Chapter 8 of the FTC Report Anticipating the 21st Century: Competition Policy in the New High-Tech, Global Marketplace

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I. INTRODUCTION When does business conduct move from a legitimate assertion of intellectual property rights to a use that may constitute an antitrust violation? For at least the last twenty years, antitrust has approached this issue with great caution, challenging business conduct involving intellectual property only rarely. See supra Chapter 6. This approach reflects the long held view that intellectual property protection is essential to protect against others' appropriation of the inventor's ideas and thus to encourage innovation [1]. No one at the hearings questioned the continued applicability of this approach in traditional contexts. The development of new technologies, especially biotechnology and software, however, did elicit testimony raising new questions both about the proper scope of intellectual property protection and about whether antitrust's wary approach is still appropriate in that context. Some contend that overbroad intellectual property protection for new technologies could cause an imbalance in innovation incentives and capabilities between initial and follow-on inventors. Such an imbalance potentially could produce more of the types of business conduct involving intellectual property that pose difficult issues for antitrust analysis and enforcement. Accordingly, this chapter addresses whether, in the context of these new technologies, antitrust enforcers need to adopt a new approach to certain conduct involving intellectual property. To put these issues in context, this chapter first reviews historical antitrust enforcement involving the acquisition and use of intellectual property. Second, the chapter summarizes hearings testimony on business conduct involving intellectual property and on how the type and scope of intellectual property protection might affect innovation and competition in biotechnology and computer software. Analysis of the testimony, along with recommendations for action, is integrated throughout. Although we do not recommend any specific actions at the ---------------- 1. E.g., Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 480 (1974); Mazer v. Stein, 347 U.S. 201, 219 (1954). See also S. REP. NO. 1979, 82nd Cong., 2d Sess., reprinted in U.S.C.C.A.N. at 2394-97 (1952). <-------------------------------- p 2 ------------------------> moment, we conclude that the issues addressed in this chapter warrant further scrutiny by the Federal Trade Commission and its staff. II. HISTORICAL BACKGROUND A. Prior Case Law Much of the case law relevant to these issues originates in the 1940s and 1950s. At that time, antitrust enforcers acted primarily to remedy competitors' pooling of intellectual property assets to gain an unfair advantage or to remedy unilateral conduct where a firm unfairly exploited its intellectual property to monopolize an industry. For example, in United States v. General Electric Co.[2], competitors in the manufacture and sale of electric lamps and lamp parts extensively cross-licensed and pooled their relevant patents. The court found that defendants had monopolized the electric lamp industry through "an arsenal of a huge body of patents that can easily overwhelm and defeat competition by small firms desiring to stay in or gain a foothold in the industry."[3] The court concluded that royalty-free licensing of the relevant patents was required to remedy violations of Sections 1 and 2 of the Sherman Act.[4] ----------------- 2. 115 F. Supp. 835 (D.N.J. 1953). 3. 115 F. Supp. at 844. 4 .See also United States v. Imperial Chem. Indus., Ltd., 105 F. Supp. 215 (S.D.N.Y. 1952) (extensive exchange and exclusive licensing of patents to allocate territories within which each firm would sell certain chemicals and explosives found to violate Section 1; court imposed remedy of compulsory licensing of existing but not future patents and technology with royalties at reasonable rates); American Cyanamid Co., 72 F.T.C. 623 (1967), aff'd sub nom. Charles Pfizer & Co. v. FTC, 401 F.2d 574 (6th Cir. 1968), cert. denied, 394 U.S. 920 (1969) (Pfizer's submission of false and misleading information to the U.S. Patent & Trademark Office (PTO) and six antibiotic manufacturers' and distributors' agreement (with knowledge of false submission) to cross-license various tetracycline patents to exclude competitors and attempt to monopolize the market constituted unfair method of competition under Section 5 of the FTC Act; FTC required Pfizer and American Cyanamid to grant non-exclusive licenses under the relevant patents at a specified royalty to any qualified domestic applicant). The FTC investigated the tetracycline industry beginning in the late 1950s, and the Department of Justice investigated it beginning in the late 1960s. United States v. Pfizer Inc., 676 F.2d 51 (3d Cir. 1982), aff'g 498 F. Supp. 28 (E.D. Pa. 1980). <------------------------- p 3 -----------------------------> With respect to unilateral business conduct involving intellectual property, the FTC charged Xerox Corporation with extending its monopoly in plain paper copying by amassing more than a thousand improvement patents during the period of exclusivity derived from its original photocopying patents [5]. The FTC asserted that Xerox had engaged in unfair practices relating to patents and required Xerox to provide non-exclusive licenses on relevant patents, in exchange for a royalty, to any applicant planning to make, use, or sell plain-paper office copiers. Historically, compulsory licensing of the relevant patents was the remedy for anticompetitive business conduct involving intellectual property assets. At the hearings, one participant discussed research results indicating that compulsory licensing, as an antitrust remedy, had effectively restored robust competition in the chemicals, electric lamps, tetracycline, and photocopying industries [6]. In most other markets, however, the witness concluded that compulsory licensing had had little or no impact on market structure [7]. In those markets, companies apparently have relied more on secrecy than on patents to protect their inventions [8]. B. Current Agency Practice The antitrust agencies continue to protect U.S. consumers from anticompetitive conduct involving intellectual property, both through guidelines and through enforcement actions. -------------- 5. Xerox Corp., 86 F.T.C. 364, 367 (1975). 