WORLD TRADE
ORGANIZATIONWT/WGTCP/W/101
25 September 1998
(98-3721)
Working Group on the Interaction
between Trade and Competition PolicyOriginal:  English
COMMUNICATION FROM THE UNITED STATES
The following communication, dated 24 September 1998, has been received from the
United States with the request that it be circulated to Members.
_______________
COMPETITION POLICY AND INTELLECTUAL PROPERTY RIGHTS
IN THE INTERNATIONAL TRADE CONTEXT
The intellectual property laws and the antitrust laws share a common purpose of promoting
innovation and enhancing consumer welfare but do so in different ways.  Intellectual property laws
give inventors and authors a temporary, exclusive right to their original works that allows creators toobtain an economic return on their investment and thereby furnishes an incentive for innovation.
Antitrust laws focus on maintaining competitive mark ets in which rivalry among creators is the spur
for innovation.  Both are essential to ensuring progress in the expansion and strengthening of trade,
economic growth and international cooperation.
It is sometimes suggested that intellectual property and antitrust principles operate at cross-
purposes.  However, as discussed below, our experience has shown that the proper application ofantitrust laws to intellectual property yields results that are consistent with the goals of both
disciplines, namely the maximization of output, the maintenance of competitive prices, and the
incentive to innovate.
This paper will first discuss the basis for intellectual property rights and WTO rules governing
such rights.  It then will describe the application of US antitrust law to the licensing of intellectual
property, with some illustrations from recent cases that involved intellectual property issues - many of
which have had international dimensions.
I. Intellectual Property Rights
Laws are created to regulate relationships in society, thereby preventing conflicts or simplifying
resolution when conflicts do arise.  Intellectual property laws generally regulate the establishment,
ownership, term, and transfer of rights in that which is created through innovation and imagination,and through attention to the character and quality of goods and services in commerce.  Recognizing
that innovative and creative endeavours and attention to character and quality of goods and service in
commerce have a positive effect on economic development, countries have enacted intellectual
property laws, and have made those laws more effective, in response to changes in technology and inWT/WGTCP/W/101
Page 2
ways of doing business.  Intellectual property laws have been enacted to govern patents, copyrights,
trademarks, marks of geographical indications1, industrial design2, maskworks3, and trade secrets4.
Patent laws encourage discovery and invention of new and useful solutions to problems in the
form of new and improved products, or new ways of accomplishing results.  These laws encouragediscovery and invention by providing exclusive rights, for a limited period, to those who disclose the
results of their work.  Disclosure enables others to understand the advances made and allows others to
extend those advances both in the original field of technology and into other fields.  Patents assure
investors that they will be able to earn a return  on their investment in particular inventions, if
successful.  One business' success with a particular patented product or process encourages others to
find non-infringing products or processes in order to compete with the original.  Strong patent
protection, therefore, results in economic growth, job creation and a wide variety of products andprocesses at reasonable prices.
Copyright laws encourage creative expression of all kinds by giving authors exclusive rights in
their creative works, with certain limited exceptions.  These exclusive rights enable authors, during
their lifetimes, to obtain economic benefits from their work, if successful, making it possible for themto devote additional time to creative endeavours.  An author's heirs also benefit from works during a
fixed period following the author’s death.  Like patents, copyrights provide investors with assurance
that investment in copyrighted works can produce a return if the work appeals to the public for which
it was created.  The existence of strong copyright laws encourages creation of a wide variety of
choices of literary and artistic works.
Trademark laws protect consumers by ensuring that the marks on which they come to rely to
represent products or services from a particular source in fact come from that source.  In order to earn
customer loyalty, trademark owners seek to develop and maintain quality products or services for
their intended market.  In order to compete in a profitable market, other businesses must develop tradeand service marks of their own and maintain quality and service to engender customer loyalty.
Effective trademark laws, therefore, encourage quality products and better service.
In the absence of clear and stable laws regulating ownership, transfer and use of that which is
created through thought and creative effort and through attention to character and quality in goods and
service in business, a country's economic development lags because investors, both domestic and
foreign, see that the risks of investing in new innovative and creative products and services, and inproducts with distinctive character and quality, are too high.  Lack of effective intellectual property
                                                     
1  Laws protecting marks of geographical indication li kewise protect consumers by ensuring that they are
not deceived in purchasing regional products on which they rely for a particular quality, reputation, or other
characteristic attributable to geographic origin.  Producers of such regional products work together to maintain the
quality, reputation, or other characteristic of their products.
2  Industrial design laws protect new and original designs.  Strong industrial design laws encourage
development of products with varied appearances, giving consumers greater choice in connection with particular
product areas.
3  Laws protecting integrated-circuit layout designs  encourage development of new integrated circuits.
This development enables other business to improve their products and services incorporating integrated circuitsand to invest in creation of new products and se rvices that incorporate integrated circuits.
4  Laws protecting undisclosed information (trade secrets) encourage businesses to find better ways to
produce products or to provide services, to improve perfor mance, or to reduce costs, even where the developments
would not be patentable.  Strong trade secret laws also he lp to repress unfair business practices such as industrial
espionage and bribery.WT/WGTCP/W/101
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protection means that those who create and innovat e are at the mercy of those who merely copy.
