. At trial, price fixing was just one of five claims CBS asserted in challenging the blanket licenses. The television network also argued that the blanket licensing arrangements constituted unlawful tying, a concerted refusal to deal, monopolization, and copyright misuse. CBS, 400 F. Supp. at 745.
188. Id. (quoting from CBS complaint).
189. The Antitrust Division had challenged ASCAP's licensing practices in 1941, and had brought a similar action against BMI several years later. Id. at 743-45. At the time of the CBS lawsuit, both ASCAP and BMI were bound by separate, but substantially similar, consent decrees that had been entered into with the government in 1950 and 1966, respectively. Id. A curious aspect of the CBS litigation was that CBS had only to invoke the consent decrees to compel the blanket licensors to license at "reasonable fees" one or more specific ASCAP or BMI musical compositions from ASCAP or BMI, directly from composers, through other agents, or through "per-program" licenses. Id. The "perprogram" licensing option under the 1950 and 1966 consents allowed a broadcast licensee to license the rights to an entire repertory for a given broadcast program, but to pay royalties only for the works that were actually broadcast. Id. at 744-45.
190. See supra note 76 and accompanying text.
191. See supra note 77 and accompanying text.
192. CBS v. ASCAP, 562 F.2d at 136 ("There is . . . some analogy to the patent pooling cases which broadly hold that the pooling of competing, and perhaps even non-competing, patents is illegal.") (citing, inter alia, United States v. Line Material, 333 U.S. 287 (1948)).
193. BMI, 441 U.S. at 20.
194. Id. at 20-21.
195. CBS, 400 F. Supp. at 744-45 (ASCAP and BMI licensed their repertories on a non-exclusive basis allowing any composer to license performance rights to his works to any other non-exclusive licensee).
196. BMI, 441 U.S. at 19.
197. See generally United States v. Line Material, 333 U.S. 287 (1948).
198. BMI, 441 U.S. at 9.
199. 1995 Guidelines, supra note 2, § 3.4.
200. Id. § 3.4 ("If there is no efficiency-enhancing integration of economic activity and if the type of restraint is one that has been accorded per se treatment, the Agencies will challenge the restraint under the per se rule. Otherwise, the Agencies will apply a rule of reason analysis.") (emphasis added).
201. Id. (citing BMI, 441 U.S. at 16-24).
202. 1995 Guidelines, supra note 2, § 3.4.
203. See supra notes 37-39 and accompanying text.
204. See generally William C. Wood, Costs and Benefits of Per Se Rules in Antitrust Enforcement, 38 ANTITRUST BULL. 887, 887-88 (1993) ("In existing justifications of the per se rules there is an explicit cost-benefit argument. A per se rule, it is argued, is less costly than a rule of reason") (citing, inter alia, United States v. Container Corp. of Am., 393 U.S. 333, 341 (1969));
205. see also Jonathan B. Baker, Per Se Rules in the Antitrust Analysis of Horizontal Restraints, 36 ANTITRUST BULL. 733, 737 (1991) ("The [Supreme] Court has stated repeat-edly that per se rules are created in order to reduce litigation costs and increase business certainty about forbidden conduct . . . .") (citing, inter alia, Arizona v. Maricopa County Med. Soc'y, 457 U.S. 332, 343-44 (1981)).
206. Sylvania, 433 U.S. at 50 n.16.
207. But see Wilson, supra note 69, at 11 (no-no's "not totally susceptible to a wooden application").
208. See generally Daniel L. Rubenfeld, 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);
209. R. HOGG & E. TANIS, PROBABILITY AND STATISTICAL INFERENCE 254 (1977) (distinguishing Type 1 and Type 2 errors);
210. see also R.S. Radford, Statistical Error and Legal Error: Type One and Type Two Errors and the Law, 21 LOY. L.A. L. REV. 843 (1988).
211. See generally Wood, supra note 161, at 891-95 (reviewing empirical data from price fixing cases tending to show that per se cases may be as or more costly than cases decided under the rule of reason); Baker, supra note 161, at 738 ("The fight over characterization [in horizontal restraint cases] - determining whether the conduct is in the appropriate pigeonhole - can involve as much cost, and generate as little business certainty, as a full-blown analysis of reasonableness.").
212. See generally W. KIP VISCUSI ET AL., ECONOMICS OF REGULATION AND ANTITRUST 9-10 (1992).
213. The cases and enforcement statements during the "separate spheres" period tended to be overinclusive rather than underinclusive.
