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The American Society of Association Executives Legal Symposium
Washington, D.C.
Christine A. Varney, Former Commissioner

It's a pleasure to be here this morning. Today, I'd like to talk with you about antitrust in Cyberspace.

More than twenty-five years ago, DOD's Advanced Research Projects Agency undertook development of an experimental computer network -- known as "ARPNet" -- the technological embryo of what we now know and love as the Internet. In time, the Net's "backbone" -- linked computers at government facilities like NSF, NASA, DOE and DOD -- expanded to connect users to a worldwide network supporting activities in government, universities, and industry labs. Today, we're all moving online to participate in a revolution that will profoundly alter the way we deliver, access, and use information. According to new, probably conservative, estimates, at least 5.8 million American adults are connected directly to the Internet, and another 3.9 million American adults use commercial online service providers like American Online, Compuserve and Prodigy.

The knowledge-based economy of the 21st Century will require the United States to develop a sophisticated and reliable information infrastructure. Two realities will likely determine the respective roles of the public and private sectors in our transition to the information age. First, I believe that the federal government should intervene only where the market is not likely to come up with solutions that respond to critical collective needs. Second, the federal government is not in a position to bankroll Cyberspace development. For better or worse, the successful development of Cyberspace depends on private investment.

A substantial amount of that private investment is likely to come from joint ventures involving your clients -- high tech players with complementary technology or skill assets.

The nature of innovation in the information industry is incremental and cumulative, most often building on existing technology. This sort of innovation, in turn, requires tight linkages, rapid feedback, mid course corrections, and unprecedented integration of the R&D, manufacturing, marketing and distribution functions. Given the pace of software innovation and the significance of first-mover advantages in networked industries, it's not surprising that we've already seen a number of potentially very powerful strategic alliances in the electronic communications and computing industry. In general (with a notable exception or two), these alliances have not involved highly concentrated segments of the industry. Most are expected to facilitate economies of scale, create synergies from integration, lead to better appropriation of research efforts, avoid duplicative investments and facilitate innovation and commercialization of innovative products.

Given the potential significance of the information infrastructure to the US's continued global economic leadership, it would be counterproductive for US antitrust law to inhibit joint ventures and other cooperative agreements designed to promote efficient development of the electronic frontier. And, as the information industry is still emerging, quite dynamic, and not yet well understood, plausible efficiency benefits should, perhaps, weigh heavily in the balance against asserted risks of decreased competition, especially when the technology is changing so fast that adverse effects on competition are likely to be transitory.

There are, however, those notable exceptions where efficiency enhancing joint ventures or association activities could also be used to facilitate the exercise of market power to reduce competition. In those cases, closer scrutiny is warranted. Potentially troublesome joint ventures and association activities can often proceed where the parties are careful to limit their cooperation to the extent necessary to achieve the desired efficiencies and to avoid or limit exclusive arrangements ancillary to the efficiency-driven cooperation.

I want to look at two issues that raise some special concerns about inter-firm cooperation in the information industry -- standard setting and intellectual property protection -- because the choices we make in these areas will determine, in significant part, the need for government intervention in the electronic marketplace of the 21st Century. I will close by turning briefly to liability issues arising on the Net.

Standard Setting

Each component of the Global Information Infrastructure (the "GII") -- computers, wire, switches, television, satellites, etc., will be built by private concerns. Information must flow easily and accurately across these components if the GII is to reach its potential as a seamless web of networks and equipment. Each network's backbone of hardware and software that transports bundles of data has to communicate with any other local network in Cyberspace, and transported content should be accessible for use in any number of applications. This so-called "open platform" model clearly presupposes an efficient standard-setting mechanism in the information industry.

Standard setting is often pro-competitive, increasing price competition, lowering entry barriers for peripheral products and service markets, and providing enhanced economic and functional value to the installed base to the extent that it is compatible with a large network of applications.

Standard setting may harm competition, however, by thwarting innovation and entrenching older standards when newer or better technology is available. A competitor or group of competitors may attempt to preclude the use or acceptance of another's product or may unfairly exclude a competitor from the standard-setting organization. Under the rule of reason, standard setting will not be sustained where the challenged conduct will substantially restrain competition in a relevant business market in the absence of a legitimate purpose and a reasonable relationship to that purpose. In cases where the imposition of a standard might restrain or prohibit market access, the fairness of the standard setting procedure and the procedural safeguards extended to interested partied will be evaluated. Antitrust enforcers will also evaluate whether the standards accomplish their efficiency goals in the least restrictive fashion, preferring "voluntary" over "mandatory" and "minimum" over "maximum" standards. Efforts to manipulate the standard setting or certification process to avoid innovation competition or impose higher costs on rivals for the purpose of exercising power over price are not likely to pass muster as legitimate standard setting.

