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The Berkeley Center for Law and Technology at the University of California, Berkeley
Robert Pitofsky, Former Chairman


The essential feature that is new about the "New Economy" is its increased dependence on products and services that are the embodiment of ideas. Examples include such diverse products as computer software, internet services, fax and other new forms of communications, and biotechnology - in general, the fastest growing segments of the present economy. In each of these areas, the "product" or "service" is a piece of intellectual property -- for example, a line of computer code, a new connecting device to make routers and servers more efficient, or new knowledge about genetic profiling that facilitates the use of gene therapy products to treat disease.

A major challenge of the next decade is to identify the policies that will allow a market economy to thrive in the context of this intellectual property revolution. More narrowly, questions abound concerning the role of conventional antitrust enforcement policy in these new areas.

In my view, it is unduly simplistic to assert that intellectual property is like all other forms of property.(2) There are important differences that will be explored in a later section of this paper. But it is also unduly simplistic to conclude, as some have urged, that because of differences, antitrust enforcement has little or no role to play when it comes to market power based on intellectual property.(3) In the remainder of this paper it will be assumed - as almost all commentators have assumed - that antitrust is sufficiently flexible that it can play a useful role in the "New Economy."(4) Discussion in this paper will examine how that part of an economy based on intellectual property is different, (Section B), and how antitrust needs to adjust, and has adjusted (Sections C and D), to take those differences into account. A final Section (E) will examine whether the institutions of antitrust enforcement are up to dealing with the kind of issues that commonly occur in the context of the "New Economy."


There are five differences relating to the "New Economy" that a sensible competition policy must take into account.

1. Differences in Fundamental Economics

Products and services based on intellectual property are usually characterized by large initial investments ("fixed costs") and low costs to reproduce individual items ("variable costs"). For example, once a new line of computer code is developed and introduced, the cost to the seller of duplicating that code and making it available to others approaches zero; once a new discovery is made about a biotech treatment for a disease, the cost of producing the pharmaceutical product is very little compared to the investment in research. Because the cost of producing additional items is so low, sellers find it to their advantage to add purchasers and users; hence price in the short run often declines in an effort by the seller to expand sales.(5) Competition to obtain the intellectual property and to expand sales therefore is beneficial for consumers and should be encouraged and preserved.

Now the bad news. Because of the fundamental nature of competition in markets characterized by intellectual property, there is a tendency to drift toward single firm dominance and even monopoly. In order to encourage initial investments, the law provides intellectual property protection (primarily patent and copyright)(6) and in effect precludes competition for a period of time. Also, products and services based on intellectual property more frequently exhibit "network effects," i.e. each individual's demand for a particular company's product or service is positively related to its widespread use by others. This phenomenon can most clearly be seen with respect to communications equipment (local telephone, fax, instant messaging) which becomes more valuable to users as more people use the service. There are also indirect network effects - situations in which producers of complementary products design and manufacture those complements to work with the products of the single dominant firm, thereby leaving potential challengers of that dominant firm without access to the complementary products or with the burden of producing the complementary products themselves.

It is important to recognize but not exaggerate these characteristics. There are many products not characterized by intellectual property with high fixed and low variable costs (incinerators, transport industries(7)) and with pronounced network effects (credit cards). On average and across the economy, however, these effects appear to be found more frequently in markets characterized by intellectual property.

In sum, incentives to innovate must be protected in intellectual property markets and innovation competition can yield great consumer benefits. On the other hand, threats to competition can be substantial. For example, the combination of intellectual property protection and network effects will almost inevitably lead to monopoly and the monopoly can diminish or eliminate future innovation. The challenge for antitrust is to deal with these economic conditions by preserving competition without unreasonably undermining incentives to innovate.

2. Value of Innovation in a Dynamic Economy

Conventional antitrust focuses primarily though not exclusively on price and output effects. Antitrust enforcers ask whether a particular transaction is likely to allow the parties to raise price to the disadvantage of consumers, or lower price drastically so as to drive out competitors and eventually injure consumers, or achieve comparable effects from other exclusionary conduct. It has been suggested, however, that improvements in efficiency, particularly efficiencies in innovation, may produce consumer benefits that dwarf any loss of competition leading to higher prices or fewer discounts. The seminal (though still controversial) statement of the general argument that concentration may favor innovation appears in Joseph Schumpeter's book Capitalism, Socialism and Democracy, and emphasizes economies of scale which assist large companies to be efficient in research and development. Others have noted that innovation may be spurred by corporate size because firms are able to spread the cost of innovation across a larger output base, accelerate implementation of innovations, and diversify risks.(8)

As discussed in the next section of this paper, the issue is not so much whether incentives to innovate should be protected - all agree on that - but how much protection is justified.

3. Durability of Market Power

While comprehensive empirical data is lacking, there is a widely held view that markets in the "New Economy" are characterized by an increased rate of innovation, relative ease of entry and instability of market shares. As a result, the argument proceeds, cartels and monopoly power in IP markets will necessarily be short-lived and in any event will be defeated more quickly and efficiently by market forces such as new entry than by any band of bureaucrats.