214. See Line Material, supra notes 49-57 and accompanying text.
215. Richard A. Posner, The Next Step in the Antitrust Treatment of Restricted Distribution: Per Se legality, 48 U. CHI. L. REV. 6 (1981).
216. See supra notes 37-39 and accompanying text.
217. See William J. Baumol & Janusz A. Ordover, Antitrust: Source of Dynamic and Static Inefficiencies?, in JORDE & TEECE, supra note 87, at 88: If there is any one prevailing view on the merits and demerits of antitrust legislation as a stimulus to economic efficiency it would appear, very roughly, to hold that on the static side, by discouraging the exercise of monopoly, these laws have served unambiguously to promote economic welfare. Nevertheless, there has been a trade-off for social welfare, in that at least in the past antitrust rules have discouraged joint research efforts, have exacerbated the innovator's free-rider problems through restrictions on the scope of the licensing contracts, and may have impeded the attainment of the firm sizes needed to mount the most effective research and innovation efforts. Baumol and Ordover go on to argue that there is another side to both of those propositions; i.e., that antitrust can undermine static efficiency through rent seeking by unscrupulous plaintiffs (in private suits) or complainants (to the enforcement agencies), id. at 86-88, and can encourage innovation by reducing the profitability of monopolization and redirecting entrepreneurs' activities into production-enhancing innovation. Id. at 88-91.
218. See, e.g., Frank H. Easterbrook, Ignorance and Antitrust, in JORDE & TEECE, supra note 87, at 122-23: An antitrust policy that reduced prices by 5 percent today at the expense of reducing by 1 percent the annual rate at which innovation lowers the costs of production would be a calamity. In the long run a continuous rate of change, compounded, swamps static losses.
219. See, e.g., Steven C. Salop & David T. Scheffman, Raising Rivals' Costs, 73 AM. ECON. REV. 267 (1983);
220. Steven C. Salop & David T. Scheffman, Cost-Raising Strategies, 36 J. INDUS. ECON. 19 (1987).
221. JOSEPH A. SCHUMPETER, CAPITALISM, SOCIALISM, AND DEMOCRACY 81-106 (1942).
222. Kenneth J. Arrow, Economic Welfare and the Allocation of Resources for Innovation, in ESSAYS IN THE THEORY OF RISK-BEARING 144 (1971).
223. See generally Wesley M. Cohen & Richard C. Levin, Empirical Studies of Innovation and Market Structure, in HANDBOOK OF INDUSTRIAL ORGANIZATION 1059 (Richard Schmalensee & Robert D. Willig eds., 1989) (surveying literature);
224. Jonathan B. Baker, Fringe Firms and Incentives to Innovate, 63 ANTITRUST L.J. 621, 639-41 (1995) (same);
225. Richard J. Gilbert & Steven C. Sunshine, Incorporating Dynamic Efficiency Concerns in Merger Analysis: The Use of Innovation Markets, 63 ANTITRUST L.J. 569, 579-80 (1995) (same).
226. See FTC Global and Innovation-Based Competition Hearings (1995) [hereinafter Hearings], Transcript at 1065-66 (testimony of Richard J. Gilbert and of Dennis Carlton); Hearings, Prepared Statement of Dennis Carlton at 8-9; Baker, supra note 176, at 640 & nn.88-89 (citing, inter alia, Richard C. Levin et al., R&D Appropriability, Opportunity, and Market Structure: New Evidence on Some Schumpeterian Hypotheses, 75 AM. ECON. REV. 20 (Papers and Proceedings, May 1985),
227. JOHN T. SCOTT, PURPOSIVE DIVERSIFICATION AND ECONOMIC PERFORMANCE 87 (1993)). The Hearings transcript, prepared statements of witnesses, and staff report summarizing the hearings can be found at 〈http://www.ftc.g ov/opp/global.htm〉.
228. Baker, supra note 176.
229. Baker's article intentionally omits discussion of non-strategic factors such as the effect of cost reductions or new products on profits, the appropriability of new ideas by their inventors, and the nature of buyer demand. Id. at 634 n.67. It also omits discussion of government policies such as trade restrictions, id., and of management and control issues.