6. Scherer 3312-15. Scherer added that certain biomedical advancements also affected the competitive dynamics in the tetracycline industry. Scherer 3314-15. 7. Scherer 3312-13. 8. Scherer 3302. This finding comported with two later studies by Mansfield and Levin, which found that most industries place little value on patent protection as a means for securing a competitive advantage. Scherer 3304-06. See supra Chapter 6. <--------------------------- p 4 -------------------------> 1. Intellectual Property Guidelines The FTC and the Department of Justice recently issued the Antitrust Guidelines for the Licensing of Intellectual Property (IP Guidelines) [9], which explain the agencies' approach to licensing and other arrangements involving intellectual property. The IP Guidelines note that the intellectual property and antitrust laws "share the common purpose of promoting innovation and enhancing consumer welfare" [10] and enumerate three principles relevant to an antitrust analysis involving intellectual property. First, intellectual property is comparable to any other form of property [11]. Second, intellectual property does not create a presumption of market power in the antitrust context [12]. Third, "intellectual property licensing allows firms to combine complementary factors of production and is generally procompetitive." [13] Finally, the IP Guidelines make clear that the enforcement agencies will "apply the same general antitrust principles to conduct involving intellectual property that they apply to conduct involving any other form of tangible or intangible property." [14] The IP Guidelines continue the antitrust approach of the last several years, which recognizes the many procompetitive justifications for intellectual property licensing and is careful to avoid any interference with such procompetitive activities. ----------------- 9. U.S. Department of Justice and Federal Trade Commission, Antitrust Guidelines for the Licensing of Intellectual Property (1995), reprinted in 4 Trade Reg. Rep. (CCH) 13,132 (IP Guidelines). 10. IP Guidelines 1.0, 4 Trade Reg. Rep. (CCH) at 20,734. 11. See 35 U.S.C. 261 (1988), which states that under patent law, "patents shall have the attributes of personal property." 12. IP Guidelines 2.0, 4 Trade Reg. Rep. (CCH) at 20,734. Similarly, recent lower court cases generally have stated that whether a patent confers market power in the antitrust sense depends on an assessment of the patent's exclusionary power in the relevant market. E.g., Loctite Corp. v. Ultraseal, Ltd., 781 F.2d 861, 877 (Fed. Cir. 1985). 13. IP Guidelines 2.0, 4 Trade Reg. Rep. (CCH) at 20,734. 14. Id. <---------------------------- p 5 ----------------------------> 2. Intellectual Property-Related Consent Orders FTC consent orders involving intellectual property assets have primarily, but not exclusively, involved pharmaceutical mergers. See supra Chapter 7. In various consent orders, the FTC has required 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 nonexclusive basis; or (4) waive the right to enforce its intellectual property rights [15]. These consents have resolved concerns regarding combinations of intellectual property assets that might delay or reduce diversity in innovation or reduce potential price competition. In Dell Computer Corp.[16], the FTC alleged that Dell had restricted competition related to VL-bus design standards for computing systems by threatening to exercise certain patent rights, despite the fact that a standard-setting organization had selected Dell components as an industry standard on the basis of Dell's certification that it had no such proprietary rights. The proposed consent required Dell to refrain from enforcing its patent in any claims of infringement based on the use of the VL-bus standard. --------- 15. Dell Computer Corp., File No. 931-0097 (consent agreement accepted for public comment (FTC Nov. 2, 1995)) (Comm'r Azcuenaga dissenting); The Upjohn Company and Pharmacia Aktiebolag, C-3638, 5 Trade Reg. Rep. (CCH) 23,914 (FTC Feb. 8, 1996); Hoechst AG, C-3629, 5 Trade Reg. Rep. (CCH) 23,895 (FTC Dec. 5, 1995); Silicon Graphics, Inc., C-3626,5 Trade Reg. Rep. (CCH) 23,838 (FTC Nov. 14, 1995) (Comm'rs Azcuenaga & Starek dissenting); Glaxo plc, C-3586, 5 Trade Reg. Rep. (CCH) 23,784 (FTC June 14, 1995); Boston Scientific Corp., C-3573, 5 Trade Reg. Rep. (CCH) 23,774 (FTC May 5, 1995) (Comm'r Azcuenaga concurring in part & dissenting in part); Sensormatic Elec. Corp., C-3572, 5 Trade Reg. Rep. (CCH) 23,742 (FTC Apr. 18, 1995) (Comm'r Azcuenaga concurring in part & dissenting in part); Wright Medical Technology, Inc., C-3564, 5 Trade Reg. Rep. (CCH) 23,726 (FTC Mar. 23, 1995); American Home Prods. Corp., C-3557, 5 Trade Reg. Rep. (CCH) 23,712 (FTC Feb. 14, 1995) (Comm'r Azcuenaga concurring); Roche Holding Ltd., 113 F.T.C. 1086 (1990) (Comm'r Owen dissenting). 16. Dell Computer Corp., File No. 931-0097 (consent agreement accepted for public comment (FTC Nov. 2, 1995)) (Comm'r Azcuenaga dissenting). <----------------------- p 6 ----------------------------> In United States v. Pilkington plc[17], the Department of Justice charged that Pilkington, a firm that had developed a revolutionary float-glass process, had monopolized the world market for float glass through patent and know-how licensing arrangements limiting the territories in which licensees could compete. The licensing arrangements remained in effect long after Pilkington's float-glass patents had expired [18]. To remedy these Section 1 and 2 violations, the Department of Justice obtained a consent order, which, among other things, eliminated all territorial and use restrictions imposed on licensees and prohibited Pilkington from enforcing related licensing provisions. III. TESTIMONY, ANALYSIS, AND SUGGESTIONS FOR ACTION The purpose of intellectual property law is to "promote the Progress of Science and useful Arts."[19] The legislative history of the 1909 Copyright Act reflects this goal:
