FTC Settlement with Cadence, Cooper & Chyan To Preserve Competition in Automated Chip Design Software

Cadence Design Systems, Inc., of San Jose, California, has agreed to settle Federal Trade Commission charges that its $400 million acquisition of Cooper & Chyan Technology, Inc. would substantially reduce competition for key software used to automate the design of integrated circuits, or "microchips."

The software -- known as "routing" software -- is used to map out, or route, the connections that must be made between the millions of miniature electronic components within a microchip. According to the FTC, Cadence is the leading supplier of microchip layout environments, and Cooper & Chyan is 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 cutting-edge microchip design. Routing tools are used in conjunction with other microchip design tools through a software infrastructure known as a layout environment. Chip designers are more likely to purchase a routing tool with an interface to a layout environment for which a full set of compatible design tools is available, the FTC said. The merger would reduce the incentives of Cadence to permit competing suppliers of routing tools to obtain access to Cadence's layout environments, the FTC alleged. Therefore, routing tool developers will find it more difficult to enter the routing tool market successfully, or they will have to enter simultaneously at the router and the layout environment levels. The result would be less innovation, higher prices and reduced services, the FTC charged.

To remedy these concerns, the FTC has reached a settlement with Cadence that would require the firm 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 has agreed to offer participation to independent software developers on terms no less favorable than those applicable to any other participants in the program, which currently number approximately 100 partners. The goal, according to the FTC, is to keep Cadence from preventing competing suppliers of constraint-driven, shape-based microchip routing tools from participating in Cadence’s independent software interface programs; to prevent the need for dual entry in the markets for these types of routing tools and layout environments; and to ensure that independent software developers will continue to invest resources necessary to develop and sell routing tools that will compete with Cooper & Chyan’s technology.

The settlement also contains a provision that would require Cadence to notify the Commission before acquiring interests in an entity that, within the preceding year, had engaged in the development or sale of integrated circuit routing tools in the United States; and before acquiring assets used or previously used in the development or sale of such tools in the United States.

Cadence has agreed to be bound by the terms of the order pending the conclusion of the public comment period and the Commission’s determination as to whether to make the order final and binding.

Cooper & Chyan is based in Cupertino, California.

The Commission vote to announce the proposed consent agreement for public comment was 4-1 with Commissioner Mary L. Azcuenaga concurring in part and dissenting in part and Commissioner Roscoe B. Starek, III, dissenting. Chairman Robert Pitofsky, Commissioners Janet D. Steiger and Christine A. Varney voted in the majority and stated that "[t]he Commission’s proposed complaint alleges a well-established vertical theory of competitive harm." They noted that "[w]hen considering the effects of mergers in dynamic, innovative high- tech markets, such as those present here, it is particularly important to investigate whether such mergers will create barriers to entry. New entrants often bring innovation to the market, and the threat of entry leads incumbents to innovate." They stated that "[t]he proposed remedy in this matter preserves opportunites for new entrants . . ." and also "preserves any efficiencies."

Commissioner Azcuenaga also issued a separate statement. She did not find reason to believe that the transaction would violate the law under the vertical theory alleged in the complaint and also dissented because the complaint failed to allege a horizontal, potential competition violation. She supported paragraph III of the order, which addresses her horizontal concerns, although questioning the adequacy of the remedy, but dissented from the vertical provisions of the order.

In his dissenting statement, Commissioner Starek said, "To justify the proposed complaint and order, the Commission once again invokes the specter of anticompetitive ?foreclosure’ as a direct consequence of the transaction. As I have made clear on previous occasions, foreclosure theories are generally unconvincing as a rationale for antitrust enforcement. The current case provides scant basis for revising this conclusion . . . The logic of the proposed complaint is fundamentally flawed. Even if we assume arguendo -- as the proposed complaint in this case does -- that Cadence is ?dominant’ in the supply of software components complementary to the router, the fact remains that it has no incentive to restrict the supply of routers."

Regarding the proposed consent order, Commissioner Starek continued, "Not only am I unpersuaded that Cadence’s acquisition of CCT is likely to reduce competition in any relevant market, but . . . I would find the proposed order unacceptable even were I convinced as to liability." For example, "[e]ven apart from the usual problems with ?most favored nations’ clauses in consent orders, this order . . . will require that the Commission continuously regulate the prices and other conditions of access." Commissioner Starek concluded, "Because I do not accept the majority’s theory of liability in this case, and because I find the proposed remedy at best unenforceable and at worst competitively harmful, I dissent."

An announcement regarding the proposed consent agreement will be published in the Federal Register shortly. The agreement will be subject to public comment for 60 days, after which the Commission will decide whether to make it final. Comments should be addressed to the FTC, Office of the Secretary, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580.

NOTE: A consent agreement is for settlement purposes only and does not constitute an admission of a law violation. When the Commission issues a consent order on a final basis, it carries the force of law with respect to future actions. Each violation of such an order may result in a civil penalty of $11,000.

Copies of the FTC complaint detailing the allegations in this case, the proposed consent agreement, and an analysis to assist the public in commenting are available from the FTC’s web site at http://www.ftc.gov and also from the FTC’s Public Reference Branch, Room 130, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-326- 2222; TTY for the hearing impaired 1-866-653-4261. Consent agreements subject to public comment also are available by calling 202-326-3627. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710.

(FTC File No. 971 0033)