230. Id. at 636-39.
231. Cf. Department of Justice and Federal Trade Commission Horizontal Merger Guidelines § 2.22 (1992) (where firms are differentiated in their capacity, they differ in their ability to constrain prices),
232. reprinted in 4 Trade Reg. Rep. (CCH) ¶ 13,104.
233. See, e.g., Hearings, supra note 177, Transcript at 3308 (testimony of F.M. Scherer) ("[i]f you don't keep running on the treadmill, you're going to be thrown off"); cf. id., Prepared Statement of Russell Wayman at 3 ("Clearly, the customer is best served by encouraging a regime within which
234. In some cases, of course, such deprivation could be welfare enhancing in the long run if it protects the ability of an innovator to appropriate the benefits of its innovation as against imitators. But since there is no necessary connection between the opportunity to deprive competitors of access to complements and situations in which the patent system is inadequate by itself to protect appropriability, the possibility of efficiency benefits flowing from a restraint would seem to argue for the rule of reason approach of the 1995 Guidelines rather than for a rule of per se lawfulness.
235. See supra note 176 and accompanying text.
236. Testimony of Timothy J. Regan, Division Vice President and Director of Public Policy, Corning, Inc., Before House Judiciary Committee (May 9, 1995). Whatever AT&T's views may be of that particular episode, its officials, too, agree that the AT&T divestiture and the resulting separation of the local "bottleneck" monopoly from the competitive parts of the telephone business has been good for innovation. At the FTC's Global Competition Hearings in 1995, an AT&T representative described the divestiture as "one of the most successful remedies in antitrust history," and noted that "innovation has burgeoned" as a result of the decree. Hearings, supra note 177 (Prepared Statement of Mark Rosenblum at 11, 14) (quoted in 1 FTC STAFF, ANTICIPATING THE 21ST CENTURY: COMPETITION POLICY IN THE NEW HIGH-TECH, GLOBAL MARKETPLACE ch. 6, p. 13 (1996) [hereinafter HEARINGS REPORT]).
237. Hearings, supra note 177, Transcript at 206 (testimony of Dr. William Coyne, Vice President, Research and Development, 3M Corp.) (cited in HEARINGS REPORT, supra note 185, ch. 6, p. 15).
238. Hearings, supra note 177, Transcript at 206 (testimony of Lewis E. Platt, Chairman, President and CEO, Hewlett-Packard Co.) (cited in HEARINGS REPORT, supra note 185, ch. 6, p. 15).
239. Hearings, supra note 177, Transcript at 510 (testimony of Terrence Faulkner, Director of Strategic Planning and Vice President of Eastman Kodak) (cited in HEARINGS REPORT, supra note 185, ch. 6, p. 14).
240. HEARINGS REPORT, supra note 185, ch. 6, p. 14 nn.66 & 67.
241. 1995 Guidelines, supra note 2, § 5.
242. Id. §§ 2.0, 2.3.
243. See supra note 40 and accompanying text. Professors Baxter and Kessler recommend that the terms "horizontal" and "vertical" should be dropped from antitrust parlance altogether, in favor of "substitutes" and "complements." William F. Baxter & Daniel P. Kessler, Toward a Consistent Theory of the Welfare Analysis of Agreements, 47 STAN. L. REV. 615, 619-21 (1995). While there is a great deal to commend this view, in this paper we emphasize the verticality of relationships among complements in order to connect the analysis of the complementary relationships that abound in intellectual property with the extensive literature on vertical restraints.
244. See generally Posner, supra note 169; BOWMAN, supra note 31.
245. 1995 Guidelines, supra note 2, § 4.1.1.
246. Id. § 4.1.1; see also Krattenmaker & Salop, supra note 40, at 242-48.
247. 1995 Guidelines, supra note 2, § 3.3.
248. Id. § 3.1. Examples 5 and 6 of the Guidelines further illustrate circumstances under which various relationships might be viewed as horizontal or vertical. As might be expected in guidelines, these examples deal with clear cases in order to make a conceptual point. Harder cases arise under conditions of uncertainty, and especially where firms, enforcement authorities, and courts may have asymmetric information.
