January 1999
Antitrust Remedies in High
Technology Industries
David A. Balto & James F. Mongoven
INTRODUCTION
Increasingly, the workload of the federal antitrust enforcement agencies has
focused on high technology markets. This should not be surprising. Much of the
growth in the U.S. economy during the last decade has been in high technology,
from computers and software to biotechnology and pharmaceuticals. Beyond the
importance of these industries, antitrust enforcers have recently given greater
attention to the importance of high technology as an influence on growth and
innovation, and how technological questions, such as the relationship between
antitrust and intellectual property, should be evaluated.
Some have questioned the application of the antitrust laws to high technology
industries as inappropriate and ineffective. Some critics wonder whether laws
initially enacted in 1890 can be effectively applied to industries that did not exist
then and to patterns of trade and commerce that have evolved to serve a vastly
different society. At times, this criticism is centered on the issue of remedies. The
argument posed is that high tech industries are too fast moving to fashion
effective antitrust remedies and that the abuse of market power will more readily
be dissipated by market forces, especially ease of entry. The specific criticism
concerning remedies is that the antitrust agencies will impose orders that are too
broad in an attempt to sweep up all anticompetitive effects, resulting in a stifling
of innovation incentives. This criticism has a grain of truth to it, but one that is
used to spur a cautious approach to remedy. High technology industries do
indeed exhibit some characteristics that make appropriate remedies more difficult
to fashion, but that does not mean that the field should be abandoned to the play
of private market forces that may be abused by anticompetitive behavior. The
Federal Trade Commission takes account of the differences in high technology
industries in crafting remedies that preserve competition without harming
unilateral and collaborative efficiencies in research and development,
manufacturing, distribution, or incentives to innovate.
This article reviews the remedies used in several recent Federal Trade
Commission and Department of Justice enforcement actions, including mergers
and nonmergers. It considers the approach to remedy in innovation markets,
networks, and vertical mergers, and addresses the use of several alternatives,
including licensing, divestiture, firewalls, and trustees. It then addresses relief in
several nonmerger cases.
D AVID A. B ALTO is Assistant Director, Office of Policy and Evaluation,
Federal Trade Commission. JAMES F. MONGOVEN is an attorney in the Office
of Policy and Evaluation. The opinions expressed herein are the authors and
not necessarily those of the Commission or of any individual Commissioner.
THE COMMISSION’S
REMEDIAL AUTHORITY
The Federal Trade Commission’s remedies are designed to be equitable, not
to punish.1 The relief is generally prospective, in order to stop unlawful conduct
and deter future violations of the antitrust laws. One aspect of deterrence, of
course, is removing any gain from illegal conduct. The Commission generally
pursues three types of remedies in competition cases: structural (divestiture and
licensing), conduct (cease and desist orders), and monetary (civil penalties,
disgorgement, restitution).
When addressing the competitive problems raised by a merger, the foremost
objective of the Bureau of Competition (“Bureau”) is to provide relief that will
return competition to the status quo ante. The Bureau recognizes, as do the courts,
that relief from a Section 7 violation should be tailored to alleviate the likely
anticompetitive effects in the relevant market. Thus, while it is true that the
Commission has “wide discretion in its choice of a remedy,”2 it seeks to assure
that its remedy is reasonably related to the unlawful practices.
The Bureau is sensitive to the need not to upset transactions that may
enhance efficiency if effective remedies may be achieved through settlement.
Crafting an effective remedy depends, in part, on a careful analysis of market
structure, especially entry barriers. It also depends on what kind of relief would be
most effective in restoring competition. To be an acceptable alternative to
litigation, a settlement must resolve the competitive concerns uncovered during
the investigations. That may require, for example in the case of a merger, that the
settlement provide that the divested assets will create a viable competitor with
market share that can replace the competition lost by the merger, or, at least,
facilitate entry (or expansion) of a successful competitor.
Over the past decade the Bureau has faced several challenges in devising
remedies in high technology cases. In the past, divestitures of physical assets in
areas of competitive overlap have been the principal form of remedy. In high
technology markets, that form of remedy sometimes appeared overinclusive and,
on occasion, inadequate. Thus, the Bureau has sought a wide range of other
remedies, including licensing arrangements.3 In some cases, these arrangements
must be supplemented with a variety of assets and continuing relationships in
order to assure that effective technology transfers take place.
As in traditional industries, it is helpful to divide the remedy discussion in
high technology industries into merger and nonmerger sections.
January 1999
D AVID A. B ALTO is Assistant Director, Office of Policy and Evaluation,
Federal Trade Commission. JAMES F. MONGOVEN is an attorney in the Office
of Policy and Evaluation. The opinions expressed herein are the authors and
not necessarily those of the Commission or of any individual Commissioner.
23
ANTITRUST
REPORT
The merger remedies favored by the Commission in
high technology acquisitions are as innovative as
the markets they protect.
MERGERS
Since mergers are a structural event, the remedies to cure the anticompetitive
part of an acquisition are typically, and preferably, structural. If the competitive
overlap constitutes most or all of the acquisition or merger in question, the
Commission will often seek a preliminary injunction to halt the transaction (and
the likely harm to consumers) before it happens; if the competitive overlap is a
smaller part of the overall deal, divestiture or licensing, if they can be drafted with
sufficient protections, may suffice to remedy the competitive concern.
When examining a merger that has both potential efficiencies and
anticompetitive effects, the Commission will ordinarily attempt to find a
structural solution that will preserve the former and eliminate the latter. As Justice
Brennan recognized over thirty years ago, the “key to the whole question of
antitrust remedy is of course the discovery of measures necessary to preserve
competition.”4 That usually requires a remedy as substantial as divestiture. As the
Supreme Court acknowledged in Du Pont, divestiture is the “most drastic” yet
“most effective” form of remedy. The Court also advised that divestiture could
not be denied the government “because economic hardship, however severe, may
result.”5 Thus, the Court concluded that divestiture is a “natural remedy” for a
violation of Section 7 and always should be “in the forefront of a court’s mind
when a violation . . . has been found.”6
Divestiture of a manufacturing plant or other physical assets is something that
the courts are familiar with and that the antitrust agencies are comfortable doing
in order to preserve competition, particularly where the assets constitute an
ongoing business.7 If the competing assets can be sold to a third party or spun off
into a viable competitor, competition can be maintained with a one-time event.
The Commission is most comfortable with an asset divestiture when it can
identify an acceptable buyer in advance. If that cannot be done, the Commission
order will maintain the status quo during the divestiture process by requiring a
tight deadline for the sale, a trustee to oversee the assets to be divested, and the
use of a crown jewel provision to ensure that the divestiture incentive is strong.
Where much of the value of a firm resides in its intellectual property and the
ability to innovate, however, divestiture may be somewhat more problematic. The
complex interplay of human capital from which innovation springs is much more
fragile than typical physical assets. In addition, intellectual property is often
embodied in patents, and the patent system has its own complex system of legal
protections. Thus, in some cases involving high technology markets the
Commission will consider licensing as an alternative. Since the output of the
innovation process can be consumed by more than one entity, the licensing of
that output has the potential to replace lost competition without physically
restructuring the merging firms. However, the Commission has always been
concerned with licensing as a remedy.8 It is by nature more regulatory than
divestiture, and may require ongoing oversight to ensure effectiveness.9
24
This
section
reviews
merger remedies in innovation
markets, computer markets, network mergers, and vertical mergers. It then
discusses two special toots—firewalls and trustees—and closes with a practical
road map to merger remedies.
January 1999
Innovation Markets
The Commission’s “innovation market” merger cases provide good examples
of its thinking about remedies in high technology industries where only certain
parts of a merger would have probable anticompetitive effects. In these cases, the
Commission alleged that competition for the innovation of new products would
be harmed by the acquisitions. Remedies were needed that could replace the
competition lost in the merger without blocking any procompetitive benefits.