The Constitution does not establish copyrights, but provides that Congress shall have the power to grant such rights if it thinks best. Not primarily for the benefit of the author, but primarily for the benefit of the public, such rights are given. Not that any particular class of citizens, however worthy, may benefit, but because the policy is believed to be for the benefit of the great body of people in that it will stimulate writing and invention to give some bonus to authors and inventors.[20]
Intellectual property law must strike a balance between the benefits of providing incentives to creators and the social costs associated with even limited monopolies [21]. Intellectual property law and antitrust law share the common goal of "encouraging innovation, industry and competition." [22] If inappropriate antitrust enforcement interferes with an intellectual property --------- 17. United States v. Pilkington plc, Civ. No. 94-345 WDB (D. Ariz. Oct. 19, 1994). 18. The complaint also alleged that Pilkington had unreasonably restrained interstate and foreign trade in the construction and operation of float-glass plants and in related technology. 19. U.S. CONST. art. I, 8. 20. H.R. REP. NO. 2222, 60th Cong., 2d Sess. (Report on the Copyright Act of 1909). 21. Stiglitz 24-25. See supra Chapter 6. 22. Atari Games Corp. v. Nintendo of Am., Inc., 897 F.2d 1572, 1576 (Fed. Cir. 1990) (continued...) <------------------------- p 7 ---------------------------> owner's ability to reap the fruits of his or her invention, that would undermine not only the laws that Congress has established for the protection of intellectual property, but also the very goal of the antitrust laws themselves. By the same token, if inappropriate grants of intellectual property interfere with the competition that often drives innovation [23], such grants would conflict not only with the purposes of the antitrust laws, but also with the purposes of the intellectual property laws themselves. To avoid such conflicts, it is appropriate for antitrust enforcers to contribute to the development of sound policy with respect to intellectual property rights. A. Unilateral and Joint Business Conduct Involving Intellectual Property Assets Associated with New Technologies The owner of intellectual property can use it exclusively, assign ownership, license it, or not use it at all. Under most circumstances [24], the owner can enforce these property rights if another person misappropriates or otherwise infringes the protected intellectual property [25]. But intellectual property rights are not absolute, and certain business conduct may exceed the legally permissible use of rights and raise antitrust concerns. Hearings participants cited joint conduct, such as cross-licensing and patent pools, and unilateral conduct, such as sham litigation, tying arrangements, and monopoly leveraging, as areas where antitrust issues most often arise. 1. Cross-licensing and Patent Pools ---------- 22. (...continued) ("[T]he aims and objectives of patent and antitrust laws may seem, at first glance, wholly at odds. However, the two bodies of law are actually complementary, as both are aimed at encouraging innovation, industry and competition."). 23. MICHAEL PORTER, THE COMPETITIVE ADVANTAGE OF NATIONS (1990). See supra Chapters 6 & 7. 24. Copyright law's "fair use" doctrine and patent law's "patent misuse" doctrine excuse infringing conduct under certain circumstances. 25. Direct patent infringement occurs when someone makes, uses, sells, or offers to sell any patented invention without permission of the patent holder; it is not necessary for the infringing party to know that it is infringing a patent. 35 U.S.C. 271 (1988). Copyright infringement occurs when someone copies the expression covered by a copyright without authorization of the copyright owner. 17 U.S.C.A. 501 (West Supp. 1978-1994). Therefore, independent creation of an identical work does not constitute copyright infringement. <--------------------------- p 8 ---------------------------> According to one witness, overbroad patent protection, especially in the area of biotechnology, may increase the need for cross-licensing arrangements and thereby increase the competitive dangers associated with patent pooling [26]. Under this view, where incremental research is important, but the patents are broad and basic, cross-licensing is potentially anticompetitive and may choke future innovation [27]. One economist noted that cross-licensing of patents served as the primary method of cartelization in the 1920s and 1930s [28]. Antitrust policy recognizes the procompetitive benefits obtainable through cross-licensing arrangements, such as "integrating complementary technologies, reducing transaction costs, clearing blocking positions, and avoiding costly infringement litigation."[29] Absent attempts at per se violations such as naked price fixing or market division, antitrust enforcers will apply a rule of reason analysis that seeks to balance procompetitive and anticompetitive effects "to determine the probable net effect on competition in each relevant market."[30] The delicacy of this balancing exercise, however, cautions against any assumption that it is easy or simple to apply. --------- 26. Barton 3409-12. For example, it may increase the number of instances where two successful patented inventions are necessary to commercialize a product. Id. See also infra Section III.B. 27. Barton 3418-20. But see infra note 51 (some assert that broad patents may be necessary to provide enough incentive to generate initial innovations). 28. Scherer 3435-36. Barton pointed out that extensive cross-licensing among a closed group in an industry, where group members share large amounts of information and, at times, even future improvements, may decrease research incentives and raise substantial entry barriers, because new entrants must invest more heavily to develop technology that can compete with the sum of the cross-licensed technology. Barton 3418-20. See also IP Guidelines 5.5, 4 Trade Reg. Rep. (CCH) at 20,743-4 ("[a]nother possible anticompetitive effect of pooling arrangements may occur if the arrangement deters or discourages participants from engaging in research and development, thus retarding innovation"). 29. IP Guidelines 5.5, 4 Trade Reg. Rep. (CCH) at 20,743-4 ("[b]y promoting the dissemination of technology, cross-licensing and pooling arrangements are often procompetitive"). See also IP Guidelines 2.0, 2.3, 4 Trade Reg. Rep. (CCH) at 20,734- 20,736. 