On average, market power probably is less durable in the high-tech sector of the economy. As a result, it is unlikely that any dominant firm will eclipse competition for 50 years to the extent and in the way Alcoa dominated the aluminum market in the first half of the 20th Century. Nevertheless, we have already seen that systems designed to encourage and protect innovation - patents and copyrights - can be and often are used to barricade a market against entry by new rivals. It also appears that network effects occur more frequently in sectors of the economy characterized by intellectual property. Brand name recognition and reputation for reliability can create substantial advantages for incumbents. Finally, practices illegal under the antitrust laws such as exclusionary conduct or intimidation tactics available to only very large firms can themselves impede entry by more efficient challengers. Market dominance for "only" 15 or 20 years can take enormous resources out of the economy and, by excluding innovative new entrants, foreclose alternative paths of technical development.

In the end, the question of whether market power is durable or ephemeral is fact specific and needs to be addressed on a market by market and product by product basis. Casual across-the-board views that antitrust has no role to play because market power is unlikely to last very long are unfounded.

4. Protecting (Without Over-Protecting) Incentives to Innovate

Virtually all agree that some level of protection of intellectual property, specifically involving a patent and copyright system, is justified. But almost all also recognize that such protection is a two-edged sword. It properly encourages and rewards innovation, and prevents misappropriation, but also prevents competition for a period of time within the zone of the IP grant. For example, since much innovation consists of improvement on basic ideas, patent protection of the basic idea may preclude the very improvements that it is designed to encourage.

Two difficult questions need to be addressed. First, in the "New Economy" context, is the present level of IP protection roughly adequate or does it grossly under-compensate or over-compensate innovation? Second, has antitrust enforcement adequately acknowledged the importance of protecting incentives to innovate?

With respect to the level of IP protection, much work needs to be done to evaluate how IP protection operates today. Many suspect that the present system is seriously flawed.(9) It should be a matter of concern that patent applications and patent grants in the United States are at an all-time high, and the patent rate per dollar of R&D is the highest since 1977.(10) Perhaps there are innocent explanations, or it may be that the "system" drives companies to seek, and the government to grant, more flimsy IP than is justified.

Take patent policy. An evaluation of levels of protection is beyond the scope of this paper, but any resolution of relationship of antitrust and intellectual property must address some or all of the following questions:

a. Does the patent office have the resources to conduct a rigorous review of patent applications?  

b. Are patent grants justified in terms of utility, novelty and invention, or is the scope of patents that are granted unnecessarily broad?

c. Is the duration of patent protection always or even usually essential to stimulate and reward innovation, or would lead time to the innovator and secrecy adequately reward much innovation? If the latter is true, what policy justifies granting as many broad patents as are issued today?  

d. Is private litigation a sensible way to work out patent controversies - especially with respect to the scope of the patent? and  

e. Are patents abused? For example, are many patent applications designed to create a thicket of uncertain scope primarily to preclude competitive challenges?(11)

Without reliable answers to some or all of these questions, it will be difficult to decide whether the balance between antitrust and IP protection is roughly correct. Even if our government grants more patents than are essential to encourage innovation, and protects patent rights to an undue extent - - and I tend to agree with those who are skeptical about the bona fides of current patent policy - - there is a still more difficult issue to address. It may be that innovation in the form of intellectual property drives the economy to higher levels of productivity, and consequently produces higher levels of consumer welfare, and therefore that generous compensation by issuing particular patents, or even patents in a general area like pharmaceuticals or computer software, is a sensible price to pay.

With respect to antitrust's overall reaction to consumer welfare consequences of innovation, antitrust historically has often if not always been sensitive to the value of innovation. Research and development joint ventures are a classic example of innovative arrangements, but since the passage of the Sherman Act in 1890, there has been only one federal government challenge to a research joint venture.(12) It would be difficult to imagine a more lenient policy. When competitors control patents that include legitimate conflicting claims so that neither can reach the market, the courts have consistently allowed cross-licenses even when the cross-licenses incorporated agreements on price.(13) Access to information about a monopolist's product may be essential for manufacturers of complementary products or services to compete. A leading court decision concluded, however, that there is no obligation to pre-disclose even by a monopolist, because among other reasons, any such duty would tend to discourage aggressive competition and innovation.(14) Finally, evidence of an intent on the part of antitrust enforcers to avoid unnecessary interference with incentives to innovate is found throughout the recently issued FTC/DOJ Antitrust Guidelines for Collaboration Among Competitors.(15)

In a later section of this paper, discussion will turn to whether antitrust law enforcement (and non-enforcement), including consent settlements, has paid adequate attention in the last half dozen years to preserving legitimate incentives to innovate. See pages 13 to 24 below.

5. Special Problem of Designing Remedies

As in other areas of antitrust, most cases involving intellectual property that raise serious antitrust problems are settled with conditions rather than litigated. Because areas of the economy characterized by intellectual property usually are dynamic rather than static, reliable predictions are difficult. This is a problem across-the-board but it particularly applies to designing remedies that alleviate competitive problems without unduly interfering with innovation incentives.

