ANTITRUST, INNOVATION AND COMPETITOR COOPERATION*
Remarks by
Thomas M. Jorde
Professor of Law UNIVERSITY OF CALIFORNIA AT BERKELEY and President LAW & ECONOMICS CONSULTING GROUP, INC.
Presented at the Federal Trade Commission's Hearings on The Changing Nature of Competition in a Global and Innovation-Driven Age
October 26, 1995
Washington, D.C.
* My remarks draw heavily on joint scholarship with Professor David J. Teece, Mitsubishi Bank Professor and Director of the Center for Research in Management, Walter A. Haas School of Business, U.C. Berkeley. See e.g., Thomas M. Jorde & David J. Teece (Eds.), Antitrust, Innovation, and Competitiveness, Chs. 1, 3 (Oxford University Press, 1992); Jorde & Teece, "Rule of Reason Analysis of Horizontal Arrangements: Agreements Designed to Advance Innovation and Commercialize Technology", 61 Antitrust L.J. 579 (1993); Jorde & Teece, "Innovation and Cooperation: Implications for Competition and Antitrust", 4 Journal of Economic Perspectives 3 (1990); Jorde & Teece, "Innovation, Cooperation and Antitrust: Balancing Competition and Cooperation", 4 High Technology L.J. 1 (1989).
ANTITRUST, INNOVATION AND COMPETITOR COOPERATION*
I. Introduction
A. Modern antitrust law recognizes that competitor agreements that create efficiencies, new markets, or other procompetitive benefits, must be carefully evaluated under rule of reason analysis.
B. Agreements designed to advance innovation or commercialize technology deserve special solicitude.
II. Economic Welfare from Innovation
A. Societal gains from innovation and commercialization of technology are enormous; they far exceed the gains from static allocative efficiency.
B. The focus of traditional antitrust, however, has been upon static, short-run consumer welfare (allocative efficiency). Such static orientation may fail to appreciate the reasons innovators need horizontal linkages and, thus, may undervalue the long-run benefits that flow from dynamic "innovation" competition.
C. To avoid hindering technological progress and the creation of national wealth, antitrust law needs to be couched in a forward-looking context. At a minimum, when the promotion of static consumer welfare and innovation are in conflict, courts should apply the rule of reason in a manner that favors the future impact.
III. The Requirements of Innovation and the Reasons Firms May Require Horizontal Linkages
A. Economies of scale and scope
B. Minimization of risk and avoidance of duplication
C. Technology transfer, enhancement and commercialization
1. Innovation is "simultaneous", not "serial"
2. Firms may not possess all the required complimentary or co-specialized assets required for successful commercialization of innovation
3. Forward and lateral coordination may be needed for maximum efficiency, learning and next generation product development
D. Appropriating returns from innovation
1. "Free-rider" and "public goods" characteristic of innovation make it difficult to appropriate the returns to innovation
2. Intellectual property laws are not sufficient to capture value
3. Private contracting can fill the gap
E. Standard setting, interoperability, benchmarking, networking, industry visions or technology roadmaps
IV. Forms of Cooperation
A. Merger
B. Joint venture/alliance
C. Contract
D. The form of cooperation should not alter substantive treatment
V. Structured Rule of Reason Analysis of Cooperative Agreements Among Competitors
A. Rule of reason analysis, rather than per se rules, should always apply to agreements designed to advance innovation or the commercialization of technology.
1. Compare DOJ Intellectual Property Guidelines
B. Rule of reason analysis should focus first on market definition and the assessment of market power.
1. This is necessary to assess whether the effects of a combination or agreement (in terms of market structure or behavior) are likely to be anticompetitive.
2. See, e.g., Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 768 (1984); SCFC ILC, Inc. v. VISA USA, Inc., 36 F. 3rd 958, 965 (10th Cir. 1994).
C. Market definition must take account of dynamic competition and performance-based competition.
1. The Merger Guidelines approach is a useful starting place. But its emphasis on price elasticities and a 5% SSNIP are not likely to reflect true market realities when innovation is concerned.