Unable to commercialize the results of their creative efforts safely, many innovative and creative
nationals and nationals interested in business emigrate to countries where their efforts will produce
greater rewards.  Thus, countries with free and open economies typically have strong intellectual
property laws and, consequently, healthy and competitive markets.  Accordingly, the United Statescontinues to work multilaterally to obtain more effective intellectual property protection.
The international legal framework for the protecti on of intellectual property rights has changed
considerably, principally as a result of the Agreement on Trade-Related Aspects of Intellectual
Property Rights (TRIPS) negotiated during th e Uruguay Round, as well as due to a growing
awareness of the importance of intellectual property to economic development.  TRIPS incorporates
and builds upon the latest intellectual property agreements done by the World Intellectual PropertyOrganization (WIPO).
The significance of TRIPS is three-fold: (i) it is the first single international agreement that
includes all intellectual property disciplines; (ii) it is the first time that enforcement provisions have
been included in an international agreement dealing w ith intellectual property protection; and (iii) it is
the first intellectual property rights agreement th at is subject to a binding, enforceable dispute
settlement mechanism.
TRIPS, which is the most detailed and comprehensive international agreement on intellectual
property rights and the enforcement of those rights yet negotiated, is administered by the World TradeOrganization (WTO), with the special assistance of the Council on Trade-Related Aspects of
Intellectual Property.
5  The relationship of TRIPS to the WTO distinguishes it from many other
multilateral agreements on intellectual property, such as the Paris and Berne Conventions, which are
administered by WIPO, a specialized agency of the United Nations.  TRIPS also is distinct from other
international intellectual property agreements in the numerosity of the countries it binds.  This isbecause membership in the WTO is a "package deal," where members must be subject to all of its
agreements, including TRIPS.
TRIPS contains general provisions and basic principles on intellectual property, including
national treatment, most-favoured-nation treatment, and compliance with certain international
intellectual property conventions.
6  While the general intent of TRIPS is to strengthen the protection
and enforcement of intellectual property rights, it also contains a number of provisions that attempt tobalance the interests of these rights against other social, economic, and public welfare interests.  For
example, Article 7 states that the objective of protecting and enforcing intellectual property rights is to
"contribute to the promotion of technological innovation and to the transfer and dissemination of
technology, to the mutual advantage of producer s and users of technological knowledge and in a
manner conducive to social and economic welfare, and to a balance of rights and obligations."
7
Article 8 states that in implementing TRIPS in their own laws and regulations, members may adopt
appropriate measures consistent with the TRIPS agreement "to protect public health and nutrition, to
promote the public interest in sectors of vital importance to their socio-economic and technological
development . . . [and] to prevent the abuse of intellectual property rights by right holders or the resort
to practices which unreasonably restrain trade or adversely affect the international transfer of
                                                     
5  TRIPS, Article 68.
6  TRIPS, Articles 1-4.
7  TRIPS, Article 7 (Objectives).WT/WGTCP/W/101
Page 4
technology".8  In setting forth general obligations for the enforcement of intellectual property rights,
Article 41.1 of TRIPS states that these enforcement "procedures shall be applied in such a manner as
to avoid the creation of barriers to legitimate trade and to provide for safeguards against their abuse".9
TRIPS also sets forth standards for the availability, scope, and use of seven categories of
intellectual property - patents, trademarks, trade secrets, copyrights, geographical indications,
industrial design, and layout-designs (topographies) of integrated circuits.  Transitional arrangements
for adoption of TRIPS' provisions are provided in light of the large number and variety of member
nations that signed the agreement.  For example, developing countries and countries in transition from
a centrally-planned to a free enterprise economy are entitled to delay implementation of TRIPS by
five years, i.e., until 1 January  2000.10
The TRIPS agreement recognizes that there is a need to promote effective and adequate
protection of intellectual property rights and ensures that measures and procedures to enforce such
rights do not themselves become barriers to legitimate trade.11  Ensuring that countries implement
their TRIPS obligations as they come into effect is of great importance to the United States.
II. The Application of US Antitrust Law to Intellectual Property Rights
Over the years, prevailing attitudes and enforcement policies in the United States toward the
application of the antitrust laws to the exercise of intellectual property rights have fluctuated.  During
the 1970s, for example, the US antitrust agencies took a restrictive view of the ability of rights holdersto exploit intellectual property, particularly through licensing arrangements.  During the 1980s, by
contrast, guided by the economic thinking of the "Chicago school", the agencies applied a much more
tolerant view toward the exercise of intellectual property rights.
In 1995, seeking to distill the state-of-the-art th inking on the interface between these disciplines
and to provide clear guidance for the business community, both domestic and foreign, the Department
of Justice’s Antitrust Division and the Federal Trade Commission ("the Agencies") jointly issued
Guidelines for the Licensing of Intellectual Property ("the Guidelines").  The Guidelines, which apply
to patents, copyright, trade secrets, and know-how, strike a balance between the need to provide
ample incentives for innovation with the antitrust goal of ensuring competitive markets without
excessive barriers to entry.  An antitrust policy that defers unduly to the unwarranted exploitation of
intellectual property rights would deprive consumer s of the benefits of innovation, while an overly
restrictive competition policy would chill the development of the new technologies and processes that
yield enormous benefits to consumers.  By setting antitrust standards at the optimal level, output and
innovation, and hence welfare, are maximized.  By applying these standards equally to domestic and
foreign entities, the antitrust agencies' ensure that  opportunities for import and export trade involving
intellectual property rights are maximized as well.