Among the issues that need to addressed are the following:

a. Enforcement officials and the courts need to be cautious in imposing remedial conditions so as not to undermine innovation;  

b. Special attention needs to be given to the duration of orders, with duration often curtailed, because market changes in high-tech markets with much IP are likely to make those long-term orders obsolete if not downright harmful; and  

c. Where network effects are present or threatened, there must be special attention to designing a remedy that ensures reasonable access to the bottleneck product or service.(16)

These issues are discussed more fully below in connection with actual cases settled or litigated by the FTC in the last several years.


It is clear that both intellectual property protection and reasonable antitrust enforcement will encourage innovation. Intellectual property rights subsidize investments in innovation by granting substantial but time-limited market power. Antitrust ensures that firms compete, and by competing, seek new roads to innovation. It also prevents dominant firms from harming or retarding innovation.

Serious problems arise when either regime - intellectual property protection or antitrust - is accorded disproportionate weight.

A striking example of undue weight is the recent Federal Circuit decision in CSU v. Xerox Corp.,(17) which concluded that a legitimate holder of a patent or copyright can refuse to license anyone, regardless of intent or effect on competition, and that refusal is exempt from the antitrust laws unless the intellectual property was obtained by fraud, the infringement suit is a sham to cover an intent to injure a competitor, or the refusal is part of a tie-in sale strategy. In effect, the Federal Circuit has leaped from the undeniable premise that an intellectual property holder does not have to license anyone in the first instance to the unjustifiable conclusions that it can select among licensees to achieve an anti-competitive purpose or can condition a license (for example, you receive a license only if you agree not to do business with my competitor) to achieve an anti-competitive effect.

That approach to the tradeoff between intellectual property and antitrust gives intellectual property an inappropriate weight in the traditional balancing process.(18)


To recapitulate, in markets characterized by the presence of intellectual property, antitrust faces the following special (though not unique) characteristics: incentives to innovate are particularly important, competition at the research and development level is critical; markets are dynamic and market shares often (though not always) unstable; predictions about the way markets will develop are uncertain; and the issues that enforcers must address are unusually complicated and technical.

Given that background, the question is whether recent antitrust enforcement has taken those considerations into account. In reviewing a sample of enforcement initiatives over the last half dozen years at the FTC, my goal is not to demonstrate that the Commission was always correct. Cases that go to litigation or involve lengthy settlement negotiations usually involve close calls and any individual administrative decision could be debated. My goal rather is to determine whether enforcement and non-enforcement decisions took into account the special characteristics of intellectual property markets that I have discussed in the first half of this paper.

1. Agreements That Have the Effect of Extending Patent Duration - Hoechst-Andrx and Abbott-Geneva(19)

In the past year, the FTC brought two actions that raised similar issues involving settlements of patent disputes between brand name and generic companies. Under federal law, (20) the first company to file with the FDA an application to market a generic bio-equivalent to a brand name drug is given a 180 day period of exclusivity after the patent expires or is declared invalid in a patent suit, during which other generic competitors are prohibited from coming to market. In both Abbott-Geneva and Hoechst-Andrx, the branded pharmaceutical company paid the first-to-file generic company a large sum of money (exceeding the amount of money the generic company might otherwise have earned by independently marketing the product) to keep the generic version off the market. The agreements thus acted as corks in a bottle, precluding competition not only by the generic company that was paid not to challenge the branded pharmaceutical, but also by other potential generic competitors because the 180 day period does not begin to run until the generic comes to market. Each agreement contained additional provisions, such as provisions that the generic company would not transfer or relinquish its 180-day exclusivity period, or would not even market non-infringing generic forms of the branded company's drugs.

Absent the agreements, it was reasonable to expect that the branded pharmaceutical house and the generic house would have engaged in extended patent litigation as to whether the generic product improperly infringed. In general, innovation is facilitated by encouraging settlements of patent litigation. But in these cases, the key provision effectively paying the generic to stay off the market (and by staying out to preclude others from entering the market), along with ancillary provisions blocking competing sales, led the Commission to conclude that the primary purpose and effect of the arrangement was to extend the de facto duration of the patent by private agreement. At least to my mind, these arrangements did little to encourage innovation.

2. Refusals to License by a Monopolist - the Intel Case(21)

In one of the most widely noted antitrust enforcement actions involving intellectual property, the Commission in 1998 issued a complaint against the Intel Corporation alleging that it was a monopolist in the microprocessor market and that it had sought to maintain its dominance by denying essential technical information and product samples of new microprocessors to companies that, because of intellectual property disputes, had initiated or threatened to initiate litigation against Intel or Intel's customers. Intel's goal, according to the complaint, was to coerce other companies not to resort to the courts, but instead to license their intellectual property on terms favorable to Intel. Intel had previously provided the information and samples to many of its customers and customer-competitors, but withdrew these advantages from those who found themselves in IP disputes with Intel. The Commission alleged that anti-competitive effects included discouraging innovation efforts by potential challengers in microprocessor technology.