Both divestiture and licensing were used in appropriate circumstances.
Although divestiture is the preferred remedy in all merger cases, as a remedy
in innovation markets it requires special care because the success of research and
development efforts often depends on a complex array of expertise and sustained
knowledge. Sometimes, even in cases where divestiture is the appropriate remedy,
it may be necessary to require ongoing obligations of the divesting party to assure
that the purchaser has some probability of successful completion of the research
effort.
The appropriateness of divestiture as a remedy, and its case-by-case flexibility,
are illustrated by the Glaxo case, where the merging parties were the two firms
farthest along in developing non-injectable agonists, which are oral drugs used to
treat migraine attacks.10 Although injectable drugs were already approved by the
FDA, they were not sufficiently substitutable to be included in the relevant
market. Both Glaxo and the acquired firm, Wellcome, competed to develop the
new drugs, and barriers to entry, based on the necessity to acquire substantial
specialized human capital resources, and the necessity of completing the FDA
approval process, were high. No other firm besides the two merging firms was
close to producing a non-injectable agonist.
The Commission thus faced a highly concentrated market for the research
and development of an important new drug where the merging parties were each
other’s closest competitors. The complaint alleged that after the merger Glaxo
could unilaterally reduce output in the relevant market by decreasing the number
of research and development efforts to develop a non-injectable drug. It would
have the incentive to do so because the remaining research effort would
presumably produce a monopoly product until the third-best effort could
complete the FDA approval process some years hence.
Thus, divestiture of Wellcome’s non-injectable R&D assets was appropriate
but not sufficient because of the difficulty of competing in this relevant market.
In order to fully restore competition, the order had to make certain that the buyer
of the divested assets could effectively use them to mount a strong research and
development effort. The assets themselves might not have been sufficient,
without the “complex array of expertise and sustained knowledge” embodied in
D AVID A. B ALTO is Assistant Director, Office of Policy and Evaluation,
Federal Trade Commission. JAMES F. MONGOVEN is an attorney in the Office
of Policy and Evaluation. The opinions expressed herein are the authors and
not necessarily those of the Commission or of any individual Commissioner.
25
Although divestiture is the preferred remedy
in all merger cases, as a remedy in innovation
markets it requires special care . . . .
human capital, to enable an
acquirer to get to market
11
expeditiously. Thus, the order in this case required not only the divestiture of
Wellcome’s non-injectable R&D assets, it also imposed significant obligations on
Glaxo to assist the acquirer in its efforts to continue the research and
development effort successfully. Glaxo had to provide information, technical
assistance, and advice to the acquirer about the R&D efforts, including
consultation with, and training by, Glaxo employees knowledgeable about the
project.12 Additionally, under certain conditions Glaxo had to produce more of
the experimental drug for the acquirer if it was unable to manufacture sufficient
quantities on its own. A trustee was appointed and given the power to sell either
the Wellcome or the Glaxo non-injectable assets if Glaxo had not divested the
Wellcome assets within nine months. The divestiture in this case was a success:
both Glaxo and the acquirer of its intellectual property now have oral migraine
drugs on the market. With the required assistance from Glaxo, the acquiring firm,
Zeneca, received complete FDA approval in only fifteen months.
In the Ciba-Geigy/Sandoz case, the Commission alleged a market for the
development of gene therapy products, despite the fact that there were no such
current products licensed by the FDA.13 This $63 billion acquisition was the
largest pharmaceutical merger in history, combining two Swiss firms that were the
leading developers of gene therapy products. The technology at issue involved the
treatment of disease through manipulation of genetic material and insertion or
reinsertion into a patient’s cells. Although there were many firms doing
pioneering research into gene therapies for various disease states, the merging
firms were two of only a few entities with the intellectual property rights and
other assets necessary for commercialization of such therapies. The firms’
combined position in gene therapy research was so dominant that other firms
doing research in this area needed to enter into joint ventures or contract with
either Ciba-Geigy or Sandoz in order to have any hope of commercializing their
own research efforts.
The remedy in the Ciba-Geigy/Sandoz case was designed to protect
competition both in the particular products then being researched and the
broader market for gene therapy research and development. For the identifiable
products under development, the order required the licensing of certain key
intellectual property rights held by the combined firm, and also required that an
acceptable buyer be identified “up front.” Rhone Poulenc Rorer was identified as
the licensee before the order was accepted by the Commission. For the broader
gene therapy research and development market, the order required the companies
to grant to all gene therapy researchers who applied non-exclusive licenses to all
essential gene therapy technologies, along with access to drug master files and
safety data filed with the FDA. Because adequate human capital was present in
the identified buyer, as well as in other companies with R&D programs in gene
therapy, ongoing technical assistance was unnecessary in this case.
Although not usually ordered in merger cases, licensing was deemed necessary
here to restore partnering prospects for other firms lost by the merger.14
Commissioner Azcuenaga dissented as to the licensing aspect of this order, noting
ANTITRUST
REPORT
26
that divestiture would cure the
anticompetitive problem in a
“simple, complete, and easily reviewable” manner.15 This is the crux of the
decision to use licensing or divestiture to cure an anticompetitive merger. While
divestiture is certainly an easier remedy to impose and monitor, it may not always
be the most effective way of restoring competition. Because licensing is more
flexible and can more easily be tailored to unusual fact situations, it may be the
preferred remedy in innovation cases where divestiture could interrupt potentially
successful research efforts. In this case, the majority of the Commission
determined that the gene therapy research efforts, which contained a number of
joint efforts with third parties, would be too difficult to disentangle from the
merging firms, and would thus “not only . . . hamper efficiency but also could be
less effective in restoring competition if it led to coordinated interaction or left
the divested business at the mercy of the merged firm.”16
The Ciba-Geigy/Sandoz case and the settlement reached there highlight both
the procompetitive and the anticompetitive potential of technology licensing.
These agreements can increase competition if the licensing is used to create
additional competitors. An older Commission case, however, shows the potential
for competitive abuse when licensing agreements become too restrictive.
Yamaha, a Japanese firm, and Brunswick, an American company, were two of
the leading outboard motor manufacturers in the world.17 In the 1970s, the two
firms formed a joint venture that effectively divided the world markets into
exclusive territories so that they would not compete with each other. Yamaha
held exclusive rights to sales in Japan, Brunswick in the United States and
Australia, and the joint venture would sell in other countries under the joint
venture trademark. Included in the joint venture agreements were technology
licensing arrangements that led to the exchange of patents and other intellectual
property regarding marine engines. The licensing agreements were restricted in
that each company was forbidden to use the technology to make or sell products
that would compete with the products of the other. Where, as here, the
technology licensing agreements were nakedly anticompetitive, the only solution
is to dissolve them. The Commission’s order dissolved both the joint venture and
its attendant licensing agreements.
January 1999
D AVID A. B ALTO is Assistant Director, Office of Policy and Evaluation,
Federal Trade Commission. JAMES F. MONGOVEN is an attorney in the Office
of Policy and Evaluation. The opinions expressed herein are the authors and
not necessarily those of the Commission or of any individual Commissioner.
27
Sometimes
technology
licensing cannot solve all of the
competitive concerns in a merger. A joint venture between Shell Oil and
Montedison, an Italian chemical company, to produce and market polypropylene
was such a case.18 The relevant markets, in which both Shell and the joint venture
participated, involved polypropylene technology and technology licensing. Both
parties were willing to attempt to alleviate the Commission’s competitive
concerns by excluding their technology licensing businesses from the joint
venture. Based on the investigation, the Commission determined that exclusion
from the joint venture of the parents’ respective technology licensing businesses
did not solve antitrust concerns for two principal reasons: first, the shared interest
created by the joint venture might temper competition between the parent
companies in research and development and in technology licensing; second,
meaningful innovation in polypropylene technology was dependent on, and
inextricable from, firsthand experience in using the technology and the
proprietary catalyst to produce and sell polypropylene resin and in working with
customers to develop new resin formulations. The joint venture would in the
future be the principal means by which Shell, and the only means by which
Montedison, would produce and sell polypropylene resin. Under these
circumstances, it was simply implausible that Shell and Montedison would
continue to compete with each other, let alone with their joint venture, in
innovation in polypropylene technology.
