INTELLECTUAL PROPERTY AND ANTITRUST:
Divergent Paths to the Same Goal
Debra A. Valentine
Federal Trade Commission
Conference: Antitrust 1996
Business Development Associates
March 5, 1996
I am pleased to be here today to discuss antitrust and intellectual property law, their mutual concern with fostering innovation, and some of the points at which these two bodies of law intersect. As Carl Shapiro noted, the Intellectual Property Guidelines begin with the fundamental recognition that: “The intellectual property laws and the antitrust laws share the common purpose of promoting innovation and enhancing consumer welfare.(1) Competition and intellectual property promote innovation in different ways, however. The intellectual property laws give inventors and authors a temporary, exclusive right to their original works; this remedies certain “public good” problems(2) and allows creators to obtain an economic return on their investment. The possibility of receiving that exclusive property right provides one incentive for innovation. The antitrust laws focus on maintaining competitive markets in which the rivalry that flourishes among inventors and creators itself provides another incentive for innovation.
For public officials, these two approaches require a delicate balancing of the value and spur to innovation that intellectual property protection and competition each provide. To illustrate some aspects of this balancing, I will start by highlighting testimony from the FTC hearings, held last fall, that focused on intellectual property and competition as incentives for innovation. I will then discuss several consent orders involving mergers and acquisitions that the FTC entered in the past year. These consents are noteworthy for the way in which the FTC dealt with intellectual property assets that we believed were critical to competition and innovation in certain markets.
As is customary, my remarks reflect only my views and do not necessarily represent the views of the Commission or any Commissioner.
INTELLECTUAL PROPERTY ISSUES AT THE FTC HEARINGS
As you heard yesterday from my colleague Chairman Pitofsky, the FTC conducted hearings on global competition and innovation to assess whether changes in the nature of competition require any adjustments to current antitrust enforcement policies. One of the assumptions on which the hearings were based is that in today’s rapidly evolving markets competition centers as much around innovation as around price. The hearings confirmed this assumption for many industries. Participants testified to the significance of innovation competition -- that unless you continue to innovate you will not be a viable competitor -- and the important role that both intellectual property and competition play in stimulating that innovation.
Interestingly, the tensions in balancing intellectual property and antitrust policies as spurs to innovation were addressed by the very first speaker, Joseph Stiglitz, Chairman of the Council of Economic Advisors. He pointed out that intellectual property can promote innovation but may also impede it if firms make overbroad assertions of intellectual property rights:
We often talk about how important patents are to promote innovation, because without patents, people don’t appropriate the returns to their innovation activity, and I certainly very strongly subscribe to that. . . . On the other hand, some people jump from that to the conclusion that the broader the patent rights are, the better it is for innovation, and that isn’t always correct, because we have an innovation system in which one innovation builds on another. If you get monopoly rights down at the bottom, you may stifle competition that uses those patents later on, and so . . . the breadth and utilization of patent rights can be used not only to stifle competition, but also [can] have adverse effects in the long run on innovation. We have to strike a balance.(3)
Not surprisingly, no one could agree about how to strike the appropriate balance between competition and intellectual property protection. Many business participants, however, believed that competition-related factors -- such as the need to be first to market in a world with ever- shortening product life cycles and escalating consumer demands for new products -- were the primary incentive for creating better, more innovative products.(4) Now, they certainly did not suggest that intellectual property has no role to play.(5) But the basic incentive for innovation was: “If you don’t keep running on the treadmill, you’re going to be thrown off.(6)
In this context, Professor F.M. Scherer of Harvard University reviewed several 1980s studies, which suggest that in the majority of industries, patents do not provide the primary incentive for innovation.(7) In a study published by Richard Levin in 1987, firms in 130 lines of business reported that patents were the least important means of securing competitive advantage for new products.(8) These firms placed a greater value on business strategies like secrecy, being first to market with an innovation, being able to move quickly down the learning curve, and providing sales or service support. In fact, 80 percent viewed investments in complementary sales and service efforts as a highly effective strategy for capturing a competitive advantage from their R&D activities.