30. IP Guidelines 4.2, 4 Trade Reg. Rep. (CCH) at20,743. <---------------------- p 9 --------------------------------> A preferable remedy would be to avoid the creation of circumstances that arguably could justify heightened antitrust scrutiny in this area. Anticompetitive cross-licensing and patent pool arrangements could be minimized by preventing the issuance of overbroad biotechnology and other patents in the first place. Accordingly, to address concerns that overbroad patents may raise, the FTC should assess how best to articulate relevant competition issues to the U.S. Patent and Trademark Office (PTO) and other intellectual property policy makers, as appropriate. Consistent with the IP Guidelines, the FTC also should continue efforts to prevent cross-licensing agreements that lack adequate efficiency justifications. 2. Sham Litigation According to several participants, patent holders are asserting infringement claims much more aggressively than in the past [31]. While conceding that such litigation might not meet the Supreme Court's stringent test for "sham" litigation in Professional Real Estate Investors v. Columbia Pictures Industries, Inc. [32], several participants contended that a deliberate intention to slow down competitive entry into a particular industry motivated much of the litigation [33]. Under the Supreme Court's two-part test, a "lawsuit must be objectively baseless in the sense that no reasonable litigant could realistically expect success on the merits."[34] If it is objectively baseless, then a court may "examine the litigant's subjective motivation,"[35] asking "whether the baseless suit conceals 'an attempt to interfere directly with the business relationships of a competitor,'[36] through the 'use [of] the governmental process -- as opposed to --------- 31. Heckman 1817-26; Scherer 3323-24. See Frankel 3400-01. 32. 508 U.S. 49 (1993). 33. Heckman 1817-26; Scherer 3323-24. See Frankel 3400-01; Rosenthal 3490-91; Black 3588. 34. Professional Real Estate Investors, 508 U.S. at 60. 35. Professional Real Estate Investors, 508 U.S. at 60-61. 36. Professional Real Estate Investors, 508 U.S. at 61 (quoting Eastern R.R. Presidents (continued...) <------------------------- p 10 -----------------------------> the outcome of the process -- as an anticompetitive weapon.'"[37] Given such a restrictive test, it may be difficult to challenge successfully a lawsuit as a sham. Certain participants believed that the FTC should take a closer look at the problem of sham litigation [38]. One emphasized that sham intellectual property enforcement could become "a very powerful tool for monopolization that . . . can have [a] profound anticompetitive impact."[39] We agree that the FTC should study sham litigation and associated issues further. The misuse of the courts and government agencies can be an especially effective way to delay or stifle competition[40]. And as one software developer noted, "A 'patent litigation tax' is one impediment to our health that our industry can ill afford."[41] ------------- 36. (...continued) Conference v. Noerr Motor Freight, Inc., 365 U.S. 127, 144 (1961)). 37. Id. (quoting Columbia v. Omni Outdoor Advertising, Inc., 499 U.S. 365, 380 (1991)). 38. Nunnenkamp 3376-78; Frankel 3400-01; Black 3588. Accord Dyson 3324. 39. Rosenthal 3490-91. 40. ROBERT H. BORK, THE ANTITRUST PARADOX 134-60 (1993). See, e.g., Scherer 3323-24, 3436-42 (citing infringement suits where he found conflict between patent and antitrust policy). 41. Douglas Brotz, Adobe Systems Inc., Before Public Hearings on Patent Protection for Software-Related Inventions, at 17 (Jan. 26-27, 1994). <--------------------------- p 11 -----------------------> 3. Tying Arrangements and Monopolization Claims Involving Intellectual Property Several participants discussed four recent cases[42], where courts upheld alleged tying arrangements[43] between computer hardware and associated software programs and denied monopolization claims based on refusals to license, on the grounds that the products at issue were protected by copyright. For example, in Data General Corp. v. Grumman Systems Support Corp.[44], the First Circuit considered a computer manufacturer's alleged monopolization of a service market for its own product through its alleged refusal to license its diagnostic software to third-party maintainers. The court acknowledged that competition issues were relevant to the analysis, but it held that "an author's desire to exclude others from use of its copyrighted work is a presumptively valid business justification for any immediate harm to consumers." [45] ------------ 42. Triad Sys. Corp. v. Southeastern Express Co., 64 F.3d 1330 (9th Cir. 1995), cert. denied, 116 S. Ct. 1015 (1996); Data Gen. Corp. v. Grumman Sys. Support Corp., 36 F.3d 1147 (1st Cir. 1994); MAI Sys. Corp. v. Peak Computer, Inc., 991 F.2d 511 (9th Cir. 1993), cert. dismissed, 114 S. Ct. 671 (1994); Advanced Computer Servs. of Michigan, Inc. v. MAI Sys. Corp., 845 F. Supp. 356 (E.D. Va. 1994). 43. A tying arrangement is "an agreement by a party to sell one product [the tying product] but only on the condition that the buyer also purchase a different (or tied) product, or at least agree that he will not purchase that product from any other supplier." Northern Pac. Ry. v. United States, 356 U.S. 1, 5-6 (1958). See also IP Guidelines 5.3, 4 Trade Reg. Rep. (CCH) at 20,743-3. 44. Data Gen. Corp. v. Grumman Sys. Support Corp., 36 F.3d 1147 (1st Cir. 1994). 45. 36 F.3d at 1187. In a footnote, the court added: "Wary of undermining the Sherman Act, however, we do not hold that an antitrust plaintiff can never rebut the presumption, for there may be rare cases in which imposing antitrust liability is unlikely to frustrate the objectives of the Copyright Act." 36 F.3d at 1187 n.64. In that statement, the court seemed to suggest that intellectual property should receive greater deference than antitrust when the two come into conflict. Some of the witnesses expressed concern that courts might find that competition values could never outweigh intellectual property values. Blecher 3366-68, 3484-85; Rosenthal 3427- 31. <------------------------ p 12 ---------------------------> Some participants, citing a principle articulated by the Supreme Court in Eastman Kodak Co. v. Image Technical Services, Inc.