249. United States v. Pilkington plc, Civ. No. 94-345 (D. Ariz., filed May 25, 1994). For additional analysis of the Pilkington case, see, e.g., Jeffrey N. Neuman, Comment, Through a Glass Darkly: The Case Against Pilkington plc. Under the New U.S. Department of Justice International Enforcement Policy, 16 NW. J. INT'L L. & BUS. 284 (1995);
250. Joseph Rattan, Perspectives on the 1995 Intellectual Property Guidelines, ANTITRUST, Summer 1995, at 11;
251. Robert P. Taylor, Pilkington, Intellectual Property Policy at DOJ: Microsoft and S.C. Johnson and More, ANTITRUST, Fall 1994, at 23.
252. See 1995 Guidelines, supra note 2, § 4.2.
253. Complaint, United States v. General Elec. Co., CV No. 96-121-M-CCL, 6 Trade Reg. Rep. (CCH) ¶ 45,090 (D. Mont, filed Aug. 1, 1996).
254. Id. ¶ 3.
255. Id. ¶ 5. The scope of the noncompete provision has varied over time. Since April 1996, the restraint has been limited to GE imaging machines of the same modality. Thus, if Hospital A has a GE ultrasound machine, it would be barred from servicing Hospital B's GE ultrasound machine as a condition of licensing the diagnostic software for the GE ultrasound machine. Id. ¶ 6.
256. Although GE was charged with violating both § 1 and § 2 of the Sherman Act, the district court dismissed the § 2 count. United States v. General Elec. Co., 1997-1 Trade Cas. (CCH) ¶ 71, 765 (D. Mont. Mar. 18, 1997).
257. See GE Illegally Restricts Servicing of Medical Equipment, DOJ Alleges, 71 Antitrust & Trade Reg. Rep. (BNA) No. 1774, at 126 (Aug. 8, 1996) (citing GE press release); see also infra text at note 208 (the antitrust laws do "not require the owner of intellectual property to create competition in its own technology" (quoting 1995 Guidelines § 3.1).
258. Complaint, supra note 200, ¶ 19.
259. Id. ¶ 7.
260. See 1995 Guidelines, supra note 2, § 3.1.
261. See United States v. General Elec. Co., 1997-1 Trade Cas. (CCH) ¶ 71,765.
262. See 1995 Guidelines, supra note 2, § 3.4.
263. Id.
264. See, e.g., Northern Pac. Ry. v. United States, 356 U.S. 1, 3 (1958); International Salt Co. v. United States, 332 U.S. 392, 396 (1947).
265. See, e.g., Tampa Elec. Co. v. Nashville Coal Co., 365 U.S. 320 (1961).
266. 1995-2 Trade Cas. (CCH) ¶ 71,096 (D.D.C. 1995) (consent decree); see also 59 Fed. Reg. 42,845 (Aug. 19, 1994) (Competitive Impact Statement).
267. See ANTITRUST LAW DEVELOPMENTS, supra note 140, at 214-25. A refinement that may not be fully reflected in the case law is that these factors are relevant because they cast light on whether the arrangements reduce rivals' ability to constrain prices and thereby augment defendant's market power.
268. Cf. Krattenmaker & Salop, supra note 40, at 242-46.
269. Thus, if there were a large number of operating system competitors not subject to the foreclosure, or entry into the operating system business by parties not subject to the foreclosure was easy, then Microsoft could not profit by the foreclosure. See id. at 236-38. In a network industry, however, small advantages can result in large consequences. See, e.g., Michael L. Katz & Carl Shapiro, Systems Competition and Network Effects, 8 J. ECON. PERSP. 93, 105-07 (1994). In such a circumstance, profiting from an exclusion may be less difficult than otherwise.
270. See, e.g., Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 9 (1984) ("It is far too late in the history of our antitrust jurisprudence to question the proposition that certain tying arrangements pose an unacceptable risk of stifling competition and therefore are unreasonable 'per se.'").
271. See, e.g., id. at 13-14 (requiring "some special ability - usually called 'market power' - to force a purchaser to do something that he would not do in a competitive market").
272. See, e.g., United States v. Jerrold Elecs. Corp., 187 F. Supp. 545 (E.D. Pa. 1960), aff'd per curiam, 365 U.S. 567 (1961); cf. International Salt Co. v. United States, 322 U.S. 392, 398 (1947) (considering an asserted justification but rejecting it on the facts).
273. See, e.g., Will v. Comprehensive Accounting Corp., 776 F.2d 665, 674 (7th Cir. 1985); 1995 Guidelines, supra note 2, § 5.3; cf. Jefferson Parish, 466 U.S. at 32 (four-justice concurrence, taking position at variance with majority).