                                                     
8  TRIPS, Article 8 (Principles).  Moreover, Article 40 permits member countries to adopt appropriate
measures to prevent or control licensi ng practices or conditions that may in particular cases constitute an abuse of
intellectual property rights having an adverse effect on competition in the relevant market.  Id. at Article 40.
9   TRIPS, Article 41.1.
10  Developing countries are entitled to delay implemen tation by an additional five years, i.e., until 2005,
with respect to extending product patent protection to areas of technology, particularly pharmaceuticals and
agricultural chemicals, that were not previously protectable in that country.  Moreover, least-developed countries
are entitled to delay implementation of TRIPS by ten years in recognition of their special needs.  TRIPS,
Articles 65 and 66.
11  TRIPS, Preamble.WT/WGTCP/W/101
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A. The 1995 US Antitrust Guidelines for the Licensing of Intellectual Property
The Guidelines are based on three core principles that represent a broad consensus concerning
the interaction between antitrust and intellectual prope rty.  The first is that, for antitrust purposes, the
Agencies regard intellectual property as essentially comparable to any other form of property.
Although, of course, differences do exist, the antitrust laws are sufficiently flexible to take those
differences into account and should not impose greater or lesser scrutiny for intellectual property than
for other forms of property.
The second principle is that there is no presumption that the intellectual property right creates
market power in an antitrust sense.  Although the intellectual property right confers the power toexclude with respect to the specific product, process, or work in question, there will often be sufficient
actual or potential close substitutes to prevent the exercise of market power.  The determination of
market power, therefore, is based on an evaluation of market circumstances.  Where a specific form of
intellectual property does confer a significant competitive advantage on its owner, that advantage is
no more in conflict with the antitrust laws than one created by any other asset that allows its owner toearn supracompetitive profits.  Market power that is solely "a consequence of a superior product,
business acumen, or historic accident" does not violate the US antitrust laws.
12
The third core principle is that licensing is generally procompetitive.  Licensing, cross-licensing
or otherwise transferring intellectual property facilitates its integration with complementary factors ofproduction. This integration can lead to more efficient exploitation of the intellectual property,
benefiting consumers by accelerating the reduction of costs and the introduction of new products
resulting from the intellectual property.  Licensing  arrangements increase the value of intellectual
property to consumers and the developers of the technology and avoid the costs of infringement
litigation.  By potentially increasing the expected returns from the intellectual property, licensing canenhance the incentive to invest in research and development for creating intellectual property.
This last principle also has important implications for international trade.  Licensing
arrangements can facilitate the transfer of technology across borders to the benefit of the global
economy and consumers.  By acknowledging the generally procompetitive nature of licensing, the
Guidelines seek to avoid unnecessary interference with most licensing arrangements, which are either
competitively beneficial or neutral, and thereby facilitate a high level of output and trade intechnology among nations.
In recognition of the generally procompetitive benefits of intellectual property licensing, the
Guidelines establish a "safety zone" in which the Agencies will not challenge, absent extraordinary
circumstances, restrictions in licensing arrangements if the restraint is not anticompetitive on its face,and the licensor and licensees collectively account for no more than 20 per cent of each relevant
market significantly affected by the restraint.  Fa cially anticompetitive restraints include those that
would normally warrant per se  treatment under the antitrust laws, such as price fixing or market
division.  The safety zone is designed to foster and encourage the procompetitive licensing of
intellectual property by simplifying the rule for smaller companies and innovators.
Outside the safety zone, the Guidelines state that a licensing arrangement may raise antitrust
concerns when it harms competition among entities that would have been actual or likely potential
competitors in the relevant market in the absen ce of the licence.  For example, a restraint in a
licensing arrangement may harm competition if it facilitates price fixing.  Similarly, licensingrestrictions affecting one market may harm competition in another by foreclosing access to, or
                                                     
12  United States v. Grinnell Corp., 384 US 563, 571 (1966).WT/WGTCP/W/101
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significantly raising the price of, an important component or input, or by making it easier to engage in
coordinated action to raise prices or reduce input.  An arrangement that effectively merges the
research and development in a particular field might harm competition for the development of new
goods and services.  An acquisition of intellectual property may also lessen competition in a relevant
market.
 While the enforcement policies set out in the Guidelines are designed to prevent such
anticompetitive practices, they also are carefully crafted not to inadvertently discourage licensing.  In
evaluating a licensing arrangement, the Agencies focus on the actual effects in the relevant market,
not on its formal terms.  The relevant market affected could be comprised of goods and services,
technology, and/or research and development efforts, depending on the circumstances of the licensing
arrangement.
 Section 3.4 of the Guidelines describes the framework for how the Agencies will evaluate the
competitive effects of a licensing arrangement.13  To determine the appropriate mode of analysis, the
Guidelines state that the threshold question is whether the restraint can be expected to contribute to an
efficiency-enhancing integration of economic activity.14  If there are no such integrative efficiencies
and the restraint is the type that violates US antitrust law per se  -- such as naked price-fixing or
market division among competitors -- the Agencies will challenge the restraint under the per se  rule,
under which there is no need for an inquiry into the restraint’s likely competitive effects.  Otherwise,
the Agencies will apply the "rule of reason," which focuses on whether the conduct is likely to have
anticompetitive effects and, if so, whether the restraint is reasonably necessary to achieveprocompetitive benefits that outweigh those anticompetitive effects.  This approach reflects the
analysis used by the Supreme Court.