[46], maintained that intellectual property should protect only conduct related to the covered product or service in its original market and not in other markets[47]. On the other hand, one antitrust professor found an antitrust problem only when "an independent base of market power is being established in an adjacent market that will be able to collect monopoly rents from people who have no demand in the first market."[48] Although several participants recognized compulsory licensing as a potential remedy for any attempted monopolization through use of intellectual property assets, they cautioned that it should be applied sparingly [49]. These issues also warrant further attention and scrutiny by the FTC and its staff. B. Intellectual Property Protection: Matters of Scope The scope of protection afforded by intellectual property law influences firms' capabilities and incentives to innovate. While it is important to maintain adequate incentives for initial innovation, overbroad intellectual property protection may constrain follow-on innovation. In certain new technologies, particularly in biotechnology and software, the type and scope of available protection may affect the incentives for follow-on innovation and the ability to -------------- 46. 504 U.S. 451, 480 n.29 (1992) (citations omitted) ("The Court has held many times that power gained through some natural and legal advantage such as a patent, copyright, or business acumen can give rise to [antitrust] liability if 'a seller exploits his dominant position in one market to expand his empire into the next.' "). 47. Kohn 3360-61; Blecher 3366-68, 3485. 48. Baxter 3549-50. 49. E.g., Scherer 3468 (there must be a really strong public interest in breaking the bottleneck); Nunnenkamp 3471-74 (there may be occasions where compulsory licensing is necessary but disagrees with how it has been approached; the defense of misuse might be a way to approach the monopoly leveraging issue). See Bresnahan 3550-51 (antitrust should be particularly cautious with respect to compulsory licensing remedies, because this year's technological complement could be next year's competitor). See also Rosenthal 3470 (further study by the FTC and Department of Justice is necessary). But see Blecher 3465-66 (compulsory licensing is a recognized antitrust remedy). <----------------------------- p 13 ----------------------> innovate. These issues can also affect the types of business conduct that antitrust enforcers must assess. 1. Issuance of Broad Patents According to hearings testimony, the scope[50] of patents issued has become increasingly broad, with some patent claims apparently designed to cover an entire area of research or even basic research, particularly in the biotechnology industry[51]. One professor cited two patents that cover enormous areas of technology -- one for all transgenic mice and one for ex vivo gene therapy -- and noted that they are not atypical of patents being issued today[52]. Another prominent example is a patent issued to Agracetus, a biotechnology company, for genetically engineered cotton[53]. The patent scope, which essentially covered an entire plant species, caused a public outcry. In discussing this patent, news articles stated that academic and U.S. Department of Agriculture researchers, among others, were concerned that "broad [biotechnology] patents ---------- 50. The term "scope" refers to the boundaries or limits of the subject matter protected by a particular grant of intellectual property. 51. Barton 3409-10. Other academics have also argued that overbroad initial patents are a disincentive for rivals to pursue follow-on innovation, thereby making new entry more difficult and stifling competition. See, e.g., Robert P. Merges & Richard R. Nelson, The Role of Patent Scope Decisions, in ANTITRUST, INNOVATION, AND COMPETITIVENESS 165-232 (Thomas M. Jorde & David J. Teece eds., 1992); Robert P. Merges & Richard R. Nelson, On the Complex Economics of Patent Scope, 90 COLUM. L. REV. 839 (1990). See Suzanne Scotchmer, Standing on the Shoulders of Giants: Cumulative Research and the Patent Law, 5 J. ECON. PERSP. 29 (1991) (discussing the difficulty of deciding whether the initial or follow-on innovator should get a greater portion of the return on the second innovation). On the other hand, some academics have argued that broad patents may be necessary to provide enough incentive to generate the initial, stepping-stone innovations, which are prerequisites for follow-on innovations. See, e.g., Carmen Matutes et al., Optimal Patent Design and the Diffusion of Innovations, 27 RAND. J. ECON. 60 (1996); Howard F. Chang, Patent Scope, Antitrust Policy, and Cumulative Innovation, 26 RAND. J. ECON. 34 (1995). 52. Barton 3409. 53. Ann Thayer, Scope of agricultural biotechnology patents sparks debate, CHEMICAL & ENGINEERING NEWS, Aug. 21, 1995, at 12-13; Patent Medicine, 98 TECHNOLOGY REV., Nov./Dec. 1995, at 28, 31. <--------------------------- p 14 ------------------------> could hinder the development and commercialization of technology and hurt competition by requiring licenses and the payment of licensing fees or royalties." [54] The hearings testimony stressed that the issuance of broad patents covering basic research in biotechnology may intensify two problems related to incremental and follow-on research. First, inventors face increasing liability for infringement, which in turn reduces incentives for, and the feasibility of, incremental and follow-on research. To avoid such liability, inventors must negotiate license and royalty agreements with the holders of the relevant patents, which can be difficult[55]. Second, anticompetitive patent pooling may occur. See supra Section III.A.1. Participants noted that either patent, compulsory licensing, or other antitrust remedies could be used to increase incentives for follow-on and incremental research and to deter anticompetitive cross-licensing schemes[56]. They preferred an increased use of the experimental use exemption for non-patent holders[57], and the utility[58] and enablement[59] doctrines for patent applicants. These witnesses also urged the PTO to focus more vigorously on fundamental patentability questions related to novelty and nonobviousness, and to take greater care to limit -------------- 54. Ann Thayer, Scope of agricultural biotechnology patents sparks debate, CHEMICAL & ENGINEERING NEWS, Aug. 21, 1995, at 12. 