The Commission’s staff rejected a licensing-only remedy in that case because
the evidence showed that a viable and competitive technology business could not
be maintained without production, sales, and distribution assets for both
polypropylene resin and polypropylene catalyst. Thus, comprehensive structural
relief was necessary in order to preserve continued competition between the two
companies in innovation and in licensing of polypropylene technology and to
assure the viability and competitiveness of the technology licensing businesses.
Solutions short of divestiture that would leave the technology licensor and its
licensees dependent on the Shell-Montedison joint venture for supply of suitable
raw materials and for information regarding new product formulations were
rejected.19 Accordingly, the Commission’s order required divestiture by Shell of an
integrated polypropylene company sufficient to support continued research and
development in polypropylene technology and to be a credible licensor of
technology.
ANTITRUST
REPORT
Computer Mergers
The first industry most people think of when high tech is mentioned is the
computer industry, and indeed, both the hardware and software components of
the industry epitomize many of the characteristics that apply across the board to
high tech industries. The technology of these products may change with unusual
rapidity. Network effects are prevalent in both hardware and software because
computers are essentially products designed to facilitate communication, and
these effects can result in high barriers to entry. The Commission has recently
28
investigated a number of
mergers in this industry that
January 1999
have raised significant competitive concerns.
One of the Commission’s more prominent merger investigations during the
last year involved the settlement of Digital Equipment’s patent litigation with
Intel, which resulted in cross-licensing of technology and the acquisition of a
fabrication facility.20 Digital and Intel are aggressive rivals in the present and
future development of microprocessors, and Digital’s Alpha microprocessor is a
significant competitor both to Intel’s Pentium microprocessor and to Intel’s next
generation IA-64 microprocessor. Digital sued Intel in May 1997, alleging that
Intel’s Pentium microprocessors infringed some of Digital’s Alpha
microprocessor patents. Intel countersued, claiming that Digital’s Alpha
microprocessors infringed some of Intel’s patents. Digital and Intel settled their
suit in October 1997 by agreeing to broad patent cross-licenses, the sale of
Digital’s microprocessor production facilities to Intel, and an agreement that Intel
would produce Alpha microprocessors for Digital. The sale of facilities to Intel
did not include the intellectual property rights, design assets, or employees for the
Alpha chip. Digital also agreed to design computer systems based on Intel’s IA-64
architecture and chips.
The Commission’s complaint alleged that certain aspects of the settlement
were likely to reduce competition in three relevant markets: (1) the manufacture
and sale of high-performance, general purpose microprocessors capable of
running Windows NT in native mode; (2) the manufacture and sale of all general
purpose microprocessors; and (3) the design and development of future
generations of high-performance, general purpose microprocessors.21 Antitrust
concerns arose because in each of these markets Digital’s Alpha chips were the
highest performance and most technologically advanced threat facing Intel’s own
microprocessors. Barriers to entry were significant because any new
microprocessor firm would need to convince computer manufacturers to design
their systems around the new microprocessor, a daunting task given the network
externalities embodied in current microprocessors. While recognizing that the
settlement would free Digital from the enormous cost of owning and operating its
own chip fabrication facilities, the Commission was nonetheless concerned that
Alpha would not remain competitively viable under the original terms of the
Digital-Intel agreement. Intel would have the ability to interfere with Digital’s
supply of Alpha chips by withholding necessary cooperation at the manufacturing
stage. Digital might also lack the ability and incentive to continue to actively
develop and promote Alpha.
To resolve these concerns, Digital entered into a consent agreement under
which it would grant perpetual and generally non-terminable licenses of the Alpha
architecture to Samsung and AMD or other suitable partners approved by the
Commission so that they would be able to produce and develop Alpha chips. This
is an “architectural” license under which the licensee will be free to create its own
implementations and derivative works—that is, to design original chips around
the architecture—with the caveat that the licensee maintain backward
compatibility with the Alpha architecture. In that fashion, the licensees will have
D AVID A. B ALTO is Assistant Director, Office of Policy and Evaluation,
Federal Trade Commission. JAMES F. MONGOVEN is an attorney in the Office
of Policy and Evaluation. The opinions expressed herein are the authors and
not necessarily those of the Commission or of any individual Commissioner.
29
the incentives to develop their
own variations of the Alpha
chip and thus restore innovation competition. An architectural license is
important for two reasons. First, the licensee can become completely independent
of the licensor by developing its own product line. Second, customers may be
more willing to commit to the Alpha architecture knowing there are alternative
sources of supply. The order also requires Digital to provide technical support to
the licensees for a period of up to two years.
Digital also agreed to begin the process of certifying IBM as a foundry for
Alpha chips, thereby establishing a manufacturing alternative to Intel. Structural
relief was not necessary in this case because the strength, experience, and market
position of the licensees made them highly formidable potential competitors.
Taken together, these provisions were intended to preserve Alpha as a viable
product and competitor to Intel’s microprocessors.
In Adobe, the Commission faced a merger to monopoly of two software
firms.22 Both Adobe Systems and the acquired firm, Aldus, designed professional
illustration software. These products are used by graphics professionals to
efficiently and reliably create and print high-quality illustrations, a $60 million
market. The Adobe product and the Aldus product were the only two
professional illustration products available for use on Apple Macintosh and
Power Macintosh computers, which are particularly favored by professional
illustrators. Even if the market were expanded to include IBM-compatible
computers, Adobe and Aldus would have 35 percent of the market and would be
each other’s closest competitors. No new entry has occurred and barriers are high
due to high developmental and reputational barriers, and a large installed base that
makes penetration difficult and time consuming. In particular, the network
externalities associated with both firms’ installed user base posed a particularly
substantial barrier to entry.
The consent agreement settling this case required Adobe to divest Aldus’s
“Freehand” professional illustration software within six months. The parties
presented and the Commission approved Altsys Corporation as an up-front
buyer, which had developed the Freehand software. The divestiture package
included customer names and addresses, as well as marketing, advertising,
training, and technical support information and materials. The merged firm was
also required to maintain Freehand’s viability and marketability in the interim. The
Commission also required a ten-year prior approval agreement from the merged
firm before acquiring any interest in any firm engaged in the development or sale
of professional illustration software for the Macintosh or Power Macintosh, or
before directly acquiring any such software if the purchase price was $2 million or
more.
As noted above, network effects can be a particularly thorny barrier to entry.
If a new entrant’s product is not compatible with the dominant network,
consumers will be unlikely to switch unless the new product offers a huge
advantage in price or product attributes. Additionally, compatibility can be
difficult to achieve due to intellectual property rights held by the incumbent
network owner. The Commission recently had a merger case in which the owner
ANTITRUST
REPORT
30
of a product with dominant
network effects attempted to
purchase a firm that was on the verge of entry with a competitive and compatible
product, Autodesk’s acquisition of Softdesk.23 Autodesk had 70 percent of the
market and 70 percent of the installed
base for computer-aided designThe antitrust enforcement agencies have been
(“CAD”)
software
engines
forincreasingly vigilant in investigating and seeking
Windows-based
computers.
Theserelief when appropriate in network mergers.
products are used in the architecture,
engineering, and construction industries to automate the design process, and are
used by over 1.4 million consumers. The large installed base of Autodesk users
necessitates that any new CAD engine developed and offered in the market offer
file compatibility and transferability with Autodesk’s product in order to be an
effective competitor. Users of the Autodesk product have a large number of
drawings in the Autodesk format, and many users must share files they create
with others who must be able to read and edit those files using the CAD
software. This situation creates barriers to entry to CAD engines that cannot read
the Autodesk files without losing data or information. A smaller firm, Softdesk
was about to introduce its own CAD engine, IntelliCADD, that would have
provided substantial direct competition to Autodesk because it offered
compatibility and transferability with Autodesk-generated files and application
software.
