ANTITRUST AND INTELLECTUAL PROPERTY IN THE YEAR 2000
COMMISSIONER MARY L. AZCUENAGA
FEDERAL TRADE COMMISSION
AMERICAN INTELLECTUAL PROPERTY LAW ASSOCIATION
LA QUINTA, CALIFORNIA
JANUARY 24, 1996
Good afternoon. I am pleased to be here in La Quinta for the Mid-Winter Meeting of the American Intellectual Property Law Association. Today I mean that even more than usual. Since last November 7, I have been serving on a jury. It has been my luck, or bad luck, to be selected for the jury in one of the longest civil trials in the District of Columbia Superior Court this year. The judge has given all of us a little time off so that I could come out and be with you today. But I know I have been on that jury too long because when I walked into the room today, I expected all of you to stand up and remain standing in respectful attention until I was seated. But enough of my jury duty. Let me turn back to my second job, that of being a Federal Trade Commissioner. As a courtesy to my colleagues on the Commission, I will begin with my customary disclaimer: the views I express today are my own and do not necessarily represent the views of the Commission or any other commissioner.
This is an important time in the evolving history of antitrust and intellectual property law. Increasingly, the valuable products and assets of American businesses are innovations. Companies in industries as diverse as computer hardware and software, biotechnology, aerospace, and pharmaceuticals generate wealth and employment for many by developing and improving a stream of new ideas and new products. Although these companies range from tiny research boutiques to giant aerospace-defense contractors, they all depend significantly on the legal framework protecting a competitive market in which rights of inventors are protected and in which innovators can profit from their ideas and inventions.
The legal framework that has sustained the spurt of innovation by American corporations over the past few decades has two parts. The first lies within your field of expertise: the intellectual property statutes secure for limited times to authors and inventors the exclusive right to their respective writings and discoveries. The second, which lies within my field of expertise, is somewhat more abstruse, but no less important: the antitrust laws ensure an open and competitive marketplace in which inventors can realize the value of their inventions. Antitrust enforcement is grounded in competition policy, and I will use the terms antitrust and competition policy interchangeably.
I have been asked today to look forward and provide some perspective on what we might expect to see in the way of antitrust enforcement in the next five years, particularly with respect to the computer industry. Antitrust enforcement, like innovation, is not always easy to predict, but I will do my best. I will begin with an overview of some general principles that guide enforcement policies with respect to intellectual property/antitrust issues. Then, I will talk about three recent Commission actions, two of which arose in the computer industry, and each of which suggests something about the nature of enforcement in the coming years. In addition, I propose to touch very briefly on a new way of talking about markets and two antitrust theories that have been around for a long time, but that seem to be receiving new attention. Each of these topics is especially relevant to issues in the computer and high tech industries.
Both competition policy and the policy underlying the protection of intellectual property seek to foster an economic environment conducive to technological change and innovation. By eliminating private restraints of trade that diminish rivalry or bar new entry, antitrust enforcement can protect the opportunity for entrepreneurs to exploit their innovations commercially. Antitrust enforcement should complement, indeed, should reinforce, the value established by the creation of intellectual property rights.
This view of antitrust and intellectual property as complementary has not always been universal. In the old days, antitrust enforcers may have seen it as their responsibility to rein in the necessary evil of patent monopolies. The perception of an inherent conflict between antitrust and intellectual property law, however, is receding into the past.
One fundamental question in this area is whether intellectual property is like other property for purposes of antitrust analysis. In considering this question, it seems to me that we should keep in mind some obvious principles. First, intellectual property is property, that is to say, it belongs to someone who has the right to exclude others from using it without his or her consent. Second, intellectual property has attributes that distinguish it from personal property and real property -- that is why we have a different word for it. For example, the enforcement of an owner's exclusive right to use physical property may be accomplished more easily, as a practical matter, than enforcement of an exclusive intellectual property right.