55. Barton 3411-16. 56. Barton 3414-15; Scherer 3480-81. 57. Barton 3414-15. The experimental use exemption allows a non-patent holder to avoid liability for patent infringement for her research efforts, so long as she does not commercialize the results. EARL W. KINTNER & JACK L. LAHR, AN INTELLECTUAL PROPERTY LAW PRIMER 87- 88 (1982). 58. Barton 3414-15; Scherer 3480-81. To be patentable, an invention must, among other things, have some beneficial use, i.e., utility. 35 U.S.C. 112, 113, 114 (1988). See, e.g., E.I. duPont de Nemours v. Berkley & Co., 620 F.2d 1247 (8th Cir. 1980). What constitutes "beneficial use" is often a matter of debate. 59. Barton 3414-15; Scherer 3480-81. According to the enablement doctrine, a patent application must describe the claims sufficiently to enable others with reasonable skill in the art to replicate the invention. 35 U.S.C. 112 (1988). <-------------------------- p 15 -------------------------> patent grants to claims actually proved[60]. Other recommendations were to give follow-on inventors the right to obtain a compulsory license under an established set of conditions[61] or to use antitrust law to preserve incentives for follow-on innovation[62]. A number of witnesses encouraged the Commission to become more involved in the intellectual property debate, particularly with respect to patent scope. One industry representative stated that antitrust principles should have an important role in defining the scope of intellectual property rights, and "[t]he FTC should raise a strong voice in these decisions." [63] Citing recent FTC staff comments to the PTO regarding Proposed Examination Guidelines for Computer-Implemented Inventions[64] as an important contribution to the debate, some also suggested that the Commission continue to inform other agencies such as the PTO and the Registrar of Copyrights about the effects that their decisions have on competition[65]. In contrast, other testimony stated that "the intellectual property area is particularly amenable to control of anticompetitive abuses through private litigation" and found "no changes in the competitive ----------------- 60. Scherer 3480-81; Wayman 3525-26. One economist noted that it is necessary to focus on the key question of patentability: "[W]hat is the quality of the inventive act that needs to be achieved in order to gain a patent?" To answer this question, one must recognize that two types of follow-on innovation are possible: first, where innovation occurs along a natural technological trajectory (such as Moore's law for semiconductors), and second, where there is not a natural progression but a second inventor could take the fundamental invention in a totally new direction. Scherer 3480-81. 61. Barton 3415-17. For example, the inventor would have to provide evidence that the second invention was an extremely important invention. One participant cited the French dependency licensing concept, where a follow-on inventor could obtain a compulsory license and the initial inventor also could receive a license from the follow-on inventor to practice any improvements that the follow-on inventor developed. Barton 3415-16. 62. Barton 3416. 63. Black (Stmt) 6. 64. Comment of the Staff of the Federal Trade Commission, Dkt. No. 9505 31 44-5144-01. See PTO Request for Comments on Proposed Examination Guidelines for Computer-Implemented Inventions, 60 Fed. Reg. 28,778 (June 2, 1995). 65. Heckman 1831-32; Black 3576-87. <------------------------------ p 16 ---------------------------> environment that would warrant changing the federal antitrust agencies' enforcement role for intellectual property licensing."[66] We agree that the FTC should continue to articulate to intellectual property policy makers the potential competitive consequences of overbroad patent rights and their aggressive enforcement[67]. Such a preventive approach is likely to reduce the number of instances in which antitrust enforcers are confronted with the complex task of parsing procompetitive and anticompetitive effects of business conduct involving intellectual property. 2. Adjudication of Patent Scope The United States Court of Appeals for the Federal Circuit was cited as the major force behind stronger, broader patent rights[68]. According to some, the Federal Circuit increasingly has tended to uphold broad patents and make them less vulnerable to attack, thereby increasing a patent's value[69]. One academic suggested that the Federal Circuit had, in fact, "invigorated a nearly moribund patent law."[70] A patent attorney wrote that, as of three years ago, "two thirds or more of patents which are litigated now are found to be valid and infringed" in contrast to ten -------- 66. Frankel (Stmt) 4. 67. The Commission could focus on newer technologies where follow-on competition is particularly important. Of course, industry-specific comments would require attention to relevant factual issues. 68. The Federal Circuit has exclusive jurisdiction of appeals from the PTO with respect to patent applications and interferences and of appeals from judgments in civil actions for patent infringement. 28 U.S.C.A. 1292, 1295 (1993 & West Supp. 1996). 69. Scherer 3316; Frankel 3399; Quillen (Stmt) (citing 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. PAT. & TRADEMARK OFF. SOC'Y (Aug. 1994)). See Stanley Besen & Leo J. Raskind, The Law and Economics of Intellectual Property, 5 J. ECON. PERSP. 3, 8 (1991). 70. Barton (Stmt) 1. <-------------------------- p 17 -------------------------> years before when "something like two thirds . . . were found invalid."[71] As a result, firms developing new products may find themselves in a mine field of "unexploded patents."[72] C. Software Copyrights, Patents, and Matters of Scope Different aspects of software can be protected simultaneously by patent, copyright, and trade secret, which one computer software representative characterized as the peculiar "triple threat" of software[73]. The type of protection accorded to software can affect the incentives for 73 subsequent innovation and the pace at which such innovation occurs, and the scope may have significant implications for the antitrust analysis of business conduct related to that software. 1. Copyright Until the late 1970s, practitioners and developers alike considered intellectual property law largely inapplicable to software. In 1978, the National Commission on New Technological Uses of Copyrighted Works (CONTU) concluded that computer programs should be protected by copyright, and its recommendation was implemented by Congress in the 1980 Copyright Act Amendments. Some hearings participants were troubled by copyright protection for software. One explained that