In this case, when apprised by the Commission staff of the competitive
implications of the merger, Softdesk divested its product to a third party,
Boomerang Technology. The order settling the case barred Autodesk or Softdesk
from reacquiring IntelliCADD or any entity that owns or controls the
IntelliCADD technology for a period of ten years without prior notification to
the Commission. In addition, Autodesk and Softdesk were prohibited from
interfering with the ability of Boomerang to recruit or hire employees of Softdesk
who worked on the development of IntelliCADD.
Both the Adobe/Aldus and the Autodesk/Softdesk acquisitions suggest the
importance of structural relief where network externalities are present. In those
cases, even though technology may have been evolving, network effects created
such a formidable barrier that remedy short of divestiture may have been
inadequate.
January 1999
Network Mergers
The antitrust enforcement agencies have been increasingly vigilant in
investigating and seeking relief when appropriate in network mergers. Perhaps a
decade ago, most such mergers received little attention, in part because it was
difficult to perceive significant barriers to entry. Now as the understanding of
network effects, including network externalities, installed base, and switching
costs, has become more sophisticated, network mergers are receiving more
careful scrutiny.24
For example, in 1995 the FTC challenged the acquisition of the Western
D AVID A. B ALTO is Assistant Director, Office of Policy and Evaluation,
Federal Trade Commission. JAMES F. MONGOVEN is an attorney in the Office
of Policy and Evaluation. The opinions expressed herein are the authors and
not necessarily those of the Commission or of any individual Commissioner.
31
Union
consumer
money
transfer system (owned by First
Financial Management Corp.) by First Data Corp., the owner of the MoneyGram
system.25 Consumer wire money transfer systems involve one-way money
transfers, typically between two consumers. Wire transfer agents include a wide
variety of retail outlets, including grocery stores and check cashing outlets.
Historically, entry into the consumer wire transfer service market was difficult for
two reasons: (1) the need to develop a minimum viable scale nationwide network
of money transfer agents; and (2) the need to establish name recognition and
customer acceptance through large-scale advertising and promotion. Long-term
agent contracts utilized by Western Union made acquiring a sufficient agent
network difficult, and building brand name recognition required a substantial
investment over a number of years. First Data (MoneyGram) was the only firm
that had succeeded in overcoming those barriers and had begun to offer
significant competition to Western Union, until then a monopolist. No other firm
was likely to enter.
To address these concerns the consent order required First Data to divest the
MoneyGram network, including its trademark and relationships with a sufficient
number of geographically dispersed agents (over 10,000) to create a viable
network. Since the agent base and trademark were critical factors, the order had
two novel provisions. First, First Data could not solicit any MoneyGram agents
until the term of their contract expired. Second, during the divestiture period, an
interim trustee was appointed to ensure the network did not deteriorate in value.
Specifically, the trustee had the ability to increase the level of MoneyGram
advertising by 20 percent, and there were financial incentives to sign up additional
MoneyGram agents to build the agent base.
Another recent network merger involved the acquisition of most of the assets
of AutoInfo by Automated Data Processing (“ADP”) in the market for a used
auto parts exchange network.26 Auto exchange networks facilitate the trade and
purchase of auto parts between salvage yards. They consist of several
components, including (1) a yard management system, a computerized
inventory-control and management system for salvage yards; (2) an interchange, a
numeric system for identifying interchangeable used automobile parts that is
included in electronic form within the AutoInfo yard management system; and (3)
a communications network, an electronic, satellite, or land-based communications
system to effectuate trading of parts between salvage yards. The ADP/AutoInfo
transaction resulted in a monopoly in the relevant market.
The merger was challenged after its consummation, in part because of
withholding of relevant Hart-Scott-Rodino information by ADP.27 The antitrust
case was ultimately settled after administrative litigation had begun. The consent
order required the divestiture of the AutoInfo assets, including the
communications network and the yard management system. There was a problem
with a simple divestiture, however, because ADP had switched all AutoInfo
customers to use the ADP interchange after the acquisition and failed to update
the AutoInfo interchange, which quickly became obsolete. In effect the ADP
interchange had become the industry standard since ADP’s conversion of all
ANTITRUST
REPORT
32
users to its own interchange
rendered impracticable any
attempt to ask users of the assets to be divested to change back to the AutoInfo
Interchange.
Thus, the Commission faced a problem: how to provide access to the ADP
interchange to the acquirer of the AutoInfo assets while providing incentives for
them to develop their own interchange? The answer was a requirement that ADP
provide a paid-up, perpetual, non-exclusive license (with no continuing royalties
and with unlimited rights to sub-license) to ADP’s interchange. This license
arrangement required no post-divestiture royalties and did not limit the licensee’s
right to sublicense. The order also required ADP to license all interchange
updates. Moreover, the order provided that ADP had to give the acquirer a copy
and non-exclusive license to all computer programs, databases, and information
sources that ADP has used to update its interchange.
As in the First Data case, the Commission recognized that the divesting
network could take actions to drive customers from the new network, and
therefore implemented provisions to protect the customer base. ADP could have
prevented customers from dealing with the new network or create barriers to
interoperability between networks. To address that issue the order contained an
open access provision that prevented ADP from reinforcing its installed base
advantage by preventing its customers from accepting or transmitting inventory
data by way of other vendors’ services. The order also provided that ADP could
not use any contracts or other means to hinder its customers’ attempts to
interconnect with the acquirer’s products or services. This provision ensured that
ADP’s customers could freely choose to send inventory data generated from
ADP systems or sent over ADP communications networks to other vendors’
systems or networks. Moreover, to facilitate the transition of ADP customers to
the new network the order provided that, for one year following divestiture, ADP
facilitate conversion of any customers (acquired post-acquisition) to the acquirer’s
system by foregoing any penalties otherwise available and by permitting
customers to exit existing contracts.
January 1999
Vertical Mergers
Vertical merger cases can also have anticompetitive effects, although they may
raise different issues from the horizontal cases already mentioned.28 The main
potential anticompetitive effect from vertical mergers is that market opportunities
may be foreclosed and barriers to entry may be raised by the necessity of entering
at more than one level in order to complete effectively. The Commission recently
settled two vertical merger cases in high technology industries. In both of these
cases, the acquisitions exhibited potential efficiencies along with the probable
anticompetitive effects from potential foreclosure. Thus, the challenge in each
case was to tailor the relief to restore pre-acquisition competition while allowing
the efficiencies to be realized.
In Silicon Graphics, the acquiring firm had 90 percent of the market for
workstations that run entertainment graphics software and the acquired firms,
D AVID A. B ALTO is Assistant Director, Office of Policy and Evaluation,
Federal Trade Commission. JAMES F. MONGOVEN is an attorney in the Office
of Policy and Evaluation. The opinions expressed herein are the authors and
not necessarily those of the Commission or of any individual Commissioner.
33
Alias Research and Wavefront
Technologies, were two of the
three leading entertainment graphic software firms in the world.29 The software is
used to produce high-resolution two- and three-dimensional digital images for
movies and other media. The two interdependent acquisitions totaled nearly $500
million. The complaint alleged that the acquisitions would foreclose access by
other workstation producers to the relevant software as well as give Silicon
Graphics nonpublic information about its competitors’ products. In addition, the
acquisition could foreclose, or increase costs to, potential entertainment software
firms, raising barriers to entry by making it necessary to enter on two levels. The
complaint also alleged a reduction in innovation in both hardware and software
markets.