15  In the vast majority of cases, restraints in intellectual property
licensing arrangements are evaluated under the "rule of reason" because licensing arrangements
usually create significant integrative efficiencies, and restraints associated with those arrangements
typically have a sufficient nexus with the efficiency-producing integration.
 The Guidelines include a section on the analysis of  a licensing arrangement's effects on
competition in the research and development of  new or improved goods or processes.  If a licensing
arrangement may adversely affect competition to de velop new or improved goods or processes, the
Agencies will analyze such an impact either as a separate competitive effect in relevant goods or
technology markets, or as a competitive effect in  a separate "innovation market."  An innovation
market consists of the research and development directed to particular new or improved goods orprocesses, and the close substitutes for that research and development.  Using an innovation market to
analyze competitive effects may be appropriate where the licensing arrangement may have
competitive effects on innovation that cannot be adequately addressed through the analysis of  goods
or technology markets.  For example, the arrangement may affect the development of goods that do
not yet exist.  Innovation markets also may be useful when an arrangement has competitive effectsfrom research and development in geographic markets where product market competition is limited or
non-existent.  The agencies will delineate an innovation market only when the capabilities to engage
in the relevant research and development can be associated with specialized assets or characteristics
of specific firms.
                                                     
13The Guidelines (sections 5.1 -5.7) also specifically discuss the application of the general
analytical framework to particular licensing restraints such as tying, exclusive dealing, and resale pricemaintenance, and to arrangements that involve cross-licensing, pooling, or an acquisition of  intellectual property.
14See, e.g.,  Broadcast Music, Inc. v. Columbia Broadcasting System, Inc., 441 US 1 (1979).
15See, e.g.,  Federal Trade Commission v. Superior Court Trial Lawyers Ass'n, 493 US 411, 433
(1990); Federal Trade Commission v. Indiana Federation of Dentists, 476 US 447 (1986).WT/WGTCP/W/101
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The Guidelines provide that the Agencies may challenge under the antitrust laws the
enforcement of invalid intellectual property ri ghts.  For example, enforcement or attempted
enforcement of a patent obtained by fraud on the Patent and Trademark Office or the Copyright
Office may violate section 2 of the Sherman Act or  section 5 of the Federal Trade Commission Act.16
Objectively baseless litigation to enforce invalid intellectual property rights may also constitute an
element of a violation of the Sherman Act. 17
B. Recent Enforcement Involving Intellectual Property Rights
While the Guidelines illustrate in principl e the interrelationship and complementarity of
antitrust enforcement and intellectual property rights, enforcement actions provide concrete examples.As the following cases show, antitrust enforcement can ensure that conduct or agreements by private
firms do not narrow the potential sources of innovation or bar entry by innovators.  Even when the
Agencies have found it necessary to affect ownership of intellectual property rights to resolve
competitive concerns about reduced price competition or product variety or reduced or delayed
innovation, they pay careful attention to fashioning  remedies that do not interfere with the basic
principles underlying  intellectual property law.
The cases discussed below include merger enforcement.
18  Over the past few years, there has
been a substantial amount of merger activity in certain markets, such as pharmaceuticals, in which the
analysis has addressed the merger’s competitive effects on research and development.  These casesmanifest the important role that antitrust may play in preserving incentives for strong competition in
the race to produce new and improved products.
(1)  Enforcement by the Department of Justice
(a)  Pilkington
The Department of Justice's 1994 case against Pilkington plc addressed an international cartel
orchestrated by a licensing arrangement that imposed restraints on competition long after such
restraints were reasonably necessary to advance the licenced technology.  Pilkington, a British
company, licenced the major world float glass manufacturers many years earlier to use its patents and
related know-how only in specified territories.  These original licences contained stringent territorial,use, and sublicensing restrictions, together with grantbacks of improvements developed by the
licensees, which substantially limited competition among the licensees and Pilkington.
Pilkington's licences did not terminate upon the expiration of the patents, but continued
indefinitely until the licensee could prove that all of the licenced technology was publicly known.According to the Department of Justice's  complain t, Pilkington then over-claimed what was "secret"
                                                     
16E.g. Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp.,
382 US 172 (1965) (patents); Michael Anthony Jewelers, Inc. v. Peacock Jewelry, Inc.,
795 F. Supp. 639, 647 (S.D.N.Y. 1992) (copyrights).
17E.g.  Professional Real Estate Investors, Inc. v. Columbia Pictures Industries, Inc. 508 US 49,
57 (1993) (copyrights);  CVD, Inc. v. Raytheon Co., 769 F.2d 842 (1st Cir. 1985), cert. denied, 475 US 1016
(1986) (trade secrets); Handgards, Inc. v. Ethicon, Inc., 601 F.2d 986, 992-96 (9th Cir. 1979), cert. denied,  444
US 1025 (1985) (patents).
18Although the Guidelines do not expressly cover merger analysis (which is set forth in the
Agencies' 1992 Horizontal Merger Guidelines),  the concepts in the Guidelines informs the analysis of mergers
with an intellectual property component.WT/WGTCP/W/101
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as a way of deterring or inhibiting the ability of licensees and other rivals from inventing around
whatever legitimate intellectual property rights it possessed.  Pilkington also entered into other
agreements, including export limitations, with its licensees outside of and apart from the licences,
allegedly as a way of limiting and controlling competition in glass markets.  The Department charged
that, as a result of the licensing agreements, United States companies were prohibited from exportingtheir own glass manufacturing technology and thus from building glass-making plants overseas.  As
stated in the complaint, there was also an adverse effect on domestic output and innovation.  This
conduct violated the Sherman Act’s prohibition of anticompetitive conduct that adversely affects US
domestic commerce and export trade.