the copyright laws really are not appropriate in their fundamental characteristics to do the job we expect them to do in the intellectual property area. [E]ssentially we want protection of functionality. And the copyright laws were not designed to
----------- 71. Quillen (Stmt) (citing 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. PAT. & TRADEMARK OFF. SOC'Y (Aug. 1994) and citing Jerome G. Lee, The Most Significant Patent Cases Relating to the Question of Obviousness Under 35 U.S.C. Sec. 103, at 2 (read at the Annual Meeting of the American Bar Association, Aug. 12, 1986)). 72. Scherer 3316 (Firms are using their patents in the courtroom "to try to keep people off their turf and [to] collect royalties from them."). 73. Wayman (Stmt) 4. Some have advocated sui generis protection for software. See, e.g., Pamela Samuelson et al., A Manifesto Concerning the Legal Protection of Computer Programs, 94 COLUM. L. REV. 2308 (1994). <--------------------------- p 18 ----------------------------->
provide protection of functionality. So they've sort of been forced and bent out of shape in order to do the job they were never intended to do.[74]
According to another witness, copyright protection for software is problematic because it is extremely easy to get[75], it is long-lived (50 to 75 years), and because, unlike the Patent Act, the Copyright Act does not require public disclosure of the subject matter of the copyright.[76] Some participants expressed concern that overbroad copyright scope might either create disincentives for, or erect roadblocks against, follow-on innovation. One computer industry representative found overbroad copyright scope "harmful to progress because software, more than anything, is a series of inventions piled on top of each other."[77] Another emphasized that broad copyright scope can create a risk of "overcompensation" in the sense that "[a]n author or inventor with too broad a monopoly over a work can seek compensation from authors or inventors of [interoperable] works, driving up the cost of such works, [and ultimately] resulting in fewer works being produced."[78] Others suggested that broad scope could thwart efforts to enhance interoperability, which would in turn impair the growth of computer networks, the anticipated source of substantial innovation in the near term[79]. Some suggested that the owner of a software copyright should be prevented from enforcing its copyright as to the interface, ---------- 74. Baxter 3618-19. 75. Copyright need not be applied for, rather it attaches at creation. 17 U.S.C.A. 101 (1996). Moreover, the copyrighted work need only be original. 17 U.S.C.A. 102(a) (1996). It need not be novel and non-obvious, as required for patent protection. 76. Gellhorn 1177-79. 77. Dyson 3331-32. 78. Kohn 3339-40. 79. Morris (Stmt) 9. Several participants warned that overbroad copyright protection for interfaces could seriously harm innovative efforts and diminish consumer welfare. Kohn 3346- 47; Scherer 3354-55; Black 3583-84. An interface provides a link between computer programs. For example, in an operating system, an interface contains information that must also appear in any application program to allow it to run properly on that system. <------------------------ p 19 -----------------------------> especially once that interface has become a standard[80], or they advocated compulsory licensing of interface standards that dominate the market[81]. See also infra Chapter 9. Certain of the key issues related to copyright protection for software are highlighted in the recent Lotus v. Borland case[82], where the question was whether a computer menu command hierarchy is copyrightable subject matter. Borland had copied the Lotus 1-2-3 menu command hierarchy to enable prior Lotus users to switch to Borland's spreadsheet software "without having to learn new commands or rewrite their Lotus macros."[83] The First Circuit concluded that the Lotus 1-2-3 menu command hierarchy was an unprotectible method of operation[84]. The Supreme Court affirmed this case through a 4-4 vote, with no opinion, further underscoring the difficulties in distinguishing protected expression from unprotected ideas under copyright law. Lotus v. Borland also raised a number of difficult and important issues regarding compatibility and customer "switching-costs" in the context of interpreting the scope of intellectual property protection for software. The ultimate resolution of these issues is likely to have major implications for competition policy in the information age. In Kodak[85], for example, the Supreme Court recognized customer "switching-cost" issues in the context of replacement parts and service contracts for copier and micrographic equipment manufactured by Kodak. The Court stated: "If the cost of switching is high, consumers who already have purchased the equipment, and are thus 'locked-in,' will tolerate some level of . . . price increases before ---------------- 80. Kohn 3350; Black 3587, 3589. 81. Kohn 3350, 3357 (advocating royalty-free, "use" license); Scherer 3354 (make "bottleneck" interfaces public domain, subject at most to a modest royalty). 82. Lotus Dev. Corp. v. Borland Int'l, Inc., 49 F.3d 807 (1st Cir. 1995), aff'd per curiam, 116 S. Ct. 804 (1996). 83. 49 F.3d at 810. 84. 49 F.3d at 815. 85. Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451 (1992). <------------------------- p 20 -----------------------------> changing equipment brands."[86] Switching costs can become significantly higher in the increasingly networked environment of electronic communication supported by software. See infra Chapter 9. 