Antitrust enforcers should certainly remain open to considering new ideas about how the rights associated with intellectual property can and should be distinguished from the ownership of tangible property in the analysis of antitrust liability. But for now, it seems fair to say that for antitrust purposes, intellectual property is generally treated like other forms of property. Let me add one qualifier to this general principle, which I hope is not too confusing. To the extent that intellectual property differs from other property, such as the duration of the property right, that difference is a fact that is considered along with all other facts in an antitrust analysis.
Two other principles seem to be generally accepted by government antitrust officials. First, the possession of intellectual property rights does not presumptively confer market power. This principle, which runs counter to the notion of a patent monopoly, is a very important one to keep in mind. Second, licensing of intellectual property can facilitate efficient commercial exploitation of intellectual property and can help integrate complementary intellectual property. Consumers benefit from licensing because it can expand access to intellectual property by increasing the speed and reducing the cost of bringing innovations to market.
Anything we might say about the importance of protecting intellectual property, of course, is premised on the assumption that it was properly obtained. Patent protection in the absence of novelty and non-obviousness can harm innovation by eliminating the incentives for the patent holder and others to engage in further pursuit of something that is novel and non-obvious. This leads to my first concrete example of a specific Commission investigation and subsequent action.
The Commission has long maintained an interest in the antitrust implications of a fraudulently obtained patent, and enforcement of such a patent may violate Section 5 of the Federal Trade Commission Act. In the most recent matter in which the Commission addressed the validity of a patent, we tried a new approach. Instead of initiating an antitrust case alleging fraud in securing a patent, the Commission, on September 15, 1992, sent a letter to the Commissioner of Patents and Trademarks, enclosing a sixty-five page memorandum written by the staff of the Commission setting forth the results of their investigation of a possible antitrust violation. The staff memorandum expressed concerns about the validity of an alpha-interferon patent owned by Hoffman-La Roche, Inc. In forwarding the staff memorandum, the Commission did not take a position on the validity of the patent, stating that "these issues are within the particular expertise of the Patent and Trademark Office." The Patent and Trademark Office subsequently reexamined the validity of the patent.
I understand that the matter is still pending, although the Patent and Trademark Office has disallowed at least preliminarily some claims in the patent. I think it is safe to say that the patent would not have been reexamined, but for the efforts of the Commission. The significance of the case should be fairly clear: antitrust enforcers continue to maintain an interest in the exploitation of intellectual property acquired by fraud, and when they encounter troubling conduct, they will not limit themselves to a single solution that can be obtained only after a long and costly antitrust trial.
The second case I want to mention is a merger case brought under Section 7 of the Clayton Act. In Silicon Graphics, Inc., Docket No. C-3626 (November 14, 1995), the Commission settled a Section 7 claim relating to Silicon Graphic's acquisition of two independent producers of entertainment graphics software, Alias Research and Wavefront Technologies. This software is used to create the special effects for movies and video games. Before the acquisitions, Silicon Graphics was not in that market; instead, the complaint alleged that Silicon Graphics produced entertainment graphics workstations and had over 90 percent of that market. The complaint alleged that the entertainment graphics software market is highly concentrated, and that the only competitor of Alias and Wavefront, the two firms Silicon Graphics acquired, is a subsidiary of Microsoft. In short, in a market having only three firms, Silicon Graphics acquired two of those three firms. Plainly, the effect was the same as if one firm in a three firm market had acquired one of its two competitors.
One allegation of competitive harm in the complaint was the elimination of what we call horizontal competition between Alias and Wavefront, which simply means competition between competitors in the same market. This is an obvious theory of violation that is clear, simple and, given the history of merger enforcement under Section 7, not only familiar but exactly what we would expect to see. It is also a theory for which there was an obvious, simple and effective remedy and that was to allow Silicon Graphics to purchase only one firm, not two. Like the theory of violation, this remedy is not only familiar to the antitrust community, but exactly what we would expect to see.