The consent order required Silicon Graphics to enter into a “porting
agreement” with a Commission-approved partner that would allow the partner to
run the two most important software programs of Alias. This porting requirement
would ensure that at least one other workstation manufacturer would have access
to the important Alias graphics packages being acquired by Silicon Graphics. The
settlement identified Digital Equipment, Hewlett-Packard, IBM, or Sun
Microsystems as possible porting agreement partners, as long as the agreement
itself was approved by the Commission. The Commission also required Silicon
Graphics to maintain an open architecture and to publish its application
programming interfaces so that other software developers could write
entertainment graphics software for Silicon Graphics workstations. Silicon
Graphics was also required to offer independent entertainment graphics software
companies participation in its software development programs on terms no less
favorable than it offers other types of software companies. To address the
potential for disclosure of competitors’ information, the order prohibited the
release of non-public information from the platform partner porting the Alias
software to those Silicon Graphics or Alias employees not participating in the
porting process.
ANTITRUST
REPORT
34
In the other merger, the
Commission
alleged
that
Cadence Design System’s acquisition of Cooper & Chyan Technology would
reduce competition for software used to automate the design of integrated
circuits.30 Cadence is the leading supplier of microchip layout environments, and
Cooper & Chyan was the only firm with a commercially viable constraint-driven,
shape-based router, which is used to automate the solution of unique engineering
problems associated with the increasingly smaller scale of microchip design.
Cadence thus stood in a vertical relationship with Cooper & Chyan as a purchaser
of its products, and the merger could lead to efficiencies due to tighter integration
between Cooper & Chyan’s integrated circuit design tools and Cadence’s product
line, which would allow the tighter coupling of physical design software with
logical design tools that is necessary to design integrated circuits at the submicron
level. The complaint alleged that the acquisition would reduce the incentives of
Cadence to permit competing suppliers of routing tools to obtain access to
Cadence’s layout environments, thereby increasing barriers to entry for routing
tool developers because they would have to simultaneously enter at the router and
layout environment levels. Innovation would suffer as a result. The evidence
indicated that Cadence was no stranger to attempts to block access to its layout
environments in order to raise costs to potential competitors. In the past,
Cadence had thwarted attempts by firms with potentially competitive technology
to develop interfaces.
The consent order required Cadence to allow developers of commercial
integrated circuit routing tools to participate in the Cadence “Connections
Program” and any other Cadence independent software interface programs that
enable independent software developers to develop and sell interfaces to Cadence
layout tools and environments. Cadence was required to offer participation to
independent software developers on terms no less favorable than those applicable
to any other participants in the program. Cadence’s Connections Program had
over 100 participants, and thus the nondiscrimination requirement was easy to
enforce and it allowed actual and potential competitors of Cooper & Chyan
products to have equal access to Cadence’s layout environment.
The key aspect of the relief in both of these cases was the use of
nondiscrimination provisions aimed at preventing self-favoritism. These
provisions are typically not easy to draft or monitor. However, in both the Silicon
Graphics and Cadence cases, there were available benchmarks that could be used to
judge how the companies would have treated rivals if the market were more
competitive. Thus, in Silicon Graphics, the respondent must treat independent
entertainment graphics software developers in the same way it treats independent
developers of industrial and scientific software applications doing business in
more competitive markets. Similarly, in Cadence, the respondent must allow router
developers to participate in existing software development interface programs
available to developers of other software tools. As Howard Morse has observed,
in both cases “the application of an existing benchmark resulted in an order that
is easier to monitor compared to other nondiscrimination provisions.”31 In other
cases, where these benchmarks are unavailable, stronger remedy alternatives may
January 1999
D AVID A. B ALTO is Assistant Director, Office of Policy and Evaluation,
Federal Trade Commission. JAMES F. MONGOVEN is an attorney in the Office
of Policy and Evaluation. The opinions expressed herein are the authors and
not necessarily those of the Commission or of any individual Commissioner.
35
ANTITRUST
be necessary.
REPORT
Vertical merger cases with both potential
efficiencies and anticompetitive problems may
present an additional remedial difficulty.
Firewalls
Vertical merger cases with both potential efficiencies and anticompetitive
problems may present an additional remedial difficulty. If the merger is allowed to
proceed, the combined firm may be in a position to gain access to proprietary
information of a competitor through a supply relationship with that company.
One form of relief to obviate this problem is the so-called “firewall,” an order
provision requiring some segregation of information within the merged entity.
The Commission has taken this approach in several vertical merger cases in
defense industries32 and pharmaceuticals.33
Firewalls may be appropriate when, because of its position in two levels of the
market, a newly vertically integrated firm may be both a competitor and a
customer or supplier of a particular firm or group of firms. In its activities as
customer or supplier, the merged firm may, in the nature of things, acquire access
to competitively sensitive information about these competitors. If this
information flows freely from the customer/supplier segment of the integrated
firm to the competitor segment, the non-integrated competitor may be harmed in
several ways. The integrated firm may be able to appropriate the fruits of the
competitor’s research and development and decipher product road maps. If the
integrated competitor gets access to a non-integrated competitor’s technical
information, the latter’s incentives to innovate or engage in research and
development may be sharply reduced because the rewards for such investment
may be appropriated by the integrated firm. Further, in a market where firms bid
for business, the integrated firm also may be able to forecast, or at least
approximate, the competitor’s bids, and itself bid less aggressively than it would
have in a state of greater uncertainty.
One example of a firewall in a defense-industry case is found in Martin
Marietta/General Dynamics, a 1994 consent order. That case involved the
acquisition by Martin—now Lockheed Martin—of General Dynamics’ Space
Systems Division. The Commission’s complaint alleged that as a result of the
acquisition, Martin’s launch-vehicle division would have access to detailed,
non-public information from competitors in the satellite industry, which it could
then pass on to its satellite division. That is because launch vehicle designers must
have a lot of information about the satellites their vehicles are to carry. This
information could be misappropriated by Martin to make better bids for satellite
business or even to build better satellites. The consent permitted the acquisition,
but prohibits Martin’s launch division from disclosing to its satellite division any
non-public information it receives from a satellite manufacturer.
The first use of a firewall provision in the pharmaceuticals industry was a consent
in Eli Lilly and Company/PCS Health Systems, in 1995. That case involved Lilly’s
acquisition of McKesson Corporation’s PCS Health Systems, a pharmacy benefit
36
management
(“PBM”)
business. PCS, in carrying out
its PBM activities, maintains a “drug formulary,” a list of drugs it gives to
pharmacies, physicians, and third-party payors to guide them in prescribing and
dispensing prescriptions to health plan beneficiaries, and it negotiates with drug
manufacturers about rebates, discounts, and prices to be paid for drugs.
Obviously, this involves obtaining a great deal of proprietary information from
manufacturers that compete with Lilly, and the concern was that, in the absence
of a firewall provision, such information could be shared with Lilly. The consent
order prohibited such information-sharing.34
The Commission’s experience with these cases indicates that, if the
troublesome information flow can be prevented, the problems of
misappropriation of competitively sensitive information can be avoided.35 In this
regard, competitors serve as an extra set of eyes for the Commission, and can
alert it if there has been a breach of the firewalls. These firewalls are rather
straightforward and they are a “clean” solution, in the sense that they should not
have any negative impact on legitimate potential efficiencies. Firewalls appear to
be effective and seem not to be creating unplanned negative effects.
Nonetheless, firewalls are not appropriate to every situation in which
disclosure of competitively sensitive information is potentially anticompetitive. A
firewall provision may be adequate where there is some neutral third-party
oversight, for instance the Department of Defense or third-party payors like
insurance companies. In other cases, a firewall will be far less than sufficient.
One might suggest that firewalls are unnecessary because private parties can
negotiate for similar agreements. But private parties might not be able to
accomplish the same level of protection with private non-disclosure agreements.
There also may be some instances in which the incentives of parties to negotiate
private confidentiality agreements would not be fully aligned with the
Commission’s concerns about the health of competition.