In settling the case, Intel agreed not to withhold or threaten to withhold product or technical information for reasons relating to an intellectual property dispute. The Commission agreed to qualify this provision however, by acknowledging that an intellectual property holder, including a monopolist like Intel was alleged to be, is free not to license its product or information in the first instance, but ought not to be able to curtail its supply when the customer seeks to vindicate its intellectual property rights through a range of legal and equitable remedies. Intel was also free to discontinue a license when a customer or competitor sought an injunction against Intel's sale of its microprocessors. The order gave the challenger a choice of waiving that remedy, or, if it refused to waive, allowed Intel to discontinue providing information or product.

The goal of the order was to avoid a "compulsory licensing"regime, even by an alleged monopolist, because of the adverse effects of such regimes on innovation. The order was designed to allow Intel and its challengers to vindicate their rights in court before an independent adjudicator, rather than resort either to self-help (by Intel) in which case the strong would almost always vanquish the weak, or to the kind of injunction (by Intel's challenger) that would threaten Intel's ability to conduct its business.

In my view, the order in Intel is the prime example of the effort by the FTC to pursue conventional antitrust enforcement,(22) while at the same time tailoring its complaint and order so as not to undermine incentives to innovate in the first place.

3. Horizontal Mergers and Claims of Efficiency - Lilly/Sepracor, Ciba-Geigy/Sandoz and Glaxo/Smith-Kline(23)

It has become commonplace for companies that control overlapping or complementary intellectual property to defend proposed horizontal mergers or joint ventures on grounds that the combined company will be able to innovate or introduce innovative products more promptly and efficiently. Where levels of concentration or entry barriers are low, the Commission routinely allows such mergers or joint ventures. One example among many was Lilly-Sepracor in which Lilly, manufacturer of the block-buster drug Prozac, sought an exclusive license to the rights to a follow-on and allegedly superior product. The case epitomizes the technical and predictive difficulties that antitrust enforcers face in an IP context. It was uncertain whether the follow-on drug would be approved by the FDA, how soon it would come to market, whether and to what extent Lilly's patent on Prozac would have blocked marketing of the follow-on drug, and whether it represented a meaningful advance over Prozac. Speaking for myself, I chose not to challenge the arrangement because Prozac faced several other competitors, there was a range of other generic manufacturers ready to challenge Prozac when it went off patent, and because Lilly's distribution resources and scientific expertise made it likely that Lilly would bring this new drug to the market much more promptly than would otherwise be the case.

On the other hand, where market shares and concentration are high and the merger is likely to leave only one or two sources of a product, efficiencies (including effects on innovation) should almost never justify the merger. For example, in December 1996, the Commission issued a consent order involving a proposed merger between Ciba-Geigy and Sandoz, the two leading commercial developers of gene therapy products. To ensure that the merger would not slow R&D or raise prices for gene therapy products closest to market, the consent order required, among other things, the licensing of a package of gene therapy technology, know-how and patent rights to a third party so that it would be in a position to compete against the combined firm. The Commission faced a similar situation in the proposed merger of Glaxo and Smith-Kline Beecham, now out for public comment, and required the parties to assign IP rights to an acquirer to prevent extreme concentration in the market.

Mergers to monopoly or near monopoly, especially when the product has already been developed and is near the marketing stage, threaten short-term anti-consumer effects in IP markets just as in markets generally. Requiring that a second firm be set up in the market, restoring the competition lost as a result of the merger, is designed to ensure that competition at least plays some role in future developments in the market.

4. Vertical Mergers and Claims of Efficiency - Silicon Graphics(24)

In 1995, the Commission reached a consent with Silicon Graphics, Inc. (SGI) that allowed two acquisitions to proceed while at the same time addressing vertical foreclosure concerns that threatened to eliminate innovative competition. According to the Commission's complaint, SGI, the dominant provider of entertainment graphics workstations with a 90% market share, proposed to acquire Alias and Wavefront, two of the three dominant developers of Unix-based entertainment graphics and animation software that operate on those workstations. The Commission was concerned about vertical foreclosure in both directions: rival workstation manufacturers could not compete effectively if Alias and Wavefront designed their software to be compatible only with SGI's workstations, and rival entertainment graphics software manufacturers would be foreclosed from 90% of a market if SGI closed its previously open software interface so that only Alias and Wavefront could design compatible software. The Commission also was concerned that if SGI did allow Alias and Wavefront to continue to work with rival workstation manufacturers to develop complementary products, it could use proprietary information received in the course of those efforts to obtain an unfair competitive advantage over those workstation competitors.