The Commission, however, did not frame the case solely as a simple horizontal merger, nor did it impose the horizontal merger remedy. In addition, it alleged vertical market foreclosure as the theory of competitive harm. Specifically, the complaint alleged that the acquisition might foreclose workstation producers other than Silicon Graphics from access to the entertainment graphics software, and that it might foreclose software producers other than Alias and Wavefront from the part of the workstation market controlled by Silicon Graphics' machines. The order was crafted to address these vertical foreclosure concerns. It required Silicon Graphics to enter a porting agreement that would permit Alias software to operate on another computer manufacturer's hardware. It also required Silicon Graphics to maintain an open architecture and publish its application programming interfaces.
I dissented from the order on the ground that the acquisition should have been treated as a routine horizontal merger. A remedy that permitted Silicon Graphics to acquire only one of the two competing entertainment graphics software houses would have resolved the horizontal overlap as well as any vertical foreclosure concerns.
What does the Silicon Graphics matter tell us about future enforcement? First, it tells us that the Commission is paying attention to the computer hardware and software industries. Second, it tells us that the Commission will challenge anticompetitive mergers in industries characterized by high technology and relatively rapid product change. I should add, however, that the rapidity of product change in a particular case may cause the Commission to forego an enforcement action.
The third lesson is perhaps the most intriguing, although it is only suggestive. Silicon Graphics suggests that the Commission is unusually open to, if not actively seeking, new uses of and applications for vertical merger theory. We can draw this inference because Silicon Graphics was in my view such an obvious horizontal case. Why the Commission chose the vertical remedy is puzzling, yet surely the case was more than an academic exercise or an experiment. Certainly the remedy has some policy implications for the future that are likely to be significant. Like you, I await further developments with interest.
The third case I will discuss also involves a consent order, the order against Dell Computer Corporation that the Commission accepted for public comment last fall. The press release announcing the settlement characterized Dell as "precedent- setting." Before discussing the merits of the case, let me offer a preliminary observation. Dell is an unlitigated consent agreement based on a novel antitrust theory. It is important for members of the bar to follow what the Commission does in unlitigated consents because such orders can alert you to new enforcement concerns. But it is also important to remember that consent orders have much less value as a basis for predicting liability than do litigated decisions. As a precedent-setting matter in the sense that it sets forth a new Commission theory of liability, the Dell case has attracted considerable attention, including a comment filed by your American Intellectual Property Law Association. In the spirit of full disclosure, I should say that I cast the lone dissenting vote on the case.
Precedent-setting cases are the lifeblood of antitrust, as economic thinking evolves and as new industries and markets are created. It is well to keep in mind that innovation in accomplishing anticompetitive ends occasionally occurs as well as innovation in developing new products. Section 5 of the Federal Trade Commission Act, more than the Sherman Act and the Clayton Act, has a degree of flexibility and provides a useful bulwark against new forms of anticompetitive conduct and anticompetitive conduct that may not violate the Sherman Act or the Clayton Act. But a degree of caution is in order in using this authority. Any new theory should have a sound anticompetitive rationale, and before adopting such a theory, the Commission should be able to articulate the rationale and the evidentiary basis for concluding that the rationale applies in the particular case.
The Dell order deals with alleged abuse of the standards setting process by a patent holder. The Video Electronics Standards Association ("VESA") is a private standard-setting organization, including as members both computer hardware and software manufacturers. In 1991-92, a VESA committee developed a standard for a computer bus design, which became known as the VESA Local Bus or "VL-bus." The bus carries information or instructions between the computer's central processing unit and peripheral devices. In August 1992, VESA members, including Dell, voted to approve VESA's VL-bus standard. The VESA ballot required each member's authorized voting representative to sign a statement that "to the best of my knowledge," the proposal did not infringe the member company's intellectual property rights.
According to the Commission's complaint, after adoption of the standard, the VL-bus design was incorporated into many computers. The heart of the problem is contained in the complaint allegation that Dell subsequently asserted that the "implementation of the VL-bus [by other computer manufacturers] is a violation of Dell's exclusive rights." Dell allegedly based this claim on its ""481 patent," which was granted in July 1991 and related to the mechanical slot configuration used on the motherboard to receive the VL-bus card. For purposes of antitrust analysis, it is important to note that the complaint did not allege that Dell's representative to VESA had any knowledge of the coverage of the "481 patent or of the potential infringement by the VL-bus at the time he cast the ballot.