The case was settled by a consent decree
19 whereby the burden of proving the continued
secrecy of the previously licenced float glass technology was essentially shifted to Pilkington from thelicensees, and Pilkington was enjoined from threatening intellectual property litigation against
potential customers (located anywhere in the worl d) of American glass plant vendors that were not
Pilkington licensees.  The elimination of these artificial barriers to competition benefits not only the
formerly constrained US manufacturers, but also fl oat glass customers worldwide, who now can enjoy
competition to supply their needs.
(b)  General Electric
An excellent example of the Justice Department's application of the Guidelines to a licensing
arrangement is its August 1996 suit against General Electric Co. ("GE") over licensing provisions thatrestrained GE's most likely competitors in the provision of maintenance and repair service for medical
equipment - its hospital licensees.  GE's medical systems unit, the world’s largest manufacturer of
medical imaging equipment, such as computed tomography (CT) scanners and magnetic resonance
imagers, licences advanced diagnostic software to hospitals and other health care facilities that use GE
imaging equipment.  At the heart of the suit was a "Continuing Representation" in the licence that, forseveral years, stated that the licensee was not a co mpetitor of GE in repairing or maintaining hospital
equipment.  The Antitrust Division contended that this "representation" amounted to an agreement
between the licensee and GE that the licensee would not compete with GE in health-care equipment
service, regardless of whether or not it was actually using the licenced software.
Normally, such an agreement between two actual  or likely competitors would probably be a
per se  violation of Section 1 of the Sherman Act - an inherently unreasonable restraint of trade.
Under the Guidelines, however, there remained the question whether this restraint might contribute to
an efficiency-enhancing integration that the licences made possible.  There was certainly an
integration, as the licences enabled licensees to combine the software with their in-house repair staffs
in order to maintain and repair their GE imaging equipment more cost-effectively.  Had the
"Continuing Representation" furthered that integration, it would have been analysed under the rule ofreason.
However, the "Continuing Representation" did not appear to have any reasonable connection to
the licence's integration.  It did not prevent free-riding among licensees as exclusive territorial
licensing might have.  Nor did it enable GE and its licensees to share the risks inherent in developingand applying the technology.  Although GE had a leg itimate interest in ensuring that licensees would
not utilize the software in any unlicenced and infringing manner, this restraint served that purpose
only trivially in relation to its entire effect, which was not to simply prohibit licensees from  utilizing
the licenced software to repair other facilities' machines.
20  Ultimately, the "Continuing
                                                     
19United States v. Pilkington plc, 1994 Trade Cas. (CCH) ¶ 70,842 (D.Ariz. 1994).
20  In fact, the "Continuing Representation" was not necessary for that purpose.  The licenced software
was usable only on the specific model of the specific modality for which it was licenced.  A licensee thereforeWT/WGTCP/W/101
Page 9
Representation" eliminated GE's most likely eq uipment-maintenance competitors regardless of
whether they could be using the licenced software to compete.
The Justice Department contended that this practice curtailed competition not only in the
maintenance market, but also in the markets for imaging equipment.  Particularly in sparselypopulated areas, hospitals are the only providers of maintenance services, which imaging equipment
manufacturers need to have available if their products are to be commercially viable.  The
"Continuing Representation" eliminated a large number of these potential providers.  Thus, when
hospitals shopped for imaging equipment, they naturally observed the difficulty of finding service for
equipment made by GE's rivals.  This skewed the equipment markets themselves in GE's favour,
hampering competition on the merits.  The lack of any plausible connection between the restraint and
GE's legitimate need to prevent misappropriation or any other efficiency-promoting purpose led theJustice Department to conclude that the restraint was a  per se  Section 1 violation, obviating the need
for proof of competitive harm.
GE sought unsuccessfully to have the United States District Court dismiss the Section 1 claim
and the per se  violation theory.
21  Ultimately, the parties agreed to settle the case by a consent decree
that prohibits GE from requiring its licensees to agree not to perform third-party medical equipment
service while also protecting GE's right to limit the use of its software and other materials to the
specific piece of imaging equipment for which it was licenced.
(2) Enforcement by the Federal Trade Commission
(a) Royal Dutch/Shell-Montedison Joint Venture
In 1993, Royal Dutch/Shell Group of Companies ("Shell") and Montedison S.p.A.
("Montedison") proposed to merge the majority of their worldwide polypropylene production andtechnology businesses
22 into a joint venture to be called "Montell".  The Federal Trade Commission
(FTC) challenged the transaction, alleging that it raised competitive concerns in five polypropylene-
related markets, of which the most relevant to this discussion is the effect of the proposed joint
venture on competition and export trade in the technology and licensing markets.