On the other hand, there were strong indications that the combination of SGI, Alias and Wavefront's complementary capacities would lead to important innovation. In order to maintain competition while at the same time allowing the achievement of these potential efficiencies, the Commission negotiated a consent order that allowed the merger to proceed subject to three main conditions. First, to preserve workstation competition, the Commission required the merged entity to enter into a Commission-approved porting agreement with a workstation competitor under which SGI would be required to use best efforts to ensure optimal interoperation of Alias' leading software programs with the competitor's workstations. Second, to keep competition fair, the order included a firewall provision prohibiting the transfer to SGI of the workstation competitor's proprietary information. Finally, to maintain software competition, the order required SGI to maintain an open architecture and publish its application programming interfaces for its workstations, and to refrain from discriminating against outside software rivals of Alias and Wavefront.

The order was admittedly "regulatory," including an on-going supervisory role for the Commission which is usually best avoided. The alternative, however, was to block a vertical merger in a dynamic sector of the economy that offered exceptionally strong prospects for innovation.

5. Standard Setting by Private Agreement - Dell Computer(25)

Standard setting, often under the auspices of a trade association, can facilitate innovation. On the other hand, private standard setting, precisely because it is private, is subject to abuse.(26)

In Dell Computer, the Commission alleged that Dell became a member of the Video Electronics Standards Association ("VESA"), a non-profit standard setting organization composed of virtually all major U.S. computer hardware and software manufacturers, which was in the process of setting a design standard for a computer part ("VL-Bus") that carried information or instructions between a computer central processing unit and peripheral devices. A Dell representative certified in writing that "this proposal does not infringe on any trademarks, copyrights, or patents" possessed by Dell. After the standard was adopted, Dell informed several VESA members that implementation of the VL-Bus was a violation of Dell's intellectual property rights. The Commission alleged that Dell had abused the power conferred by its patent by failing to disclose its patent rights and then threatening to enforce those rights against others.

In a consent agreement, Dell agreed not to enforce its patent against computer manufacturers incorporating VL-Bus design, nor to enforce in the future any patent rights that it intentionally failed to disclose upon request of any standard setting organization during the standard setting process. The remedy was designed to maintain incentives to innovate created by patent law by leaving in place Dell's patent rights for all purposes other than enforcement against competitors who had relied on the apparently open industry standard. The complaint alleged that the "bait-and-switch tactics" adopted by Dell threatened to retard the development and adoption of standards in this particular matter and to discourage in the future efficient standard-setting efforts.

The enforcement action and the order aimed to protect the integrity of the private standard setting process, itself an essential device to help introduce new products, without punitive action against Dell's patent.

6. Duration of Orders - Intel and AOL-Time Warner(27)

As noted earlier in this paper, areas of the economy characterized by IP usually are dynamic and fast changing and, as a result, predictions are not always reliable. On the other hand, it is often the case that antitrust enforcers must intervene at an early point to be effective. Once mergers or other transactions lead to a dominant market position, restoration of competition may be impossible or very difficult.

Until six years ago, antitrust orders entered by the Federal Trade Commission were permanent and were vacated only on a showing by the party covered by the order of changed circumstances of fact or law. In 1995 the Commission changed its policy and adopted a 20 year cap on all antitrust orders.(28)

Even 20 years can be an unacceptably long duration for an order when high-tech is concerned. As a result, the Commission, largely on its own initiative, has curtailed the duration of several of its orders in the high-tech sector to less than 20 years.

An example was the Commission settlement in Intel, discussed earlier, where the duration was limited to 10 years because of the fast changing nature of competition in microprocessor design. A more striking example can be found in the recent settlement of the proposed merger of America Online and Time Warner. The product markets alleged to be likely to be affected by the merger included broadband internet connections over cable, the means by which most residential broadband subscribers access the internet, and "interactive television" - a new technology that will permit expanded viewer choice of the forms of entertainment and information that they can receive over cable. It was argued to the Commission that broadband connections over cable are already challenged competitively and will increasingly be challenged by broadband connections over telephone lines ("DSL"), by satellite and through wireless devices. Interactive television, though widely regarded as an important innovation, is largely in the developmental stage. Given the uncertainty of developments in these areas and the dynamic quality of innovation, the Commission elected to limit the duration of all provisions of its order to five years - the shortest duration of a competition order of which I am aware.

It is possible, of course, that the market will develop in unexpected ways and competition problems will be more rather than less serious five or ten years after the order is entered. If those problems are created by illegal competitive behavior, there are other provisions of the antitrust laws that will come into play. If dominance is achieved solely as a result of the superior skill and energy of the merged entity, then neither the antitrust authorities nor consumers have much to complain about.

7. Interim conclusions

Obviously I am not objective since every one of the enforcement and non-enforcement decisions described in this paper was voted upon by the FTC in the past six years, most unanimously. Nevertheless, there is a good deal of evidence that in fashioning complaints and orders in cases that involve intellectual property, the FTC has tried to ensure that conventional antitrust enforcement is sensitive to incentives to innovate. In some instances the enforcement action itself was designed to discourage behavior that was alleged to suppress other people's intellectual property rights (Intel and Dell); in others it was designed to pursue conventional enforcement but with attention to avoid overreaching that would undermine incentives to innovate.