January 1999
Trustees
One important element in some of the remedies in high technology markets is
the use of a trustee. Trustees have been used for a number of purposes. For
example, in First Data,36 an interim trustee was used to ensure that the value of the
MoneyGram network did not dissipate during the divestiture period. The trustee
was responsible for monitoring advertising expenditures and solicitation of
agents. In Glaxo,37 a trustee was used to ensure that an adequate package of
intellectual property was divested, that the research and development continued
to be pursued in an appropriate fashion, and that the acquiring party could
manage the regulatory drug approval process. In Digital,38 a trustee was used to
monitor both the process of finalizing the implementing agreements for the
licenses and the continuing relationships between Digital and the licensees.
The Commission’s increasing use of trustees in recent high technology
mergers is based on several recurring complexities in high technology industries.
Where the Commission does not possess the technical expertise to draft and
D AVID A. B ALTO is Assistant Director, Office of Policy and Evaluation,
Federal Trade Commission. JAMES F. MONGOVEN is an attorney in the Office
of Policy and Evaluation. The opinions expressed herein are the authors and
not necessarily those of the Commission or of any individual Commissioner.
37
monitor effective licenses, an
experienced trustee may be
able to do so. Many trustees are experts with hands-on experience in certain
industries and technologies and can effectively determine whether a particular
remedy is adequate to restore competition. Ongoing relationships between the
respondent and the acquirer may provide the opportunity for strategic behavior
by the respondent to thwart the acquirer’s ability to compete effectively. The
trustee can monitor the transfer of know-how and other agreements to deter
strategic behavior. Also, the constant presence of a trustee may be necessary in
order to ensure that research and development continues to be pursued and to
facilitate the seamless exchange of information necessary to contract for a license.
Finally, Commission orders that contain licensing provisions usually contain
“crown jewel” provisions requiring the divestiture of a more valuable set of assets
if problems arise with the license. Trustees are available to enforce these
provisions and activate the crown jewel clause, if necessary.
ANTITRUST
REPORT
A Practical Road Map to Merger Remedies
The merger remedies favored by the Commission in high technology
acquisitions are as innovative as the markets they protect.39 While each remedy is
different, molded to the precise competitive situation in the affected markets,
there are certain key factors that are considered:
 Divestiture of an Ongoing Business
Divestiture of an ongoing business with customer and supplier relationships
with an up-front buyer or under a strict timetable remains the preferred remedy; it
is quick and has a high probability of success.
 Divestiture of Selected Assets
Where it can be determined that a divestiture of selected assets is adequate,
with the right acquirer, to facilitate entry, the Bureau will consider this as a
possibly less burdensome requirement. In high technology markets, such selected
assets may include patents and technology portfolios, and research and
development assets.
 Licensing
If divestiture appears to be inappropriate for whatever reason, licensing will
be considered. Generally, the Bureau prefers exclusive licenses, so that the
licensee has the greatest economic stake in the technology being transferred. In
addition, the Bureau will generally prefer that the licensee obtain the right to use
any improvements to the technology that the licensee develops, including uses of
the technology in fields outside the alleged innovation product market. Often,
licensing must be supplemented with other assets such as supply agreements for
an interim period, critical personnel, facilities, or customer relationships.
38
 Use of an Up-Front Buyer
January 1999
Presentation of an up-front buyer is always useful, regardless of the form of
remedy. Where the divestiture is less than an ongoing business or where licensing
is considered, it is critical for the respondent to present an up-front buyer or
licensee during consent negotiations. An up-front buyer or licensee will help to
assure that the remedy is adequate to restore competition. The Bureau will always
attempt to determine if the up-front buyer will be able to effectively utilize the
divested assets or the proffered license. This gives the Bureau more confidence
that competition will be restored for the long run.
 Crown Jewel Provision
Also, the Bureau will often insist on a “crown jewel” provision, with
enforcement power in the trustee, to assure that the respondent will make every
effort to resolve the remedy issue in a timely and effective fashion. A crown jewel
provision requires a company to sell a different, more valuable group of assets if
the assets to be divested are not sold in a given time period. Such provisions
increase the incentive for the respondent to sell the initial package during the
initial period and provide a more attractive package for the trustee to divest if the
respondent is unsuccessful. A crown jewel will be particularly important where
licensing is used; it creates incentives for the respondent to cooperate fully in
technology transfers and supply agreements and may dampen the incentives to
engage in strategic behavior.
 Interim Trustees
Very often, the Bureau will require the appointment of an auditor-trustee to
oversee the respondent’s efforts in transferring technology and performing under
any supply agreement. The orders will also frequently contain a hold-separate and
an interim maintenance requirement, to make certain that the active research and
development continues on schedule and that the assets are not dissipated during
transfer. In such instances, an auditor-trustee can prevent the dissipation of assets
and information-exchange problems that might occur.
D AVID A. B ALTO is Assistant Director, Office of Policy and Evaluation,
Federal Trade Commission. JAMES F. MONGOVEN is an attorney in the Office
of Policy and Evaluation. The opinions expressed herein are the authors and
not necessarily those of the Commission or of any individual Commissioner.
39
ANTITRUST
NONMERGERS
REPORT
When the Commission considers the need for effective remedies for
anticompetitive conduct in high technology industries, it faces a broad set of
issues. In part, this merely reflects the greater number of merger cases, but it also
highlights the wider range of conduct under review in nonmerger cases. While all
mergers are alike in that they are a melding of separately owned assets at a
particular point in time, potentially anticompetitive nonmerger conduct is more
diverse, ranging from per se horizontal division of markets to monopolization to
vertical distribution agreements analyzed under the rule of reason. In addition,
divestiture and other structural remedies may be more difficult to fashion in a
situation where assets are not already being combined or spun-off. To be sure,
conduct remedies such as injunctive relief and cease and desist orders are also
important remedies in nonmerger cases, but even these are more difficult to
analyze and put in place than a simple prohibition of an acquisition. Finally,
nonmerger conduct might call for a third type of remedy that is not often
appropriate in mergers, that is, monetary relief. Monetary remedies might include
civil penalties, restitution, or perhaps even disgorgement.40
Several of the perceived differences in high technology competition may have
an impact on the type of remedies sought in nonmerger cases. For instance, the
prevalence of network effects may raise issues of access to the network by
competitors or by producers of complementary goods. In such a case, the owner
of a proprietary system who committed anticompetitive or exclusionary acts could
be forced to open the system in order to restore competitive conditions.
The abuse of intellectual property licensing in order to maintain monopoly
power can also give rise to an antitrust violation. In the Pilkington case, the
Department of Justice alleged that the British firm, the world’s largest producer of
float glass, violated Sections 1 and 2 of the Sherman Act by maintaining
agreements and understandings that unreasonably restrained interstate and
foreign trade in the construction and operation of float glass plants and in float
glass process technology, and by monopolizing the world market for the design
and construction of float glass plants.41 The agreements in question were put in
place in the 1960s, but the patents and trade secrets they were initially based-on
had long since expired and had moved into the public domain. Despite the
erosion of the intellectual property protections, over 90 percent of float glass
worldwide continued to be manufactured under a Pilkington license agreement.
The complaint specifically alleged that, without sufficiently valuable intellectual
property rights, Pilkington and other float glass manufacturers allocated territories
for, and limited the use of, float glass technology worldwide, required competitors
to prove that all of the licensed technology had become publicly known before
being relieved of the territorial and use restrictions, and imposed limitations on
the sublicensing of float glass technology. As a result of the restrictions, existing
licensees, including those in the United States, could not design and build new
float plants without Pilkington’s permission.
40
The consent decree entered
in Pilkington enjoined
defendants from enforcing license provisions that restrain their U.S.-based
licensees’ freedom to use float glass technology anywhere in the world, and from
enforcing license restrictions against their other licensees that restrain the
licensees’ freedom to use float glass technology in the United States. It also
enjoined defendants from asserting any proprietary know-how rights in such
technology against individuals or firms in the United States who are not licensees.