Private sector and government participants have begun to address interoperability issues, and a consortium of public and private interests have formed an NII Test Bed to develop standards and test applications for a wide variety of fields. But further work will be required to ensure real interoperability at both the transport and the content layers of the GII, and some believe that government intervention will be needed to achieve this end. Whatever role the government does play, the level of openness achieved in the course of standards development will determine, to a significant degree, the strength of competition on the Net, and the need for government intervention to ensure competition in its operation.

Intellectual Property

The intellectual property regime that we adopt will also affect the degree to which government intervention is required to support competition in Cyberspace. There are a lot of stakeholders, representing very diverse intellectual property interests, in Cyberspace. Reconciling these interests in the context of changing technology is a formidable task, but reconciled or not, these competing interests will directly affect the rate of progress and the vitality of competition in Cyberspace.

Intellectual property law and antitrust law are inextricably intertwined, sharing the common goal of "encouraging innovation, industry and competition." When properly applied, the two bodies of law complement and reinforce each other's purposes. Conversely, inappropriate application of either can undermine the purpose of both. If antitrust enforcement unnecessarily prevents intellectual property owners from profiting, the interference also interferes with accomplishing the goals of antitrust laws. Inappropriate or overbroad grants of intellectual property rights may interfere with the competition that often drives innovation.

Intellectual property protection that goes beyond what is necessary to induce innovative effort may actually reduce innovation by other inventors by raising their costs and restricting their innovative activities as well as their market access.

The historical pace of technological innovation in various industries characterized by cumulative technology has been cited to support the theory that broad blocking patents may retard innovation and industry growth. The early years of the aircraft industry saw substantial patent litigation between the Wright brothers, who held a patent for a stabilizing and steering system for aircraft, and potential competitors who were unable to enter the industry without infringing on the patent. To enable new competitors to enter the industry, the Secretary of the Navy worked out an automatic cross licensing system for various manufacturers during World War I that enabled new competitors to enter the industry. A similar blocking patent was held by the Marconi interests in the radio industry. After much litigation, the various manufacturers formed the Radio Corporation of America to acquire the major patents in return for ownership in the corporation. The semiconductor and computer industry, on the other hand, developed without blocking patents and, as a result, less energy and resources were spent on litigation. See Merges and Nelson, supra, 890-94.

"A 'patent litigation tax' is one impediment to our financial health that our industry can ill-afford." Testimony of Douglas Brotz, Adobe Systems, Inc., United States Patent and Trademark Office Hearings on Patent Protection for Software-Related Inventions, January 26-27, 1994, 17 (hereinafter "Software Patent Hearings"). Overbroad protection is especially troublesome in the patent context, where independent creation is not a defense. Hence, if patent protection is inappropriately granted, competition may be impeded and industry efficiency may be diminished without providing any corresponding incentive to innovate.

Three legal doctrines together protect against overbroad patent protection for software today: the subject matter test, the novelty test, and the non-obviousness test. The Patent and Trademark Office recently proposed new examination guidelines governing internal PTO decision making on whether or not to grant software patents by establishing presumptions that certain implementations of computer-based inventions constitute statutory subject matter.

These presumptions, in effect, ease the subject matter test, which, in turn, puts greater pressure on the novelty and non-obviousness test to weed out inappropriate patents. But because the novelty and non-obviousness tests do not function well here, The Supreme Court has enunciated a three part test for nonobviousness:

  1. the level of ordinary skill in the art and the scope of the prior art must be determined;
  2. the differences between the prior art and the patent claims at issue must be ascertained; and
  3. the obviousness of those differences to a person of ordinary skill must be decided.

Graham v. John Deere, 383 U.S. 1, 17-18 (1966). Kramer, supra, S33. Lehman, Commissioner of PTO, Software Patent Hearings, 2. See also Glazer and Kahn, supra, 22. The 1966 Report recommended that patents not be issued for computer programs, in part because of the Patent Office's lack of in-house expertise to adequately judge patent claims. it is important to preserve the subject matter test in order to avoid the inadvertent grant of overbroad patent protection.

If the software industry in the US today is any indication, the current mix of copyright and patent protection appears to have been successful in encouraging substantial innovation. It is not clear to me that any market failure has occurred, or that expanded patent protection is necessary to cure any such failure. Overbroad grants of patent protection, however, may harm competition, consumers, and future software innovators. In response to these concerns, the FTC staff submitted comments to the PTO urging caution on the adoption of the proposed Guidelines for Examination of Computer Implemented Innovations.