In a recent paper Judge Richard Posner raised in his usual thoughtful way questions about whether the institutional structure of antitrust enforcement is adequate to deal with the pace of development and type of issues likely to be encountered in the "New Economy."(29) In addressing such institutional questions, one cannot help but think of the debacle when the U.S. Government brought a monopolization case against IBM, representing at the time the cutting edge of high-tech innovation. After several years of investigation, the Government filed its lawsuit in 1969. After seven years of discovery and six years of trial, including a trial presentation that covered 104,000 pages of transcript, the Government in 1982 dismissed the case - almost certainly correctly - on grounds, among others, that by that time IBM was no longer a monopolist.(30)

Questions raised in antitrust enforcement actions involving high-tech are unusually complicated and highly technical: for example, whether new technologies are likely to persist in the face of future competition or whether a highly technical chip was designed to preclude a particular form of competition. Investigations and cases tend to be long compared to other forms of civil litigation because questions of cause and competitive effect are exceptionally complicated. Is antitrust up to the challenge?

1. Speed of Review

It is usually in everyone's interest - business, consumers and government - to complete and review cases promptly. On the other hand, law enforcement can rarely equal the speed of economic change in high-tech sectors. Fact finding, especially when developed through an adversarial process before decision makers who are not technically trained, is bound to be slow. All the government can hope to do is reduce delay to the maximum extent possible without short-changing consumers or undermining the constitutional rights of respondents.

In terms of efficiency of review, much progress has been achieved in recent years in the area of merger enforcement. Ninety-seven percent of mergers filed with the Department of Justice and the FTC are cleared without a "second request" (i.e., without extensive factual inquiry), and of transactions where a second request is issued, the parties are in court or the investigation is closed in the vast majority of instances within 120 days.

If the Commission decides to challenge a transaction in court, it usually proceeds by preliminary injunction so that the initial trial is completed within a matter of months after a complaint issues. If the Commission elects to proceed along the administrative route and litigate the case within the agency, it has adopted a "fast track" procedure, available at the option of the parties, so that elapsed time from complaint to Commission decision does not exceed 13 months.(31)

A comparable improvement in the speed of review and litigation needs to occur in the non-merger area. My impression is that the enforcement agencies and the courts are aware that it is essential to move things along, and improvement is occurring.

2. Technology Challenges

Antitrust enforcement has often faced the challenge of dealing with complicated technological questions - for example, in patent litigation or review of standard setting results. I can testify better than most that there has never been a time when so many highly technical questions - best addressed by people with advanced training in chemistry, biology and engineering - must be resolved in order to deal with antitrust issues.

Few government enforcement officials, administrators or judges have sufficient technical competence to deal directly with those issues and therefore must turn to experts. As Judge Posner notes,(32) relatively few lawyers and economists have scientific training and those who do can command vastly better levels of income in the private sector than in the government. There are competent experts in the private sector but many are either on the payroll of high-tech companies or avoid government connections because they hope to be in the future. I fully acknowledge the problem identified by Judge Posner.

The situation is not entirely bleak however. Government lawyers and economists, after exposure to the technology of a particular sector, learn in the process of doing and are better equipped to handle a later, similar case. Also, some technically sophisticated lawyers and economists, blind to the virtues of wealth maximization, remain with the government for extended periods, and even an entire career, because they prefer service in the public sector. Some technical experts from outside government do commonly serve as consultants and expert witnesses on government litigation teams, or as trustees appointed to oversee compliance with consent decrees. Finally, and perhaps most important, the Federal Trade Commission has turned to other agencies in government - NIH with respect to biotechnology, FCC for communications expertise, and EPA for help on some mergers in the chemical industry - and have in that way found invaluable assistance.


This paper is primarily about the need to adjust competition policies to the realities of the "New Economy." While much remains to be done, my contention is that antitrust has made significant progress in understanding the "New Economy," and adjusting its policies to take more fully into account the need to protect both incentives and opportunities to innovate. At least as important, there is a need, touched upon only briefly here, to revisit intellectual property policy to access whether IP protection has gotten out of hand.


1. Chairman of the United States Federal Trade Commission. The views expressed are my own and do not necessarily reflect the views of the Commission or other Commissioners. I want to thank Steven Salop, Thomas Leary, Simon Steel, and Gregg Vicinanza, for invaluable help on this paper.

2. In the U.S. Department of Justice and Federal Trade Commission, Antitrust Guidelines for the Licensing of Intellectual Property, § 2.1 (1995), there are statements to the effect that the same general antitrust principles that apply to any form of tangible or intangible property should apply to conduct involving intellectual property. But the Guidelines then go on to note that "[i]ntellectual property has important characteristics, such as ease of misappropriation, that distinguish it from many other forms of property." As this paper will develop, the antitrust laws should apply fully to intellectual property - certainly no broad exemption is justified - but in application must take important special characteristics of intellectual property into account.

3. David J. Teece and Mary Coleman, "The Meaning of Monopoly: Antitrust Analysis in High-Technology Industries," 43 Antitrust Bull. 801, 843, 846 (1998); Robert J. Barro, "Why the Antitrust Cops Should Lay Off High-Tech," Business Week, August 17, 1998, at 20.