It is important to note that in the Levin study, several industries did perceive patents as being valuable to their innovation efforts. In inorganic and organic chemistry, plastic materials, and pharmaceuticals industries, patents were considered to be an effective means of protecting new products. Another study done in 1986 by Edwin Mansfield, which surveyed firms from 12 industries, found that only 14 percent of innovations in those industries (in a period from 1981- 83) would not have been developed without patent protection. But when the results are disaggregated by industry, they show that 65 percent of pharmaceutical inventions and 30 percent of chemical inventions would not have been developed without patent protection.(9)
Testimony from industry representatives largely corroborated those findings. In general, corporations have many incentives, other than patent protection, to engage in R&D. But representatives of pharmaceutical and biotechnology industries emphasized the importance of patents in protecting the large, up-front investments needed to research and develop new drugs and medical devices.(10)
Other witnesses returned to Stiglitz’s concern -- patent breadth and its potential effect on follow-on innovation. Some scholars have argued that overly broad patents will deter other firms from pursuing follow-on innovations, thereby making new entry more difficult and stifling competition.(11) In testimony at the hearings, Professor John Barton of Stanford Law School asserted that the 1970's pattern of weak patent law and strong antitrust law has been replaced in the 1990's with a pattern of strong patent law and weak antitrust law.(12) He suggested that fundamental changes in the PTO’s willingness to issue patents and the Federal Circuit’s willingness to enforce patents have led to increasingly broad patents and to certain patent claims that cover basic research tools.
These changes have intensified two related problems, according to Professor Barton. First, broad patents and patents covering basic research may discourage follow-on research. Moreover, the negotiation of patent rights for the incremental or follow-on innovation could be difficult, because there would be only one monopoly rent to split between the initial and the follow-on innovators.(13) Second, when broad patents and basic research patents are at issue, cross-licensing that is the equivalent of patent pooling is likely to be more prevalent.(14) This raises similar concerns regarding disincentives for follow-on innovation.
Other participants shared Professor Barton’s concern that the creation of the United States Court of Appeals for the Federal Circuit has led to stronger and broader patent enforcement, which may have important implications for incremental and follow-on innovation.(15) According to Cecil Quillen, Jr., as of three years ago, “something like two thirds or more of patents which are litigated . . . are found to be valid and infringed” in contrast to ten years before when “something like two thirds . . . were found invalid.(16) Professor Scherer also agreed that the creation of the Federal Circuit has led to important, substantive changes in the law -- changes, he argued, that were not intended by Congress. As a result, patents have been strengthened greatly, and firms are recognizing that a good patent is a powerful instrument to have. The impact of this change in the legal environment, according to Professor Scherer, is that smaller firms, and even some rather large firms trying to develop a new product, are essentially finding themselves in a mine field. In his words, “[T]here are lots of unexploded patents out there, and you might step on one and have your corporate leg blown off.(17)
It is likely impossible to resolve as a general matter whether intellectual property protection or competition is a superior catalyst for innovation. The Commission and its staff are very sensitive to the need to avoid a reduction in innovation efforts through an inappropriate application of antitrust analysis. We work hard to maintain competitive markets that encourage innovation, and at the same time, to accord due weight to existing intellectual property rights.
While the FTC is only beginning to think about some of the above-sketched issues involving the scope of patent rights and follow-on innovation, one area where we have considerable expertise concerning the intersection of intellectual property and antitrust law is in the merger context. There, the Commission has accepted carefully crafted consent orders that place some conditions on the exercise of intellectual property rights in order to remedy competitive concerns. Interestingly, the pharmaceutical and biotechnology industries are some of the very few industries in which the FTC has found it necessary to affect the owners’ rights to intellectual property assets in order to resolve concerns about likely reduced price competition, reduced or delayed innovation, or reduced product variety.
FTC INTELLECTUAL PROPERTY-RELATED CONSENTS
When investigating any proposed acquisition, the FTC considers the possibility that an anticompetitive problem might exist not with respect to the entire transaction but only with respect to certain product or innovation markets. If that is the case, efforts are made to place conditions on transaction to ensure that competition in the relevant markets will be as robust as it would have been without the merger, while allowing the majority of the transaction to proceed unhampered.
Consistent with the Intellectual Property Guidelines, the Agencies regard intellectual property as being essentially comparable to any other form of property.(18) In a consent order, the FTC may require the acquiring or merged firm to (1) divest certain intellectual property assets; (2) help a new competitor to enter the relevant market by providing critical intellectual property assets, technology assistance, and know-how; (3) license its intellectual property assets on an exclusive or non-exclusive basis; or (4) waive the right to enforce intellectual property rights. The following examples show how some or all of these remedies have been employed to resolve concerns about a likely lessening of competition with respect to existing products, research pace and diversity for new products, and future product diversity.