274. See, e.g., A.I. Root Co. v. Computer/Dynamics, Inc., 806 F.2d 673, 676-77 (6th Cir. 1986); 1995 Guidelines, supra note 2, § 5.3; cf. Jefferson Parish, 466 U.S. at 32.
275. See Northern Pac. Ry. v. United States, 356 U.S. 1, 6 (1958); see also United States v. Loew's, Inc., 371 U.S. 38, 49 (1962).
276. See BOwMAN, supra note 31, at 53-119, 140-82; BORK, supra note 130, at 365-81; RICHARD A. POSNER & FRANK H. EASTERBROOK, ANTITRUST: CASES, ECONOMIC NOTES, AND OTHER MATERIALS 777-856 (2d ed. 1981).
277. See, e.g., Michael D. Whinston, Tying, Foreclosure, and Exclusion, 80 AM. ECON. REV. 837 (1990);
278. Louis Kaplow, Extension of Monopoly Power Through Leverage, 85 COLUM. L. REV. 515 (1985).
279. United States v. Microsoft Corp., 1995-2 Trade Cas. ¶ 71,096, at 75,244-46 (D.D.C. 1995) (part IV of consent order).
280. Competitive Impact Statement, United States v. Microsoft, 59 Fed. Reg. 42,845, at 42,852 (Aug. 19, 1994).
281. See, e.g., Will, 776 F.2d at 674 (tying arrangement can be unlawful if there is a "substantial danger that the tying seller will acquire market power in the tied product market"); Hearings, supra note 177, Transcript at 3549-50 (testimony of William F. Baxter) ("The only time I recognize the existence of a problem is when an independent base of market power is being established in the adjacent market that will be able to collect monopoly rents from people who have no demand in the first market.").
282. For example, in an influential article, Whinston sets forth a model in which anticompetitive effects arise from tying when the two products are complements, there are economies of scale in the second market, a tying arrangement is used to gain so large a share of sales in that market that competitors cannot reach minimum efficient scale, the seller thereby gains a monopoly in the second market, and the buyers in that market are not identical to the buyers in the first market (i.e., there is an alternative use for the tied product that does not involve the simultaneous use of the tying product), Whinston, supra note 224, at 854-55.
283. See, e.g., Katz & Shapiro, supra note 216, at 94; Michael L. Katz & Carl Shapiro, Network Externalities, Competition, and Compatibility, 75 AM. ECON. REV. 424 (1985).
284. HEARINGS REPORT, supra note 185, at ch. 9 p. 1.
285. See Hearings, supra note 177, Transcript at 3732 (testimony of Richard Schmalensee).
286. Cf. Carl Shapiro, Deputy Assistant Attorney General, Antitrust in Network Industries, Address Before American Law Institute and American Bar Ass'n 27-31 (text released Mar. 7, 1996) (available from the Department of Justice, Antitrust Division, Legal Procedures Unit) (leveraging may permit today's standard bearer to extend its control into the next generation of technology).
287. Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 19-21 (1984).
288. See Brulotte v. Thys Co., 379 U.S. 29 (1964); American Securit Co. v. Shatterproof Glass Corp., 268 F.2d 769, 777 (3d Cir. 1959).
289. See Baxter, supra note 31, at 327.
290. United States v. Electronic Payment Servs., Inc., 1994-2 Trade Cas. (CCH) ¶ 70,796 (consent decree).
291. Competitive Impact Statement, United States v. Electronic Payment Serv's., Inc., 59 Fed. Reg. 24,711 (May 12, 1994).
292. 5 Trade Reg. Rep. (CCH) ¶ 24,054 (May 20, 1996) (final acceptance of consent order).
293. Complaint ¶ 7, United States v. Dell Computer Corp., FTC No.C-3658, 62 Fed. Reg. 4,767 (Jan. 31, 1997) (final acceptance of consent order).
294. Id. ¶ 6.
295. 1995 Guidelines, supra note 2, § 5.5.
296. Id. § 3.3.
297. Id. § 5.5.
298. Vertical theories, however, might still apply in some specialized circumstances. See id. § 3.3 (horizontal relationship between licensor and licensee does not make an arrangement presumptively anticompetitive, "nor does a purely vertical relationship assure that there are no anticompetitive effects"). In addition, it is possible that parties that are not actual or potential competitors in a technology market may nonetheless be competitors in an innovation market.