4. See, e.g., Lawrence H. Summers, "The New Wealth of Nations," (Hambrecht & Quist Technology Conference, May 2000) (; Richard A. Posner, "Antitrust in the New Economy" (ALI-ABA Conference, September 2000) (; Daniel L. Rubinfeld, "Competition, Innovation and Antitrust Enforcement in Dynamic Network Industries," (Software Publishers Ass'n Spring Symposium, March 1998) (; David A. Balto & James F. Mongoven, "Antitrust Remedies in High Technology Industries," Antitrust Report 22 (Jan. 1999); Carl Shapiro, "Navigating the Patent Thicket: Cross Licenses, Patent Pools and Standard Setting" (National Bureau on Economic Research seminar: "Innovation Policy and the Economy," April 2000) (; and R. Pitofsky, Challenges of the New Economy: Issues at the Intersection of Antitrust and Intellectual Property (American Antitrust Institute conference: "An Agenda for Antitrust in the 21st Century," June 2000) (/speeches/pitofsky/000615speech.htm).

5. See, Carl Shapiro & Hal R. Varian, Information Rules 28 (1999) ("With information goods, unit costs of production are negligible and supply chain management and related techniques usually don't help much with the first-copy costs. The key to reducing average cost in information markets is to increase sales volume.").

As Judge Posner explains:

"Intellectual property is characterized by heavy fixed costs relative to marginal costs. It is expensive to create but once created the cost of making additional copies is low, dramatically so in the case of software, where it is only a slight overstatement to speak of marginal cost as zero. Without legal protection, the creator of intellectual property may be unable to recoup his investment, because competitors can free ride on it; and so legal protection can expand, rather than as the usual case with monopoly contract, output."

Posner, supra note 4, at 2.

6. In addition to patent and copyright law, various other intellectual property laws or quasi-intellectual property laws, including trade secret law and statutory proposals for database protection, serve the economic function of rewarding creative or inventive effort with competitive exclusivity, thus trading off the benefit to customers of competition against the benefits of encouraging innovation. See, e.g., William A. Landes & Richard A. Posner, "An Economic Analysis of Copyright Law," 18 Jo. Leg. Studs. 325 (1989); Federal Trade Commission, Statement Concerning H.R. 1858, The "Consumer and Investor Access to Information Act of 1999" (July 1, 1999). Trademarks are better dealt with separately, however, because while some common issues arise, they involve an economic tradeoff with different implications for antitrust law. The economic purpose of trademark law is not in general to encourage innovation and creativity, but instead to reduce consumer search costs by identifying the source of goods, and thereby incidentally to encourage quality by protecting reputation. See Landes & Posner, "Trademark Law: An Economic Perspective," 30 Jo. Law & Econ. 265 (1987).

7. As Shapiro and Varian, supra note 5 at 22, point out, "It costs United a huge amount to purchase and operate a 747, but the incremental cost of an additional passenger is tiny, so long as the plane is not full."

8. See, e.g., Steven C. Salop, "Efficiencies in Dynamic Merger Analysis" (Statement at FTC Hearings on Global and Innovation-Based Competition, November 2, 1995) (/opp/global/saloptst.htm#15).

9. See, e.g., Robert P. Merges, "As Many as Six Impossible Patents Before Breakfast: Property Rights for Business Concepts and Patent System Reform," 14 Berkeley Tech. L.J. 577 (1999) (arguing that the growing volume of patents and the emergence of new types of patents such as business method patents reinforce a general need for new procedures, such as a European-style patent opposition system, and a reform of patent examiners' training and incentives, to minimize the granting of invalid patents); Lawrence Lessig, "The Problem with Patents" (April 23, 1999) (,1151,4296,00.html) (attributing the growing problem of "bad patents," especially bad business method patents, as "the space debris of cyberspace, to workloads and incentives for PTO Examiners that limit scrutiny, and to the high cost of litigating against invalid patents); Mark A. Lemley, "Rational Ignorance at the Patent Office" (working paper) ( (arguing that reforms should focus on litigation rather than the PTO, including an abolition of the presumption of validity in patent litigation); Mark A. Lemley et al., Software and Internet Law 333-34 (2000) (discussing specific weaknesses in the PTO's scrutiny of software patents in the 1990s); Jeff Bezos, "An Open Letter on the Subject  of Patents"  ( (arguing that business method and software patents should be limited to three to five years duration and subjected to public comment before issuance). See also National Research Council, Computer Science and Telecommunications Board, The Digital Dilemma: Intellectual Property in the Information Age 228 (2000) ("The past decade has seen a substantial de facto broadening of items for which patents can be obtained, including information inventions such as computer programming, information design, and business methods. The long-term effects of this trend are as yet unclear, although the near-term consequences are worrisome.").