At the time of the transaction, Montedison was the world's largest polypropylene producer and
leading licensor of polypropylene technology.  Shell was the world’s second largest producer ofpolypropylene and, through its technology and licensing joint venture with Union Carbide
Corporation ("Shell/Carbide joint venture"), was the leading rival to Montedison in licensing of
current polypropylene technology worldwide.  Polypropylene technology, which is an essential input
in the production of polypropylene, consists of an optimized process, plant design and catalyst.  The
technology is licenced in the form of a total p ackage licence that includes licenced polypropylene
process technology and related know-how, catalyst technology and know-how, a licence for catalysts
optimized for use with the packaged technology, and a catalyst supply agreement.
                                                                                                                                                                    
could not have employed the software it had licenced for use with its GE CT scanner on another manufacturer's
CT scanner, or even on another model of GE CT scanner.  Thus, by design, the technical potential for
misappropriation of the software for competitive purposes was slight, and even with the same model of the samemodality, a security code installed by GE prevented unauthorized use.
21  United States v. General Elec. Co., 1997-1 Trade Cas. (CCH) ¶ 71,765 (D. Mont. 1997).  The Court
did, however, dismiss the Department's claim that the licences constituted a conspiracy to monopolize the market
for health-care equipment service under Section 2 of the Sherman Act.
22Polypropylene is a type of plastic used in many applications, including carpet fibers, apparel,
and industrial fabrics, interior and exterior automotive parts, toys, and bottle caps.WT/WGTCP/W/101
Page 10
Shell/Carbide was the principal competitor to Montedison in research, development, and
licensing of polypropylene technology and catalyst technology.  At the time of the transaction,
Montedison coordinated the licensing of polypropylene technology and sale of polypropylene
catalysts with Mitsui Petrochemical Industries Ltd. ("Mitsui"), sharing royalties from licensing ofpolypropylene technology and licensing of catalyst technology.  In contrast to the cooperative
relationship between Montedison and Mitsui, competition between Shell/Carbide and Montedison in
licensing was vigorous.  The evidence showed that the competition between the two was so intense
that following Shell/Carbide’s entry into technology licensing, licensing fees dropped dramatically.
Other evidence demonstrated that innovation through competition in research and development in the
technology market had led to reductions in cost, improved product properties and performance, and
the expansion of applications and use of polypropylene resins.
 After the joint venture, Montell/Mitsui would account for over 70 percent of all polypropylene
capacity built or projected to be built worldwide since 1990, and over 75 percent of the world's
production of polypropylene catalyst.  Because the evidence showed that other technologies were not
a significant competitive constraint, and that barriers to entry, including patent obstacles, were high,the joint venture had potentially serious anticompetitive effects.  Specifically, the proposed joint
venture would create a shared interest between Shell and Montedison with possible spill-over effects
on competition outside the joint venture.  Shell would control both Montell and the Shell/Carbide
joint venture, and would seek to maximize joint profits from the production and licensing activities of
these entities.  The FTC's complaint therefore alleged that the effect of the proposed joint venturewould likely be substantially to lessen compe tition in the worldwide markets for polypropylene
technology, licensing of polypropylene technology, and the licensing, production and sale of
polypropylene catalysts.
23  This would allegedly have led to an increase in the price of licences and
catalysts and a reduction in innovation, which in turn would lead to an increase in the cost of
production and ultimately the price of polypropylene resin to end users.
The complaint also alleged that the proposed joint venture would have adverse effects on US
export trade.24  The FTC charged that the formation of Montell likely would reduce Shell’s incentives
to support the Shell/Carbide polypropylene technology, thereby reducing both total output and US
exports of that technology and related products.  Thus, the FTC alleged that the reduction of US
exports was a likely consequence of the anticompetitive reduction flowing from the merger.
The parties entered into a consent agreement settling the FTC's complaint.25  To maintain the
competition that the proposed joint venture othe rwise would have restrained, the consent order
required Shell to divest all of its US polypropylene assets, including its interest in the Shell/Carbide
joint venture and its US polypropylene catalyst business.  These assets included Shell’s
polypropylene-related intellectual property (patent rights, trade secrets and technology and know-how) and its rights under applicable patent licences.  The assets were divested to Union Carbide
Corporation, which would compete as a separate entity.
26
                                                     
23 Definition of a technology market consisting of licenced intellectual property is consistent with
section 3.2.1 of the Guidelines.
24The Foreign Trade Antitrust Improvements Act of 1982 also amended the FTC Act to codify its
jurisdictional reach over anticompetitive conduct that has a direct, substantial, and reasonably foreseeable effect
on export trade or commerce with foreign nations.
25Montedison S.p.A., 119 F.T.C. 676, 687-723 (1995).
26During the investigation, the FTC staff uncov ered, and the complaint challenged, the royalty
and profit-sharing agreement between Montedison and Mitsui Petrochemical Industries, Ltd., Montedison’s
partner for the licensing of both polypropylene technology  and catalyst technology.  The evidence indicated thatWT/WGTCP/W/101
Page 11
(b) Ciba Geigy/Sandoz
 Complex intellectual property issues arose in the FTC's challenge to the US$63 billion  merger
of Ciba-Geigy Limited ("Ciba") and Sandoz Lt d. ("Sandoz") into a new firm, Novartis.  The
Ciba/Sandoz merger raised serious competitive concerns in three distinct areas: gene therapy research
and development, corn herbicides, and flea control products.  Intellectual property issues figured most
prominently in the gene therapy market.27  At the time of the investigation, there were no
commercially available gene therapy products sold in the US, but certain gene therapy treatments
were in clinical trials with the introduction of the first products expected by 2000.  These treatments
offer substantial promise for the treatment of various cancers and other medical conditions.