299. See 1995 Guidelines, supra note 2, § 5.5 ("When cross-licensing or pooling arrangements are mechanisms to accomplish naked price fixing or market division, they are subject to challenge under the per se rule.") (citing United States v. New Wrinkle, Inc., 342 U.S. 371 (1952)).
300. Cf. BOWMAN, supra note 31, at 202 (". . . the relationship that patents bear to each other is not often an either/or matter. The relationship of patented processes or products can be competing, complementary, or blocking, or a little of each"); see also Gilbert Goller, Competing, Complementary and Blocking Patents: Their Role in Determining Antitrust Violations in the Areas of Cross-Licensing, Patent Pooling and Package Licensing, 50 J. PAT. OFF. SOC'Y 723 (1968).
301. See Assistant Attorney General Joel I. Klein, Cross-Licensing and Antitrust Law, Address Before the American Intellectual Property Law Association (May 2, 1997) (expressing concern regarding anticompetitive effects of intellectual property infringement litigation settlements and proposing measures to subject settlement agreements to notification and antitrust review).
302. For example, pooling arrangements that include certain forms of grantbacks can effect innovation incentives under some circumstances. See supra part II.C. The Guidelines specifically note the potentially anticompetitive and innovation retarding effects of some grantback provisions in the pooling context: [A] pooling arrangement that requires members to grant licenses to each other for current and future technology at minimal cost may reduce the incentives of its members to engage in research and development because members of the pool have to share their successful research and development and each of the members can free ride on the accomplishments of other pool members. 1995 Guidelines, supra note 2, § 5.5 (citations omitted).
303. See DENNIS W. CARLTON & JEFFREY M. PERLOFF, MODERN INDUSTRIAL ORGANIZATION 527 (1990) ("both consumers and firms are worse off with successive monopolists than when there is a single, integrated monopolist");
304. F.M. SCHERER & DAVID ROSS, INDUSTRIAL MARKET STRUCTURE AND ECONOMIC PERFORMANCE 489 (3d ed. 1990) (same).
305. U.S. Department of Justice Merger Guidelines (1984),
306. reprinted in 4 Trade Reg. Rep. (CCH) ¶ 13,103 [hereinafter 1984 Merger Guidelines]. As with a two-level entry problem, there are limiting principles involving the degree to which the transaction increases the need for multiple-level entry, the extent to which such entry is more difficult than single-level entry, and the degree to which the affected markets are susceptible to monopolization or collusion. And one might also have to consider the possibility of efficiencies that could not readily be achieved through less restrictive means.
307. MPEG-2, Business Review Letter, 1997 DOJBRL LEXIS *14 (Dep't of Justice Jun. 26, 1997), available at 〈http://www.usdoj.gov〉.
308. Id. at *1 ("The technology standard eliminates redundant information . . . reducing the amount of data, storage and transmission space required to reproduce video sequences").
309. See supra part III.D.2.
310. MPEG-2, Business Review Letter, supra note 251, at *20-21.
311. W. at *12 (footnotes omitted).
312. Id.
313. Id. at *9.
314. Id. at *15.
315. Id. at *24.
316. Id.
317. While licensees are not subject to any grantback provisions of any kind, licensors are obligated to license to the pool any patent that is determined by the independent expert to be "essential." Id. at *26. However, improvement patents and technological alternatives to "essential" patents are not subject to the grantback. Id. at *26 n.47.
318. Civ. No. 94-C-50249 (N.D. Ill. filed Aug. 4, 1994).
319. 1984 Merger Guidelines, supra note 250, § 4.1.
320. For an overview and analysis of the potential competition doctrine, see Mark D. Whitener, Potential Competition Theory - Forgotten But Not Gone, ANTITRUST, Summer 1991, at 17.
321. See 1984 Merger Guidelines, supra note 250, § 4.13.
322. Id. § 4.133.
323. See Michael H. Riordan & Steven C. Salop, Evaluating Vertical Mergers: A Post-Chicago Approach, 63 ANTITRUST L.J. 513, 519-20 (1995).
324. See generally Raymond Hartman et al., Assessing Market Power in Regimes of Rapid Technological Change, 2 INDUS. & CORP. CHANGE 317, 319 (1993). Cf. Easterbrook, supra note 172.
325. 1995 Guidelines, supra note 2, § 3.2.3.