2. Patents A patent, which lasts for 20 years, is extremely powerful because it protects novel and nonobvious ideas and not just the expression of those ideas[87]. In exchange for this powerful protection, an inventor must publicly disclose the subject matter of the patented invention. The PTO has issued patents for computer-implemented inventions since 1981, when the Supreme Court held that claims for a process for molding rubber which employed a well-known mathematical equation constituted patentable subject matter[88]. Increasingly, software developers seek patent protection in addition to copyright protection. In 1993 alone, the PTO issued 2008 patents covering software[89]. Some hearings participants favored patent protection for software, on the theory that a patent offers stronger protection to true breakthroughs, thus providing greater innovation ------------------ 86. Kodak, 504 U.S. at 476. 87. The Patent Act characterizes patentable subject matter, i.e., ideas, as "any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof." 35 U.S.C. 101 (1988). The Supreme Court has held that laws of nature, physical phenomena, scientific principles, and abstract ideas are not patentable subject matter. E.g., Parker v. Flook, 437 U.S. 584 (1978); Gottschalk v. Benson, 409 U.S. 63 (1972). 88. Diamond v. Diehr, 450 U.S. 175 (1981). Significantly, the patent did not preclude use of the algorithm itself by the general public. After Diamond v. Diehr, the PTO began issuing patents employing algorithms where the use was limited to a specific special-purpose implementing apparatus or the claims described a series of steps for manipulating specific electronic signals. See Stern, 22 AIPLA Q.J. 167 (Spring 1994). In 1994, however, the Federal Circuit concluded that software turns a general purpose computer into a special purpose computer, thereby eliminating the need to claim a specific apparatus to get patent protection. In re Alappat, 33 F.3d 1526 (Fed. Cir. 1994). 89. Electronic data submission from Richard Nearing, EDS Shadow Patent Office, to Daniel Halberstam, Federal Trade Commission (May 2, 1996) (on file in FTC Policy Planning Office). <----------------------- p 21 -----------------------------> incentives[90]. Others criticized patent protection for software, citing the lack of a prior art database for software, the absence of a patent classification system for computer software, and the resulting roadblocks for patent examiners attempting to develop adequate expertise, all of which make it extremely difficult for the PTO to assess whether software patent claims are novel and nonobvious[91]. According to one participant, what "most deeply chills software developers is not just the breadth of software patents but [the] frustration in not being able to know in advance whether they are violating someone else's patent."[92] Commentators fear that overbroad protection could inhibit competition in software by making it much more difficult to invent around existing patents and by increasing the costs of subsequent innovation[93]. The scope of Compton's NewMedia software patent, which covered the idea of multimedia presentations, exemplifies this concern[94]. Many criticized the patent's broad scope and argued that the patent improperly covered ideas in the public domain. As a result, the Commissioner of the PTO decided to re-examine the patent. -------- 90. Gellhorn 1177-79; Kohn 3347 (citing interface and command structures). 91. See Wayman 3525-26. See also Bruce A. Lehman, Assistant Secretary of Commerce and Commissioner of the PTO, Before Public Hearings on Patent Protection for Software-Related Inventions (Jan. 26-27, 1994); Notice of Public Hearings and Request for Comments on Patent Protection for Software-Related Inventions, 58 Fed. Reg. 66,347 (Dec. 20, 1993). 92. Heckman 1824. 93. Effy Oz, Software Intellectual Property . . . Protection Alternatives, J. SYS. MGMT., July/Aug. 1995, at 50-56; Richard Morin, Freedom to Program, UNIX REV., May 1995, at 79-80; Jerry Fiddler, Just Say No, INC., July 1994, at 25-26; Richard A. Bowers, What Does the Compton's NewMedia Patent Mean?, CD-ROM PROFESSIONAL , Mar. 1994, at 41; Catherine Yang, Is the Patent Office Smothering Software Innovation?, BUS. WK., Mar. 7, 1994, at 66. For a discussion of these patent issues in other industries, see, e.g., A dose of patent medicine, THE ECONOMIST, Feb. 10, 1996, at 71 (whether financial services patents stimulate or hinder innovation); First, do no harm. Then, get a patent, BUS. WK., July 24, 1995, at 86 (pros and cons of surgical-methods patents). Accord Rosenthal 3423-24 (whether allowing surgical-methods patents is the most efficient way to encourage innovation). 94. Catherine Yang, Is the Patent Office Smothering Software Innovation?, BUS. WK., Mar. 94 7, 1994, at 66; Richard A. Bowers, What Does the Compton's NewMedia Patent Mean?, CD-ROM PROFESSIONAL, Mar. 1994, at 41. <-------------------------- p 22 -------------------------> D. Conclusion Antitrust should pay close attention to unilateral and joint business conduct involving intellectual property rights associated with new technologies. Shrinking product lifecycles and the increasingly global character of high-tech competition, in combination with expanded intellectual property protection, create a situation that warrants close examination to ensure that companies do not wield their intellectual property rights to stunt competition. As the Supreme Court has recognized many times, there is a need to balance intellectual property and competition values.[95] However, antitrust should also continue to recognize, as did the IP Guidelines, the many procompetitive aspects of business conduct involving intellectual property. If the scope of intellectual property rights is not overbroad, then there is generally less need for antitrust enforcers to apply heightened scrutiny to such arrangements. Accordingly, in light of testimony and literature on this topic, we believe that the FTC should act to ensure that intellectual property policy and decision makers, including the courts, the PTO, the Registrar of Copyrights, and the legislature, are aware of the potential competitive consequences of intellectual property policy for new technologies such as biotechnology and computer software. ------------- 95. E.g., Fogarty v. Fantasy, Inc., 114 S. Ct. 1023, 1029 (1994); Sony Corp. of Am. v. Universal City Studios, Inc., 464 U.S. 417, 429 (1984). <--------------------- END OF CHAPTER 8 -------------- --->

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