Dell might have been a routine antitrust case. A traditional antitrust analysis of Dell's conduct would have centered on two questions: whether Dell intentionally misled VESA into adopting a VL-bus standard that was covered by Dell's "481 patent and whether as a result of the adoption of such a standard, Dell obtained market power beyond that lawfully conferred by the patent. If Dell had obtained market power by knowingly or intentionally misleading a standards-setting organization, it would require no stretch of established monopolization theory to condemn that conduct. Indeed, Section IV of the Commission's cease and desist order against Dell seems to address precisely such a traditional antitrust violation. It prohibits Dell's enforcement of intellectual property rights only if in response to a written inquiry "respondent intentionally failed to disclose such patent rights" during the standards-setting process (emphasis added). If the case had gone only this far, I doubt that the order would have been controversial.
The novelty of Dell, the reason it has been characterized as precedent-setting, is that the order prohibits the company from enforcing the "481 patent without any allegation that Dell intentionally and knowingly misled VESA and without any allegation that the company obtained market power as a result of the misstatement at issue. Although Dell's voting representative to VESA indicated on the ballot that "to the best of my knowledge" the VL-bus standard did not infringe a patent right, as I mentioned a moment ago, the complaint makes no allegation that he was aware either of the patent or of the potential infringement at the time the ballot was cast. Consistent with the absence of such allegations in the pleadings, I am not aware of any reliable evidence to support a claim that the representative had any such knowledge. Moreover, the circumstances surrounding the process of adopting the VL-bus standard do not suggest deliberate manipulation of the process by Dell. For example, the complaint does not allege (nor am I aware of evidence to suggest) that Dell steered the VESA standards committee toward its patented technology.
The way in which the Commission handles the factual questions of intent and knowledge is critical to the policy issue at the core of this case. It is one thing to prohibit a knowing misrepresentation or an intentional manipulation because under that standard it is easy to see how to avoid liability -- keep your people honest. It is quite another matter to find liability on the basis of constructive knowledge or unsubstantiated inferences. It is always possible to assert that Dell "must have" known of the patent, because obviously some people at Dell did know about the patent. That sort of logic leads to a strict liability standard, under which a company would place its intellectual property at risk simply by participating in the standard setting process. No matter how much money, time and talent a company might devote to avoiding mistakes in the certification process, the company would know that a mistake was still possible, and a single mistake could be very costly.
A second notable omission in the Dell complaint is the omission of an allegation that the company acquired or extended market power. Instead, paragraph nine of the complaint alleges that Dell unreasonably restrained competition in four ways: (1) industry acceptance of the VL-bus was hindered; (2) systems utilizing the VL-bus were avoided; (3) uncertainty concerning the acceptance of the VL-bus design standard raised the costs of implementing the VL-bus design and competing bus designs; and (4) willingness to participate in standards-setting has been chilled. Assuming the allegations are true, none of them suggests that Dell would have acquired the power to control price and output. Indeed, if, as appears to be the case, computer producers readily could switch to bus designs that do not incorporate Dell's technology, no monopoly seems possible.
In these circumstances, finding a Section 5 violation in the absence of any allegation of a knowing or intentional misrepresentation imposes a duty of disclosure on Dell above and beyond what VESA itself apparently required in its ballot. VESA asked the voting representative to state that "to the best of my knowledge," the proposal does not infringe any intellectual property rights. The association might have, but did not, request each participant to review the complete patent portfolio of the company and disclaim any intellectual property rights to matters covered by the standard. Had that been the standard, the process of collecting votes likely would have been very prolonged and perhaps even impossible. VESA could have structured its process in this more exacting way. Perhaps there is a good reason why it did not.
Under the Dell order, a participant in a VESA-like standards process would be well advised not only carefully to review its patent portfolio before permitting its voting representative to sign a ballot, but if it has highly valuable intellectual property, to consider not putting it at risk by not voting at all. The threat that voting on a standard might result in the loss of a company's intellectual property rights may dissuade some firms from participating in the standards-setting process in the first place. That would be a curious result indeed for an order resting on a complaint that alleges, as an anticompetitive effect, that "[w]illingness to participate in industry standard- setting efforts have [sic] been chilled."