Hoechst’s Merger with Marion Merrell Dow
Last December, the Commission took action to remedy likely competitive problems in four relevant drug markets involved in Hoechst’s proposed merger with Marion Merrell Dow (MMD) -- a merger that created the third largest pharmaceutical firm in the world. (19) The consent contained several different remedies, including a waiver of the right to enforce certain patents, a divestiture of intellectual property assets, and licensing of intellectual property assets.
The largest market involved extended-release diltiazem, a drug used to treat hypertension and angina. Prior to the acquisition, MMD sold the leading extended-release diltiazem product, known as Cardizem® CD. Hoechst was developing a competing product, called Tiazac®, in tandem with Biovail, a Canadian biotechnology firm. Hoechst had turned over all of its rights to Biovail just before the merger with MMD was announced. Nonetheless, the FTC found reason to believe that the merger was likely to create anticompetitive effects in the market for extended- release diltiazem, because Hoechst and MMD were in a position to delay FDA approval of Biovail’s new drug -- Hoechst had retained some competitively sensitive information about Biovail, and MMD had an outstanding patent infringement action related to Tiazac®. To remedy these problems, the consent order required Hoechst to provide Biovail with a letter of access to toxicology data necessary to secure FDA approval of Tiazac®. The order also required Hoechst to withdraw all patent infringement litigation filed by MMD relating to Tiazac® and prohibited Hoechst from instituting any future patent infringement actions against Biovail relating to Biovail’s diltiazem products. Furthermore, Hoechst was required to withdraw a Citizen Petition that MMD filed with the FDA relating to Tiazac®. Finally, Hoechst was required to turn over any confidential information obtained from Biovail in the course of their relationship.(20)
A second major concern involved the market for drugs used to treat intermittent claudication, a painful leg cramping that is caused by artheriosclerosis. Hoechst sells Trental®, the only FDA drug approved for treatment of this problem. At the time of the proposed acquisition, MMD was developing Beraprost, which was one of only a few possible alternatives then in development. Under the consent order, Hoechst was required to divest either Trental® or Beraprost in order to preserve potential competition in this market. The relevant assets included: patents, trade secrets, rights to the brand or trade name, certain relevant software, and in the case of Trental®, the unique physical assets necessary to manufacture the drug.
The other two markets of concern were for oral mesalamine, a drug used to treat certain gastrointestinal diseases, and rifampin, a drug used to treat tuberculosis. In both cases, MMD was already marketing a branded drug and Hoechst was one of only a few firms developing a generic formulation of that drug. For each market, the remedy for the likely elimination of significant potential competition was divestiture of Hoechst’s or MMD’s assets and rights relating to the research, development, manufacture, and sale of the drug.(21)
Wright Medical Technology’s Acquisition of Orthomet
After reviewing the proposed acquisition of Orthomet, Inc., by Wright Medical Technology, Inc., the FTC found reason to believe that the acquisition would be likely to lessen competition in the market for the sale of orthopaedic implants used in human hands and in the market for the research and development of such implants.(22) Here, the remedy included a transfer of assets, the grant of a license, and the provision of assistance to a competitor.
For several years, the Mayo Foundation had licensed certain implant technology to, and worked with, Orthomet, which was researching and developing orthopaedic implants. The FTC required Wright Medical to transfer a complete copy of the Orthomet/Mayo research assets related to orthopaedic finger implants (which included patents, trade secrets, and other business know-how) to the Mayo Foundation, and to grant the Mayo Foundation a license to the assets with rights to sublicense them in perpetuity. Furthermore, Wright Medical had to provide technical assistance to the licensee whom the Mayo Foundation selected. Thus, the consent order enabled the Mayo Foundation to find another non-exclusive licensee who would compete against Wright in developing and eventually commercializing orthopaedic implants for use in human hands.