In the meanwhile, development of the Net will proceed at a pace that is determined, at least in significant part, by where we strike the intellectual property balance. In April, the Federal Trade Commission and the Department of Justice issued Antitrust Guidelines for the Licensing of Intellectual Property, and I expect that these guidelines will be increasingly important in our competition reviews over the next few years.

Online Liability

I'd like to talk very briefly about online liability. In May, The New York Supreme Court held that Prodigy, an electronic online service provider, acts as a publisher with respect to comments posted by its subscribers and, as such, is liable for defamatory statements made by such users. This decision, if upheld, could disrupt the evolving cooperative approach among online service providers ("Sysops"), government authorities and consumers that allows for the free flow of information, with the minimum of government regulation. My goal, as a government official charged with consumer protection, is to create an environment where the consumer, not the government, controls the information arriving in that consumer's home or workplace via the information superhighway.

Prodigy operates a financial bulletin board ("Money Talk") where Prodigy subscribers can discuss financial and investment matters. Money Talk discussions are facilitated by "bulletin board leaders" who participate in board discussions and have the ability to delete posted messages under Prodigy's stated editorial policy. Under this policy, Prodigy is entitled to remove material it deems "to be in bad taste or grossly repugnant to community standards or are deemed harmful to maintaining a harmonious online community." The plaintiff, Stratton Oakmont, Inc., is a securities investment bank that is seeking to hold Prodigy liable for allegedly libelous and defamatory statements made about Stratton by an unknown Prodigy subscriber on Money Talk.

The crux of the issue -- whether online service providers should be held generally liable for content posted by subscribers -- is being debated in courts, government agencies and Congress. In prior cases involving online libel or defamation, courts have determined that Sysops are not liable for their subscribers' statements. The New York Court believes that Prodigy "publishes" everything on its system because it does, in fact, exercise some content control by removing "inappropriate" or "offensive" material. The Court bases this conclusion on the fact that Prodigy has an editorial policy stated in content guidelines for subscribers and enforced through an "editorial staff of board leaders" using electronic screening technology. Under the Court's reading of libel law, this makes Prodigy a publisher, and therefore liable for all system content.

Online systems themselves represent an increasingly important consumer product, and this decision disturbs me. The Stratton decision sends a perverse message to Sysops, saying, in effect, "don't edit anything online, even if it is patently unfair or deceptive!" By undertaking to exercise editorial control over any aspect of the online discussion you are opening yourself up to liability for your subscribers' opinions about anything else. I recently learned, for example, that at least one Prodigy Board Leader responds to suspect ads for credit-repair services by appending an FTC brochure on consumer credit rights. Do we really want to discourage this sort of information sharing by online services or their board leaders?

The Stratton decision also warns Sysops not to let subscribers talk about consumer products because these discussions create Sysop liability for trade libel and defamation. Consumers value the ability to talk directly with other consumers who have experience with a particular product or service. Do we really want to discourage this sort of information sharing among consumers? Are we entitled to assume that consumers don't know or can't learn the difference between a manufacturer's warranty and another subscriber's opinion? Many associations sponsor bulletin boards - should you be subject to liability for opinions posted on such a bulletin board?

The Federal Trade Commission, on which I serve, frequently considers the circumstances under which a third party should be accountable for another party's unfair or deceptive conduct. Although unfair or deceptive advertisements are admittedly subject to a different legal regime than defamation or liable, I think that our approach will work in Cyberspace as well. Over the years, the Commission has concluded that a third party should be held liable for another party's message only when the third party "knew or should have known" that the message was unfair or deceptive and failed, in light of such knowledge, to take appropriate action. For example, last year the Commission investigated fraudulent ads posted on America Online ("AOL"), another Sysop, by a credit repair operation. The Commission chose to prosecute the author of the message and not AOL. In fact, AOL's cooperation helped us to identify the perpetrator. In reaching this conclusion we considered whether or not AOL participated in the ad campaign by developing the ads themselves (they did not).

In protecting consumer and worker safety, federal agencies do NOT say that any manufacturer who takes any steps to prevent harm is responsible for any harm that might conceivably have been prevented. In promoting truthful and fair advertising, the FTC does NOT say that the way to avoid responsibility for accuracy is to be sure NOT to check any of your facts.

A party who posts a wrongful message should, of course, be held responsible for doing so. But making the carrier of the message responsible for its content, absent a contractual obligation to that effect, threatens the very consumer choice we hope to foster. Consumer protection interests would be much better served by allowing online services, as a matter of contract law, to engage in some content selection and rule enforcement without becoming responsible for any and all conceivable harm associated with the messages posted by others on Not surprisingly, I've raised a lot of questions and provided no answers. Chairman Pitofsky has called for a series of hearings to be held this Fall to look at these and other high tech issues in depth. It's a very exciting time to be at the FTC, and I'm looking forward to working on these important issues.