 The FTC's principal concern was loss of research and development (R&D) competition, unlike
some other cases in which the loss of  R & D competition was an adjunct to the loss of competition in
current production and sales.  The FTC's analysis of the likely competitive effects from this merger
applied the concepts of innovation markets described in the Guidelines.  This case illustrates, in
particular, that the FTC intervenes in innovation market transactions under carefully limitedcircumstances - namely, where few firms possess the specialized assets or characteristics needed to
compete successfully in the market.
The FTC's concerns related both to (i) the broad market for gene therapy technology and the
research and development of gene therapies, including ex vivo and in vivo gene therapy, and (ii) the
research, development, manufacture, and sale of four distinct gene therapies: herpes simplex virus-
thymidine kinase ("HSV-tk"), for the treatment of cancer; HSV-tk, for the treatment of graft versus
host disease; the treatment of hemophilia; and chemoresistance.  As stated in the complaint, the
competitive concerns stemmed from the fact that each of the gene therapy markets is highly
concentrated and that Ciba/Chiron
28 and Sandoz were two of only a few entities capable of
commercially developing a broad range of gene th erapy products, and were the only two entities in
the case of the four specific gene products.
With respect to each of the specific gene therapy products, Ciba/Chiron and Sandoz were the
only two firms with products sufficiently developed to act as a competitive constraint on each other
and as a spur to faster development and commercialization.  With respect to the broad market for gene
therapy, the merging firms controlled crucial intell ectual property inputs for developing gene therapy
products;29 the FTC was concerned that the merger would create an unmatchable portfolio of
                                                                                                                                                                    
the purpose and effect of the agreement was to restrict price competition and to allocate markets for the licensing
of these technologies, including the US market.   The settlement required Montedison to forsake revenues under
the agreement from future US licences by Mitsui and would prohibit the company from entering into similar
illegal agreements.
27Gene therapy involves treating diseases or medical conditions by modifying genes and then
inserting the modified genes into a patient's cells.  Genes may be altered using one of two broad approaches: ex
vivo, outside the body, for subsequent administration into the patient; or  in vivo , inside the body, by gene therapy
products that are given directly to the patients.
28In the gene therapy portion of the case, the complaint names Chiron Corporation as a party
because Ciba owns approximately 46.5% of Chiron stock and Chiron, rather than Ciba, is the firm active in genetherapy research and development.
29 The critical intellectual property rights for gene therapy held by Ciba/Chiron and Sandoz
include a broad patent covering all ex vivo approaches used in gene therapy (the so-called "Anderson patent"), and
patents covering the use of certain cytokines, a protein that is necessary for many ex vivo  gene therapy
applications and that is used to increase the number of cells taken from a patient.  The parties also have vitalWT/WGTCP/W/101
Page 12
intellectual property assets needed for commercializing gene therapy products.  Both firms also
possessed the technological, manufacturing, clinical, and regulatory expertise and manufacturing
capability to develop commercially gene therapy products.
Absent relief, the merger of Ciba and Sandoz appeared very likely to reduce competition in the
research, development, manufacture, and sale of the specific gene therapy products.  Given the
absence of potential competitors, the merged firms'  incentives would change, such that the FTC was
concerned that the parties would have been likely to combine their research efforts or eliminate or
slow down one of their parallel research projects.  With respect to the broad market, the merged firm
would have less incentives than the parties would have as independent competitors to licence
intellectual property rights to or collaborate with other companies.  Ciba/Chiron and Sandoz had
substantial individual intellectual property portfolios prior to the merger, and they had the incentive toand did act as rivals in licensing needed intellectual property rights.  After the merger, the firm could
have acted as a monopolist in supplying those rights to other researchers, sharply diminishing the
incentive of such researchers to continue their research and development efforts.
The FTC reached a settlement agreement designed to restore the competition lost as a result of
the merger while maintaining incentives of the merg ed firm to compete vigorously in this important
innovation market.
30  To remedy the alleged competitive harms, the consent order provided for a set
of patent licences to allow other companies to co mpete with the merged firm and thereby restore the
competition otherwise lost due to the merger.31  In this case, a licensing remedy, rather than
divestiture of assets, was judged to be the preferred approach to restoring the competition lost by themerger.  This was because, given that access to certain key intellectual property rights held by the
merged firm may be crucial to successfully commercializing many potential gene therapy products,
rivals and other scientists confirmed that licensing would enable them to develop gene therapy
products and replace the competition lost due to the merger.  Further, an asset divestiture might have
created substantial disruption in the parties' research and development efforts.
 To ensure that the development program for specific gene therapy products would continue
quickly and with little interruption, the consent order requires a buyer "up front."  To satisfy this
condition, the parties proposed Rhone Poulenc Rorer as a specific licensee whom the FTC staff
investigated before recommending Commission approval of the consent agreement.  Were the consent
order to have provided only for licensing to Rhone Poulenc Rorer, it would not have restored
competition in the broader market for gene therapy research and development.  Certain features of theunderlying intellectual property limited the ways in which the licensees could in turn sublicence the
                                                                                                                                                                    
intellectual property rights in retroviral vectors, the only delivery vehicle for gene therapy that has been proven
safe and relatively effective.
30Ciba-Geigy Ltd.,  Docket No. C-3725 (consent order issued, March 24, 1997), reported in  5
Trade Reg. Rep. (CCH) ¶ 24,182.