Upjohn’s Merger with Pharmacia
The most recent FTC consent to involve intellectual property assets was made final last month.(23) The merging companies, The Upjohn Company and Pharmacia Aktiebolag, were two of only a very small number of companies in the advanced stages of developing topoisomerase I inhibitors, which inhibit the multiplication of cancer cells and may aid in treating colorectal cancer. Upjohn had the U.S. rights for CPT-11, a topoisomerase I inhibitor that was developed in Japan. Pharmacia had the worldwide rights for 9-AC, another topoisomerase I inhibitor, under a Cooperative Research and Development Agreement with the National Cancer Institute. According to the FTC complaint, Upjohn’s product was expected to be the first to receive FDA approval for treating colorectal cancer, while Pharmacia planned to seek FDA approval for the same purpose within the next few years. The consent addressed the concern that the merger might delay or affect diversity in the U.S. market for research and development of topoisomerase inhibitors, or, even if both drugs were eventually developed and approved, might eliminate potential future price competition between the drugs. Accordingly, Upjohn and Pharmacia were required to divest Pharmacia’s intangible assets relating to the research and development of its topoisomerase I inhibitor for sale in the United States.(24) The order also required the merging firms to provide technical assistance and advice for up to one year, if requested by the acquirer of the assets, in order to ensure that the acquirer is capable of continuing to research, develop, and produce Pharmacia’s topoisomerase drug.
Sensormatic’s Acquisition of Knogo
One additional consent order, unrelated to the pharmaceutical industry, deserves mention because it prohibited the acquisition of certain intellectual property. This matter involved the proposed acquisition of certain assets of Knogo Corporation by Sensormatic Electronics Corporation, two companies that manufactured and sold electronic article surveillance systems.(25) These companies were also researching and developing disposable source labels that could be imbedded in goods or packaging at the manufacturing or distribution level. Knogo had a patented technology called SuperStrip, and Sensormatic was working on its own proprietary technology.
Sensormatic had agreed to acquire through a merger all of Knogo's assets outside of North America, along with all patents related to SuperStrip. Knogo’s North American assets were to remain as a separate entity. The agreement also obligated Sensormatic and Knogo North America (the successor corporation) to grant royalty-free cross-licenses for any improvements to the SuperStrip intellectual property.
The consent addressed concerns that the acquisition likely would lessen competition in the market for the research and development of disposable labels and for the research and development of processes to manufacture those labels, in the United States and Canada. The order prohibited Sensormatic from acquiring the SuperStrip patents for the practice and use of SuperStrip technology in the United States and Canada. However, the consent order did allow Sensormatic to acquire a non-exclusive license to use the technology for products manufactured or sold in the United States and Canada and to acquire exclusive rights to the technology outside the United States and Canada.
Intellectual property and competition have complementary roles in driving innovation in today’s technologically dynamic markets. As we have seen through the hearings testimony as well as in certain FTC investigations, intellectual property can be an asset that is critical to a company’s ability to compete in the marketplace, particularly in the pharmaceutical and biotechnology industries. By maintaining competition in today’s dynamic markets, the FTC can ensure that businesses have adequate incentives and abilities to innovate, which will lead to new and improved products and processes that will benefit consumer welfare.
I will be happy to answer any questions you may have.
(1)” 1995 Antitrust Guidelines for the Licensing of Intellectual Property § 1.0.
(2)The “public good” problem is that without intellectual property protection, the public would freely appropriate the benefits of an invention or creation without compensating the innovator. See Kohn 3339.
(4)Coyne 217-18; Phelps (Stmt) 3; Katz 1139-41; Mowery 755; Dyson 3326.
(5)Indeed, Max Frankel, testifying on behalf of the AIPLA, emphasized the value of intellectual property as well as competition: “[O]ur clients have learned that business competition spurs innovation, and they seek to preserve that competition. But they do not want to stifle innovation by making it harder or less rewarding to innovate or compete in the United States. We believe that intellectual property protection is essential to promoting innovation and investment in new technologies . . .” Frankel 3385. We also heard from the Licensing Executives Society (LES), which is comprised of over 3900 professionals in the U.S. and Canada who are engaged in the transfer and licensing of technology and industrial and intellectual property. According to a member survey that LES conducted, seventy-seven percent of respondents believed that intellectual property is a valuable asset that gives U.S. companies a competitive advantage. Nunnenkamp 3374 et seq. And Dr. William Coyne reported that 3M Corporation has built a strong intellectual property portfolio in each of its product areas, because patents are necessary to protect its innovation efforts. Coyne 205.