The Dell Section 5 duty of disclosure to standard-setting organizations appears to be even more rigorous than a patent applicant's duty of disclosure to the Patent and Trademark Office. Two standards have been applied by the courts in determining whether there was inequitable conduct before or fraud on the Patent and Trademark Office (PTO). First, in order to prove the fraud on the PTO necessary to make out a Walker Process, monopolization claim, a party must make out a common law fraud claim, including proof of a material misrepresentation, intentionally made to deceive, reasonably relied on by the PTO. Second, although the showing of inequitable conduct as a defense to a patent infringement claim is lower than that necessary to establish common law fraud, the Court of Appeals for the Federal Circuit nonetheless requires clear and convincing evidence that the patent applicant failed to disclose material information known to the applicant or that he submitted false information with the intent to act inequitably. The premise of this inequitable conduct theory is that "a person who obtains a patent by intentionally misleading the PTO cannot enforce the patent."
I am not suggesting that decisions of the Court of Appeals for the Federal Circuit in patent cases do or should control in cases under Section 5 of the FTC Act. What I am suggesting is that it may be anomalous for our legal system to establish a more rigorous duty to disclose to purely private standards-setting organizations, as a condition of participating in the standards- setting process, than the duty to disclose to the Patent and Trademark Office for the purpose of obtaining a patent.
Another concern one might have about the Dell case is that the remedy it imposes seems out of proportion to the competitive harm alleged in paragraph nine of the complaint. The order prohibits Dell from enforcing the patent for its remaining term (until the year 2008), but the harm alleged was just a delay in implementing the standard. The order effectively seems to enjoin enforcement of the patent, which in turn seems much like an order invalidating a patent. A Federal Trade Commission order invalidating a patent might raise other questions regarding the Commission's authority effectively to invalidate decisions of the Patent and Trademark Office, or at least about the circumstances under which it might do so. In American Cyanamid Co. v. F.T.C., 363 F.2d 757, 772 (6th Cir. 1966), the respondents argued that the Commission had no jurisdiction to review decisions of the Patent Office. The Court of Appeals avoided the issue and observed that the Commission's order recognized the validity of the patent and merely required compulsory licensing on a reasonable royalty basis.
In Dell, it might be suggested that the order does not invalidate the patent, but rather grants a global, royalty free license to everyone implementing the VL-bus standard for the term of the patent. That argument would not necessarily carry the day for the Commission. In American Cyanamid, the Court of Appeals upheld the Commission's authority to require compulsory licensing "on a reasonable royalty basis" to remedy fraud on the patent office and misuse of the patent, but the court pointedly observed that "[w]e do not hold that the Commission has jurisdiction either directly or indirectly to invalidate or destroy a patent, nor do we hold that the Commission could order compulsory licensing without payment of reasonable royalties." 363 F.2d at 772.
Given the alleged harm, a delay in implementation of the standard, it would be difficult to fashion a remedy that corresponds closely to the harm. A conventional cease and desist order limited to prohibiting future intentional misrepresentations might have been the optimal relief. Private remedies are available to cure any harm that may have resulted from the delay in adoption of the VESA standard. If government action is deemed to be essential, the order might at most have restrained enforcement of the "481 patent long enough for VESA to change the standard, once it learned of the patent.
The public comment period for the Dell order is now over. The Commission staff is reviewing the comments and will recommend to the Commission either that it issue the order in final form without change or that appropriate changes should be made. I look forward to reading the comments and the staff analysis to see if they shed light on some of the issues I have raised and to considering whether the order should be issued in final form with or without revision.