The settlement freed competitors worldwide to pursue the best technology
and to innovate to produce new technology. The Department estimated that
thirty to fifty float glass plants were planned or projected worldwide out to the
year 2000, amounting to expenditures of as much as $5 billion. Once defendants
were enjoined from imposing the licensing restrictions, firms in the United States
could compete for contracts to design and manufacture these plants. The
judgment also enjoined conduct that had the effect of restricting exports of float
glass and float glass technology into the United States.
Three recent high technology nonmerger cases brought by the FTC show the
diversity of remedies being sought. In the Intel case, which is currently in
administrative litigation, the Commission alleges that Intel refused to provide to
three companies technical information necessary to make products that would
work with Intel microprocessors, in an attempt to force those companies to
license their own technology to Intel.42 The relief sought by the Commission
would order Intel to cease and desist from discriminating, or threatening to
discriminate, between customers that compete with it or who threaten to assert
intellectual property rights concerning computer technology against it, and those
that do not, unless Intel can demonstrate legitimate business reasons for such
discrimination. Discrimination would be forbidden in the areas of the sale of
microprocessors, terms of nondisclosure agreements concerning microprocessors,
providing information concerning Intel’s computer technology, providing
prototypes of Intel’s products in development, and providing technical assistance
concerning Intel’s existing dominant products or products in development.
The VISX case also involved abuse of market power based on intellectual
property.43 In that case, Summit Technology and VISX, the only two
FDA-approved manufacturers of lasers used in photo refractive keratectomy
(“PRK”) to treat vision disorders, formed a patent pool whereby the two firms
agreed to charge a $250 licensing fee that was paid into the pool each time laser
eye surgery was performed using either firm’s equipment. The proceeds of the
pool were split according to a formula. The result was that prices were far higher
than they would have been if the two firms had been competing with each other,
in markets for the sale or lease of PRK equipment, and the licensing of
technology related to PRK. Both companies possessed patents that would have
allowed them to be horizontal competitors, and they had planned to so act before
the pool was formed.
The pool effectively fixed the minimum price for the technology licenses
under which doctors perform PRK. The pool also had the power to exclude
competitors. Any manufacturer that wanted to market a laser for PRK needed a
January 1999
D AVID A. B ALTO is Assistant Director, Office of Policy and Evaluation,
Federal Trade Commission. JAMES F. MONGOVEN is an attorney in the Office
of Policy and Evaluation. The opinions expressed herein are the authors and
not necessarily those of the Commission or of any individual Commissioner.
41
license from the pool for one
of the patented laser aiming
mechanisms. The pool eliminated the option of receiving bids from two
competing firms to license the technology and it also permitted either Summit or
VISX to veto any potential licensee. The veto power was exercised and
third-party entry was prevented.
In this case, a cease and desist order and licensing of the intellectual property
of both companies were sufficient to restore competitive conditions. Under the
terms of the settlement of the patent pool charge, the two firms are prohibited
from fixing prices or agreeing in any way to restrict each other’s sales or licensing
of their patents or lasers, including prohibition of the “per-procedure fee”
charged to doctors for use of the lasers. Since the companies had already agreed
to dissolve the patent pool, the order requires them to take no action inconsistent
with the dissolution, and also requires them to license each other, on a
royalty-free and non-exclusive basis, the patents that each contributed to the pool.
This settlement embodies the principle found in the Intellectual Property
Guidelines that a patent pool that evidences anticompetitive effects may be
defended if it is reasonably necessary to achieve procompetitive efficiencies.44
Here, the Commission found that the pool was anticompetitive and not necessary
to achieve efficiencies.
The Dell Computer case involved an anticompetitive acquisition of market
power through abuse of a standard-setting procedure.45 At issue was a standard
designed for the Video Electronics Standards Association for a local bus to
transfer instructions between a computer’s CPU and peripherals. There would be
considerable efficiency-enhancing potential in a product that would let computer
and peripheral manufacturers know how to make products compatible with one
another. The agreement on the standard was premised on representations by the
participants that no firm would assert intellectual property rights that might block
others from developing towards the standard. The anticompetitive potential of
the standard-setting activity surfaced when Dell alleged that the new standard
infringed on its patent, despite twice certifying, along with other members of the
Association, that it would not assert intellectual property rights. Dell made its
claim only after the bus was highly successful, and its claim for royalties gave it
effective control of the standard.
Dell’s belated assertion of patent ownership in this case enabled it to exercise
market power that went beyond power that it could have obtained in the absence
of its misrepresentation. The Commission’s complaint specifically alleged that
industry acceptance of the new standard was delayed and that uncertainty about
the acceptance of the design standard raised the cost of implementing the new
design. Other firms avoided using the new bus because they were concerned that
the patent dispute would reduce its acceptance as an industry standard. In
addition, willingness to participate in industry standard-setting efforts was chilled.
When Dell asserted ownership of a blocking patent, this anticompetitive use of
intellectual property was sufficient to cause harm through suppression of
innovation and delay of introduction of the products that the standard was
designed to implement.
ANTITRUST
REPORT
42
NOTES
Dell Computer was a
January 1999
relatively straightforward case, and the Effective antitrust enforcement depends on a
resulting remedy was also simple and
thoughtful and determined approach to remedies.
easy to effectuate. The consent order
requires that Dell refrain from enforcing its patent against any computer
manufacturer using the new design in its products. In addition, Dell is prohibited
from enforcing any of its patent rights that it intentionally fails to disclose upon
request of any standard-setting organization during a standard-setting process.
Other competitors are thus free to innovate and produce products to the
specifications of the standard, and Dell is precluded from duplicating its
anticompetitive behavior in the future.
CONCLUSION
Effective antitrust enforcement depends on a thoughtful and determined
approach to remedies. The unique innovation incentives and intellectual property
aspects of high technology industries have challenged the Commission to craft
remedies that work effectively in difficult and unfamiliar situations. The same
remedies of divestiture and licensing that are used in traditional “smokestack”
industries are also used in high technology industries, but they must be applied
with unusual precision in order not to adversely affect the innovation and new
product development that are the hallmarks of competition for these rapidly
evolving industries. The Commission’s efforts to apply intelligent and flexible
remedies in high technology industries have helped protect competitive markets
and ensure open access to those markets for new entrants, and thus have the
ultimate effect of increasing innovation incentives across all industries.
1. The Commission’s remedial authority is
derived from the Federal Trade Commission
Act, 15 U.S.C. §§ 41-58, the Clayton Act, 15
U.S.C. § § 12-21, and more than 30 more
specialized statutes, e.g., Magnuson-Moss
Warranty Act, 15 U.S.C. § 2301, Fair
Packaging and Labeling Act, 15 U.S.C.
§§ 1451-61.
5. Id. at 327.
6. Id. at 331. See Ford Motor Co. v. United
States, 405 U.S. 562, 573 (1972) (divestiture is
“particularly appropriate” in merger cases);
Olin Corp. v. FTC, 986 F.2d 1295 (9th Cir.
1993), cert. denied, 510 U.S. 1110 (1994); RSR
Corp v. FTC, 602 F.2d 1317, 1325-26 (9th
Cir. 1979), cert. denied, 445 U.S. 927 (1980);
Ash Grove Cement Co. v. FTC, 577 F.2d
1368, 1379-80 (9th Cir. 1978).
2. FTC v. Rubberoid Co., 343 U.S. 470, 473
(1952).
3. By requiring licensing, the Commission can
create a new competitor or enhance the
probable success of an existing competitor
without weakening the respondent by
removing assets or intellectual property that
may be necessary to successfully compete in
the relevant market.
7. See, e.g., RSR Corp. v. FTC, 602 F.2d 1317
(9th Cir. 1979), cert. denied, 445 U.S. 927 (1980)
(partial divestiture sufficient to restore
competitive entity); OKC Corp. v. FTC, 455
F.2d 1159, 1161 (10th Cir. 1972) (total
divestiture of acquired assets necessary to
restore “viable, independent, local competitive
entity”).