2. Know-how markets: Relevant know-how markets are likely to be very broad and almost always global.
3. Product markets for commercialization activities: Product performance and features are often more important than price. Market definition must be forward-looking and take account of actual and potential performance-based competition from competing technologies.
a. We develop these points in Hartman, Teece, Mitchell and Jorde, "Product Market Definition in the Context of Innovation", Consortium on Competitiveness & Cooperation Working Paper No. 90-7, University of California at Berkeley, Center for Research in Management; Thomas M. Jorde and David J. Teece, Antitrust, Innovation and Competitiveness, Chapter 1, pp. 7-11 (Oxford University Press 1992).
4. The Antitrust Guidelines for the Licensing of Intellectual Property discuss "innovation markets".
D. Rule of reason analysis should employ a market-power-based safe harbor.
1. Firms lacking substantial market power cannot unreasonably restrain competition in a relevant market. Therefore, as a first step, plaintiff should bear the burden of establishing that defendants possess substantial market power in a relevant market.
2. A safe harbor should exist for cooperating firms that together do not possess more than a 20-25% share of any relevant market. An alternative measure, based on the Herfindahl-Hirschmann Index, might require a plaintiff to demonstrate that the HHI of any relevant market will be greater than 1800 and increase by more than 100 as a result of the agreement between defendants.
a. The Antitrust Guidelines for the Licensing of Intellectual Property adopt a 20% safe harbor.
3. An effective safe-harbor rule will insure parallel treatment between merger analysis and integration by contract or strategic alliance, and will help eliminate the worry or threat of unmerited treble damage litigation.
E. If plaintiff meets its initial burden of demonstrating market power above safe harbor levels, then defendants must demonstrate procompetitive benefits and efficiencies that will flow from the cooperative arrangement.
1. Traditional efficiency analysis is often cost oriented and short-run. But in the context of innovation, efficiencies are also likely to be dynamic.
2. To demonstrate dynamic efficiencies, defendants should be permitted to show:
a. That the innovation sought by the cooperative arrangement will, if achieved, be inadequately protected under the patent, trade secret, or other intellectual property laws, and that specific contractual restraints have been adopted in order to secure appropriability and prevent free-riding and opportunistic behavior;
b. That the innovation sought by the arrangement is of such a character or magnitude that a cooperative arrangement will help achieve the economies of scale and scope necessary to mount a successful research and commercialization effort and will reduce overall risk;
c. That successful innovation sought by the arrangement will be aided by cooperative or integrated commercialization, including specific contractual restraints;
d. That the arrangement will compete in a market or markets that are characterized by rapid technological change; and
e. That the innovation sought by the arrangement will compete with other technologies (a type of "interbrand" competition argument).
F. When both substantial market power and substantial efficiencies are demonstrated, full weighing and balancing is necessary, but plaintiff bears the ultimate burden of proving that the complained of cooperative arrangement should be held an "unreasonable" restraint of trade.
1. In response to defendants' showing of efficiencies, plaintiff should be permitted to demonstrate that the benefits of the cooperative arrangement obviously could have been achieved with substantially fewer participants or a substantially less restrictive contractual provision. In such case, a trier of fact might appropriately find the original cooperative agreement was an "unreasonable" restraint of trade. Thus, the existence of an obvious and substantially less restrictive alternative may be a factor considered in overall rule of reason balancing, but it should not be elevated to a separate stage of analysis, nor be available in a "trump" card.
2. Ultimate balancing remains an unprecise operation, but clarity about burdens should aid the trier of fact.
3. A "sliding scale" between market power and efficiency is appropriate.
VI. The National Cooperative Production Amendments of 1993 (amending the National Cooperative Research Act of 1984)
A. Rule of reason analysis required.
B. Production joint ventures that are registered with the government will be exposed only to single damages in any subsequent private civil litigation.
1. De-trebling applies only if the venture's principal production facilities are located in the United States and the participants are either U.S. citizens or "persons from countries that do not discriminate in antitrust treatment under their laws against United States persons that seek to participate in production joint ventures there".
C. Costs, including a reasonable attorney's fee, may be awarded to the substantially prevailing party in private litigation challenging the joint venture.
VII. Concluding Remarks
A. Understanding how and why cooperation and strategic alliance can advance innovation and the commercialization of technology is a necessary first step toward insuring that antitrust law will not thwart technological progress.
B. Proper rule-of-reason analysis is an important second step to enable dynamic competition to flourish.