(6)” Scherer 3308.
(8)Scherer 3301-11. Wesley M. Cohen and Richard C. Levin, Empirical Studies of Innovation and Market Structure, in Handbook of Industrial Organization 1059, 1092 (Richard Schmalensee & Robert D. Willig eds., 1989); Levin, Klevorick, Nelson & Winter, Appropriating the returns from industrial R&D, Brookings Papers on Economic Activity 783 (1987); Richard C. Levin, A New Look at the Patent System, 76 Am. Econ. Rev. 199 (1986).
(9)Edwin Mansfield, Patents and innovation: An empirical study, 32 Management Science 173 (1986). See Cohen & Levin, Empirical Studies of Innovation and Market Structure, in Handbook of Industrial Organization at 1091-92.
(10)Schafer 718-19; Bloom 719-20; Green 721; Cooney 722; Scherer 3301-17.
(11)See, e.g., Kenneth W. Dam, The Economic Underpinnings of Patent Law, 23 J. Legal Stud. 247 (1994); Robert P. Merges & Richard R. Nelson, Market Structure and Technical Advance: The Role of Patent Scope Decisions, in Antitrust, Innovation, and Competitiveness 186 (Thomas Jorde & David Teece eds., 1992); Robert P. Merges & Richard R. Nelson, On the Complex Economics of Patent Scope, 90 Colum. L. Rev. 839 (1990).
(13)See Suzanne Scotchmer, Standing on the Shoulders of Giants: Cumulative Research and the Patent Law, 5 J. Econ. Persp. 29 (1991). See Suzanne Scotchmer & Jerry Green, Novelty and disclosure in patent law, 21 Rand J. Econ. 131 (1990).
(14)Barton 3417 -20.
(15)The Federal Circuit has exclusive jurisdiction of appeals from the U.S. Patent and Trademark Office with respect to patent applications and interferences and of appeals from judgments in civil actions for patent infringement. 28 U.S.C. § 1292. The Federal Circuit was formed partly in response to concerns about lack of uniformity in patent law decisions. See Stanley M. Besen & Leo J. Raskind, The Law & Economics of Intellectual Property, 5 J. Econ. Persp. 3, 8 (1991).
(16)” Written comments from Cecil D. Quillen, Jr. (Dec. 6, 1995) (emphasis added) (citing Jerome G. Lee, The Most Significant Patent Cases Relating to the Question of Obviousness Under 35 U.S.C. § 103, at 2 (read at the Annual Meeting of the ABA, Aug. 12, 1986); Jon F. Merz & Nicholas M. Pace, Trends in Patent Litigation: The Apparent Influence of Strengthened Patents Attributable to the Court of Appeals for the Federal Circuit, J. Patent & Trademark Office Society (Aug. 1994)). See Besen & Raskind, The Law & Economics of Intellectual Property, 5 J. Econ. Persp. at 8.
(17)” Scherer 3316. Along similar lines, Robert Kohn stated that while Borland International needed strong enforcement of existing intellectual property rights to protect its investments, Kohn 3336, overbroad intellectual property protection drives up the cost of subsequent innovation, thus resulting in the production of fewer works. Kohn 3339-40.
(18)Intellectual Property Guidelines § 2.0.
(19)Hoechst AG, C-3629 (Dec. 5, 1995).
(20)Interestingly, several days after the Commission accepted the consent agreement, Hoechst withdrew the infringement claims, and 24 hours later the FDA approved Biovail’s drug.
(21)Similar to the Trental®/Beraprost provision, the key intellectual property assets included all rights to relevant patents, trade secrets, trade or brand names, and other critical know-how.
(22)Wright Medical Technology, Inc., C-3564 (Mar. 23, 1995).
(23)The Upjohn Company and Pharmacia Aktiebolag, C-3638 (Feb. 8, 1996).
(24)This involved the divestiture of an exclusive license to all formulations, patents, trade secrets, technology, research data, proprietary software, and know-how related to Pharmacia’s drug. The assets to be divested also included the assignment of Pharmacia’s rights to National Cancer Institute patents, trade secrets, know-how, etcetera, related to the relevant drug.
(25)Sensormatic Electronics Corp., C-3572 (Apr. 21, 1995).