10. See Linda Cohen and Roger Noll, "Is U. S. Science Policy at Risk?," Brookings Review 10, 13 (Winter 2001).

11. On this last question, see Shapiro, supra note 4 at 3.

12. See Automobile Mfrs. Ass'n v. United States, 307 F.Supp. 617 (C.D. Cal.1969), aff'd sub nom City of New York v. United States, 397 U.S. 248 (1970).

13. The leading case is Standard Oil Co. (Indiana) v. United States, 283 U.S. 163 (1931).

14. For example, see Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263, 281 (2d Cir. 1979).

15. See U.S. Department of Justice and Federal Trade Commission, Antitrust Guidelines for Collaboration Among Competitors, § 3.31(a) (2000) (concluding that R&D agreements are usually pro-competitive).

16. Perhaps the most perplexing question about how the antitrust laws should apply to intellectual property concerns entrenched market power achieved as a result of network effects. That issue deserves an entire paper of its own and is beyond the scope of this discussion.

I have attempted to address those issues elsewhere. See Pitofsky, "Antitrust Analysis in High-Tech Industries: A 19th Century Discipline Addresses 21st Century Problems" (Remarks at ABA Antitrust Section's Antitrust Issues in High-Tech Industries Workshop, February 1999) (/speeches/pitofsky/hitch.htm). My tentative conclusion there was that antitrust should be cautious in challenging legally achieved market power based on network effects, and with rare exceptions, should concentrate on its traditional role of ensuring that companies achieve market power through legitimate competitive conduct, and that they maintain their network dominance only through superior skill, foresight and industry - not by exclusionary conduct.

17. In re Independent Service Organizations Antitrust Litigation, 203 F.3d 1322 (Fed. Cir. 2000).

18. Illustrating the way CSU v. Xerox may be misused, see Townshend v. Rockwell Int'l Corp., 2000 U.S. Dist. LEXIS 5070 (N.D. Cal. March 28, 2000). In that case, the owners of basic patents underlying the 56k modem technology sued for patent infringement. The defendant, Rockwell, asserted antitrust counterclaims alleging that the patents on which the suit was based were invalid, the technology under the patents had been adopted as part of an industry standard through fraud on a trade association and its members, and the patents were made available to competitors only on condition that they cross-license their technology to the patent holder. The district court dismissed the antitrust counterclaims, "[b]ecause a patent owner has the legal right to refuse to license his or her patent on any terms, [and therefore] the existence of a predicate condition to a license agreement cannot violate the antitrust laws." Id. at *26. To the same effect, see Integraph Corp v. Intel Corp. 88 F. Supp. 2d 1288 (N.D. Ala. 2000).

19. In re Abbott Laboratories and Geneva Pharmaceuticals, Inc., Docket Nos. C-3945 and C-3946 (March 16, 2000) (/os/2000/03/index.htm#16); In re Hoechst Marion Roussel, Inc., Carderm Capital L.P., and Andrx Corporation, Docket No. C-9293 (March 16, 2000) (/os/2000/03/index.htm#16).

20. The Drug Price Competition and Patent Term Restoration Act of 1984, 98 Stat. 1585, 21 U.S.C. § 355 (the "Hatch-Waxman Act").

21. In re Intel Corp., Docket No. 9288 (August 3, 1999) (/os/1999/ 9908/

22. For similar enforcement efforts in non-IP contexts, see, e.g., Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985); Lorain Journal Co. v. United States, 342 U.S. 143 (1951).

23. In re Ciba-Geigy Limited, Ciba-Geigy Corporation, Chiron Corporation, Sandoz Ltd., Sandoz Corporation, and Novartis AG, File No. 961-0055 (/os/1996/9612/ index.htm); In re Glaxo Wellcome plc, and SmithKline Beecham plc, Docket No. C-3990 (/os/2000/12/index.htm#18).

24. In re Silicon Graphics, Inc., Docket No. C-3626 (November 14, 1995) (outlined in press release at /opa/1995/9511/sil2g.htm).

25. Dell Computer Corp., 121 F.T.C. 616 (1996).

26. See Allied Tube & Conduit Corp. v. Indian Head Inc., 486 U.S. 192 (1988) (largest manufacturer of steel conduit recruited voters to attend an annual meeting for the purpose of having them vote against approval of a standard that would allow a potential competitor into the market).

27. Intel, supra note 21; In re America Online, Inc., and Time Warner Inc., Docket No. C-3989 (/os/2000/12/index.htm).

28. 16 C.F.R. § 3.72 (b)(3)(2000).

29. Posner, "Antitrust in the New Economy," supra note 4.

30. See ATRR No. 1051, 310-311 (1982); United States v. IBM, 1997-1 Trade Cas. (CCH) ¶ 71, 786 (S.D.N.Y. 1997) ("It has been established beyond any real question that whereas IBM formerly had a great deal of market power in an antitrust sense, that market power has been substantially diminished, and is continuing to diminish, to the point of its disappearance in the sense of a threat of antitrust violation.") aff'd, 1998 U.S. App. LEXIS 32577 (2d Cir. 1998).

31. 16 C.F.R. § 3.11A(c)(1), (3) (2000).

32. Posner, supra note 4.