4. United States v. E. I. du Pont de Nemours
& Co., 366 U.S. 316, 326 (1960).
8. Although it may present difficulties,
sometimes the divestiture of intellectual
D AVID A. B ALTO is Assistant Director, Office of Policy and Evaluation,
Federal Trade Commission. JAMES F. MONGOVEN is an attorney in the Office
of Policy and Evaluation. The opinions expressed herein are the authors and
not necessarily those of the Commission or of any individual Commissioner.
43
ANTITRUST
19. Potential future input supply
problems will not always necessitate
divestiture. In the recent Exxon/Shell case, the
Commission determined that a long-term
supply contract would solve the competitive
problems. Exxon Corp., FTC File No.
971-0007 (Aug. 20, 1998) (proposed consent
order).
REPORT
property or innovation efforts is necessary to
fully restore competition. In these cases, the
Commission will not hesitate to order
divestiture. See, for example, the discussion of
Glaxo and Montedison, infra.
9. Some commentators have criticized the
adequacy of licensing as an antitrust remedy.
See Richard T. Rapp, The Misapplication of the
Innovation Market Approach to Merger Analysis, 64
Antitrust L.J. 19 (1995). For a response, see
Thomas N. Dahdouh & James F. Mongoven,
The Shape of Things to Come: Innovation Markets in
Merger Cases, 64 Antitrust L.J. 405, 438 (1996)
(“Licensing is usually found to be an
appropriate remedy when market participants
and innovators agree that access to intellectual
property is key”).
20. Digital Equip. Corp., No. C-3818 (FTC
July 14, 1998) (consent order).
21. Digital Equip. Corp., Complaint at
¶¶ 11-13.
22. Adobe Sys., Inc., No. C-3536 (FTC Nov.
8, 1994) (consent order) (Commissioner
Owen dissenting).
23. Autodesk, Inc., No. C-3756 (FTC June 18,
1997) (consent order).
24. For a discussion of the evolution of
government enforcement in this area, see
David Balto, The Murky World of Network
Mergers: Searching for the Opportunities for Network
Competition, 42 Antitrust Bull. 793 (1997).
10. Glaxo plc, No. C-3586 (FTC June 14,
1995) (consent order).
11. Dahdouh & Mongoven, supra note 9, at
439.
25. First Data Corp., No. C-3635 (FTC Jan.
16, 1996) (consent order).
12. See III P. Areeda & H. Hovenkamp,
Antitrust Law ¶ 707i, at 184 (1996)
(advocating “divestiture of sufficient assets to
create viable new firms with free access to the
monopolist’s then-existing technology . . .
where an acquisition, or a series of
acquisitions, has probably made a substantial
contribution to monopoly power”).
26. Automatic Data Processing, Inc., FTC
Dkt. No. 9282 (June 18, 1997) (consent
order).
27. Automatic Data Processing, Inc., FTC File
No. 951-0113 (Mar. 27, 1996) (consent order).
ADP agreed to pay a $2.97 million civil
penalty, the third largest ever obtained for an
HSR violation and the largest ever involving
the failure to submit documents. United States
v. Automatic Data Processing, Inc., No.
96-0606, 1996 U.S. Dist. LEXIS 21160
(D.D.C. Apr. 10, 1996).
13. Novartis A.G., No. C-3725 (FTC Apr. 8,
1997) (consent order) (Commissioner
Azcuenaga concurring in part and dissenting
in part).
14. For a discussion of the Commission’s use
of licensing as a remedy, see Mary Lou
Steptoe & David A. Balto, Finding the Right
Prescription: The FTC’s Use of Innovative Merger
Remedies, Antitrust, Fall 1995, at 16.
28. For a description of recent government
enforcement in this area, see M. Howard
Morse, Vertical Mergers: Recent Learning, 53 Bus.
Law. 1217 (1998). For a more elaborate
analysis of vertical merger remedies, see
Richard Parker & David Balto, The Merger
Wave: Trends in Enforcement and Litigation
(forthcoming).
15. Separate Statement of Commissioner
Azcuenaga at 1.
16. Statement of Chairman Pitofsky &
Commissioners Steiger, Starek & Varney at 2.
17. Brunswick Corp., 96 F.T.C. 151 (1980),
aff’d as modified, Brunswick Corp. v. FTC, 657
F.2d 971 (8th Cir. 1981), cert. denied, 456 U.S.
915 (1982).
29. Silicon Graphics, Inc., No. C-3626 (FTC
Nov. 16, 1995) (consent order)
(Commissioners Azcuenaga & Starek
dissenting).
18. Montedison S.p.A., No. C-3580 (FTC
June 15, 1995) (consent order).
30. Cadence Design Sys., Inc., No. C-3761
(FTC Sept. 2, 1997) (consent order)
44
1998) (complaint).
January 1999
43. VISX, Inc. and Summit
Technology, Inc., FTC Dkt. No. 9286 (Aug.
21, 1998) (proposed consent order).
(Commissioner Azcuenaga concurring in part
and dissenting in part; Commissioner Starek
dissenting).
44. U.S. Dep’t of Justice & Federal Trade
Comm’n, Antitrust Guidelines for the
Licensing of Intellectual Property (1995),
reprinted in Antitrust Laws and Trade
Regulation: Primary Source Pamphlet
(Matthew Bender 1998).
31. Morse, supra note 28.
32. See, e.g., Martin Marietta/General
Dynamics, No. C-3500 (FTC June 1994)
(consent order).
33. See, e.g., Eli Lilly & Co./PCS Health Sys.,
No. C-3594 (FTC July 1995) (consent order).
45. Dell Computer Co., No. C-3658 (FTC
May 20, 1996) (consent order) (Commissioner
Azcuenaga dissenting). 
34. A similar prohibition of sharing
non-public information is contained in the
order in Merck & Co., Inc., FTC File No.
971-0097 (Aug. 27, 1998) (proposed consent
order), which arose from the vertical merger
between Merck and Medco Containment
Services, a pharmacy benefit manager.
35. The use of firewalls has raised questions in
the past. Commissioner Mary L. Azcuenaga
issued a separate statement questioning the
extent to which the firewall adds to private
contracts and the FTC’s ability to effectively
monitor compliance in one of the first cases
using a firewall. Alliant Techsystems, Inc., 5
Trade Reg. Rep. (CCH) ¶ 23,714, at 23,474
(FTC Apr. 7, 1995).
36. First Data Corp., No. C-3635 (FTC Jan.
16, 1996) (consent order).
37. Glaxo plc, No. C-3586 (FTC June 14,
1995) (consent order).
38. Digital Equip. Corp., No. C-3818 (FTC
July 14, 1998) (consent order).
39. See Mary Lou Steptoe & David A. Balto,
Finding the Right Prescription: The FTC’s Use of
Innovative Merger Remedies, Antitrust, Fall 1995,
at 16, 18.
40. See Andrew J. Strenio, Jr., FTC
Commissioner, Why Thirteen Should Be a Lucky
Number for Victims of Price Fixing, Speech
before the Section of Antitrust Law,
American Bar Association, 36th Annual
Spring Meeting, Washington, D.C. (Mar. 23,
1988) (advocating disgorgement in antitrust
cases in appropriate circumstances).
41. United States v. Pilkington plc, No.
94-345 (D. Ariz. May 25, 1994) (consent
decree).
42. Intel Corp., FTC Dkt. No. 9288 (June 8,
D AVID A. B ALTO is Assistant Director, Office of Policy and Evaluation,
Federal Trade Commission. JAMES F. MONGOVEN is an attorney in the Office
of Policy and Evaluation. The opinions expressed herein are the authors and
not necessarily those of the Commission or of any individual Commissioner.
45