The Dell case raises so many interesting and difficult questions that it is tempting to devote an entire speech to the case. But it is only one piece of the enforcement picture, so at this point, I will move on to touch briefly on a few issues that seem to come up at least in discussions of certain antitrust matters involving intellectual property. The notion of an essential facility is familiar to the antitrust bar, but difficult to assess. The grandaddy of all essential facilities cases involved the Terminal Railway Association, which first assembled in the 1890's the sole river bridge and related yards and tracks at St. Louis and which subsequently purchased a second, competing bridge. Although ordinary monopoly analysis or modern merger analysis might have disposed of the matter, the Supreme Court left us the legacy of the essential facility. It has been suggested that a 1990's equivalent of owning both Mississippi bridges is to own the software used on a very large installed base of computers, and various other modern day analogies have been suggested. I am not sure whether a century of practice has perfected our ability to analyze the elements of an essential facility case. Some aspects of the doctrine are still subject to serious debate. For example, how essential is essential? Although the doctrine has been criticized, it is still alive, and perhaps the next five years will provide some illumination about how well it is.
Another idea that has come up with some frequency is the notion of leveraging of market power. For example, a party might claim that a software company was able to use its strong position in one line, such as operating systems or networking, to obtain market position in other product lines, say applications software. Again the term reflects an antitrust concern, and there are some circumstances in which the concern seems compelling. Nonetheless, the competition analysis that forms the basis for a leveraging claim also has been the subject of vehement debate. Essential facilities and leveraging are both fascinating topics for another speech on another day. I mention them only as a form of alert, because I expect we will continue to hear about them in the next five years.
Let me mention one more issue that has received a great deal of attention in the last couple of years and is likely to continue as a high profile issue for some time to come. The idea, which has crept into a number of consent agreements, is that research and development constitutes a separate product market for the purposes of antitrust analysis. This concept, also referred to as the innovation market, accounts for a large share of the current attention in the area of antitrust enforcement that relates to intellectual property. So far, the question of innovation markets has arisen only in merger cases, although I see no reason why it should not arise in other antitrust cases as well. This topic also would provide more than enough content for an entire presentation. In fact, I have spoken about it before and will be speaking about it again tomorrow in San Francisco. Today, I will limit my remarks to emphasizing one important distinction that Commission complaints do not always draw clearly. That distinction is between on one hand, competition among products that are not yet, but soon will be (or are expected to be), on the market, and on the other hand, competition to develop new products that have not yet even been imagined. Most recent Commission orders have been of the former variety, and the antitrust analysis is not really different from the analysis of any merger, except that the prospective focus of the inquiry is accentuated because there is no past competition in the products in question. In fact, these cases are much like old fashioned potential competition cases. Competition in true innovation or pure research, in contrast, poses an entirely new set of challenges for antitrust enforcers, such as identifying barriers to entry into research, as distinguished from entry into a product line. The Commission has not yet ventured far into this difficult terrain, and I rather doubt that it will in the next few years.
Although antitrust law enforcement is the most direct manifestation of competition policy, competition policy also can be introduced into issues of intellectual property law. For example, it is sometimes argued that grants of intellectual property have to be carefully restrained because any overly broad grant of intellectual property rights is anticompetitive and may impose unwarranted costs on consumers. By definition overly broad awards of property rights, intellectual or otherwise, are potentially bad, but truisms of this sort shed little light on the real and difficult questions of what is the optimal amount of innovation and what incentive will induce the optimal amount of innovation. I anticipate that in the next few years, we may hear more about market solutions to intellectual property questions. My suggestion to you is that you should be prepared when this occurs, to ask some serious and exacting questions about the appropriate placement and measures of the intersection between intellectual property and antitrust.
In conclusion, I would like to return to the fundamental principles that I mentioned at the beginning and observe that I do not see any effort to weaken or abandon these principles, which recognize the complementarity of intellectual property law and antitrust. Over the next five years, I predict that we may see more antitrust enforcement action in those industries that rely on and generate intellectual property. That is probably a safe prediction because it is just those industries that are generating an increasing share of our national wealth and output. To some extent, however, it may also reflect the natural evolution of antitrust law and policy as it reacts to and perhaps helps shape the expansion of a competitive economy. If so, the next five years will be active and interesting ones for antitrust enforcement.