31In the broad gene therapy market, Novartis and Chiron would be required to grant licences at
low royalties to the "Anderson ex vivo  patent" and patents for cytokines used in ex vivo gene therapy, to any entity
that requests such a licence.  (The Anderson patent covers the entire category of gene therapy treatment involvingcell modification that takes place outside the body, the most advanced area of commercial development.  Absentthis provision, these patents would be solely under the merged firm’s control.)  With respect to the four genetherapy products, Ciba, Sandoz, and Chiron would be required to grant a non-exclusive licence for their
worldwide HSV-tk patent rights to Rhone-Poulenc Rorer, Sandoz would be required either to convert its exclusive
licence for the Factor VII gene to a non-exclusive licence or to grant Rhone-Poulenc Rorer a sublicence to thoserights, and Ciba, Chiron, and Sandoz would be barred from acquiring exclusive rights in intellectual property andtechnology related to the use of specified genes in chemoresistance gene therapy.WT/WGTCP/W/101
Page 13
intellectual property to other researchers.  To restore full competition in the broader gene therapy
market,  it was necessary to require the unusual remedy of compulsory licensing.
(c) Summit Technology/VISX-
Patent pooling can offer a lawful and procompetitive means of resolving situations in which
firms possess patents that otherwise would block each other from bringing inventions to market.32
However, pooling arrangements that eliminate competition between firms and create a jointlyadministered monopoly are subject to antitrust challenge.  This was the issue in the FTC's
enforcement proceeding against Summit Technology and VISX, the only two manufacturers of lasers
approved by the US Food and Drug Administration for use in photo refractive keratectomy ("PRK")
to treat nearsightedness, farsightedness, and astigmatism.
According to the FTC complaint, Summit and VISX each had the intellectual property and
other assets to enter the market independently, but instead pooled most of their existing patents, as
well as certain future ones, related to PRK in a newly created partnership called Pillar Point Partners
("PPP").  The patent pool eliminated head-to-head competition between the two firms in two ways.First, the firms no longer competed on price.  The pool established a US$250 licensing fee payable to
the pool each time a laser produced by either firm was used to perform PRK.  The  firms then split the
proceeds from these licence fees according to a predetermined formula.  The effect of this per-
procedure fee was to fix and raise the price that doctors paid for PRK equipment and technology, and
to deprive consumers of the benefit of competition.  The other anticompetitive effect of the pool wasto eliminate competition in the licensing of the PRK technology.  The two firms agreed that neither
would licence its own technology without the approv al of the other.  The FTC's complaint followed
the analysis outlined in the Guidelines and alleged that the patent pool was not reasonably necessary
to achieve any procompetitive efficiencies.
The FTC also alleged that VISX fraudulently acquired a key patent from the United States
Patent & Trademark Office.  More specifically, the complaint charged that VISX intentionally
withheld from the Patent and Trademark Office highly material "prior art" that might prove that the
claimed invention was not novel, as required by th e patent laws.  The complaint further charged that
VISX settled a patent interference in violation of Patent and Trademark Office rules, assigning a
patent to someone who was not the true inventor in order to cover up fraud by the rightful patent
owner.  Under applicable precedent (see Part II A. of this paper), this conduct, if proven, wouldviolate Section 2 of the Sherman Act and Section 5 of the FTC Act.
In August 1998, the two firms settled all charges other than those against VISX relating to
patent fraud and alleged illegal settlement of patent interference claims;
33 VISX continues to litigate
those charges. The proposed consent orders would prohibit Summit and VISX from agreeing in any
way: (i) to fix the prices they charge for the use of their PRK lasers and patents, including the per-
procedure fee charged to doctors for using the PRK laser, and (ii) to restrict each other’s sale or
licensing of their PRK lasers and patents.  The proposed order requires the parties to dissolve the
partnership, which the companies have privately agreed to do.  It would also forbid the companies
from re-creating this arrangement.  The order requires the companies to licence to each other, on aroyalty-free and non-exclusive basis, the patents each contributed to PPP.  Further, the companies
must notify customers who had incurred an obligation to pay a per-procedure fee that they could, with
certain exceptions, stop using the lasers without penalty or continuing obligation.  Finally, they must
notify the FTC orders to any person who previously requested a licence to use any of the PPP patents.
                                                     
32See Section 5.5 of the Guidelines.
33Summit Technology, Inc., File No. 951-0029 (proposed consent order issued on August 21,
1998).WT/WGTCP/W/101
Page 14
This case illustrates that the great potential harm to competition from unwarranted pooling
arrangements.  Commission staff estimated that the suppression of competition for this new surgical
technique cost consumers some US$30 million in one year.  Absent this enforcement action, the
amount of consumer loss would have grown dramatically with the projected increase in demand forthis procedure.
III. Conclusion
Both the Guidelines and the discussion of the above cases illustrate how competition enforcers
can harmonize the goals of antitrust law and policy and intellectual property rights in a way that
promotes competition, innovation, a nd welfare.  Intellectual property rights and rules, both national
and multilateral, provide a critical regulatory fr amework for the growth of innovation, international
trade and economic development.  The net effect of applying sound antitrust policies to intellectual
property, and further applying these principles in a transparent and non-discriminatory manner to
domestic and foreign firms, is to further encourage both competition and trade, to the net benefit of
trading nations and their consumers.
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