326. See, e.g., FTC Commissioner Roscoe B. Starek III, Innovation Markets in Merger Review Analysis: The FTC Perspective, Address Before Florida Bar (Feb. 23, 1996);
327. Gilbert & Sunshine, supra note 176; Symposium: A Critical Appraisal of the "Innovation Market" Approach, 64 ANTITRUST L.J. 1 (1995);
328. Nicholas A. Widnell, Comment, The Crystal Ball of Innovation Market Analysis in Merger Review: An Appropriate Means of Predicting the Future?, 4 GEO. MASON U. L. REV. 369 (1996);
329. Azam H. Aziz, Note, Defining Technology and Innovation Markets: The DOJ's Antitrust Guidelines for the Licensing of Intellectual Property, 24 HOFSTRA L. REV. 475 (1995).
330. See HEARINGS REPORT, supra note 185, at ch. 7;
331. Richard T. Rapp, The Misapplication of the Innovation Market Approach to Merger Analysis, 64 ANTITRUST L.J. 19, 37-46 (1995).
332. 5 Trade Reg. Rep. (CCH) ¶ 23,784 (June 14, 1995).
333. 5 Trade Reg. Rep. (CCH) ¶ 23,712 (Feb. 14, 1995),
334. reopened and modified, 5 Trade Reg. Rep. (CCH) ¶ 23,966 (Jan. 16, 1996).
335. 5 Trade Reg. Rep. (CCH) ¶ 23,914 (Feb. 8, 1996).
336. 5 Trade Reg. Rep. (CCH) ¶ 23,895 (Dec. 5, 1995).
337. FTC Docket No. 971-0002, 62 Fed. Reg. 408 (Jan. 3, 1997).
338. § 505, 21 U.S.C. § 355.
339. Sensormatic Elecs. Corp., 5 Trade Reg. Rep. (CCH) ¶ 23,742 (Dec. 5, 1995).
340. 1995 Guidelines, supra note 2, ¶ 3.2.3.
341. United States v. General Motors Corp., Civ. No. 93-530 (D. Del. filed Nov. 16, 1993), summarized at [Transfer Binder 1988-1996] Trade Reg. Rep. (CCH) ¶ 45,080.
342. Id., Complaint ¶¶ 35-45.
343. FTC No. 961-0055, 62 Fed. Reg. 409 (Jan. 3, 1997). See also Joseph Kattan, Trends in Intellectual Property Antitrust Enforcement, ANTITRUST, Summer 1997, at 26 (analyzing consent decree);
344. James B. Kobak, Jr. & Richard P. McGuire, FTC Looks at Merger's Antitrust Effects on R&D, NAT'L L.J., Mar. 31, 1997, at C03 (same);
345. Naomi Freundlich et al., A Booster Shot For Gene Therapy, Bus. WK., Jan. 20, 1997, at 92 (same).
346. FJC News Release, Dec. 17, 1996, available at 〈http://www.ftc.gov〉.
347. Complaint, Ciba-Geigy Ltd., FTC No. 961-0055, § V (Mar. 24, 1997), 5 Trade Reg. Rep. (CCH) ¶ 24,182.
348. Id.
349. Analysis to Aid Public Comment, Ciba-Geigy Ltd., FTC No. 961-0055, Dec. 17, 1996, available at 〈http://www.ftc.gov〉.
350. Complaint, supra note 283, ¶ 16-19.
351. Analysis to Aid Public Comment, supra note 285, at 6.
352. Id. at 6-8.
353. Decision and Order, Part IX, Ciba-Geigy Ltd., C-3725 (Apr. 8, 1997).
354. Separate Statement of Chairman Robert Pitofsky and Commissioners Janet D. Steiger, Roscoe B. Starek III, and Christine A. Varney [hereinafter Majority Statement], at 2, Ciba-Geigy Ltd., C-3725 (Apr. 8, 1997).
355. Id. (quoting Analysis to Aid Public Comment, supra note 285, at 7).
356. Analysis to Aid Public Comment, 7 Id.
357. Order, supra note 289, part IX(A);
358. Majority Statement, supra note 290, at 2-3.
359. Order, supra note 289, part IX(B) & (C);
360. Majority Statement, supra note 290, at 3-4;
361. Analysis, supra note 285, at 9-10.
362. See Majority Statement, supra note 290, at 3-4;
363. Analysis, supra note 285, at 9-10.