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Analysis of the Agreement Containing Consent Order to Aid Public Comment

In the Matter of Flow International Corp.

File No. 081-0079

I. Introduction

The Federal Trade Commission (“Commission”) has accepted, subject to final approval,

an Agreement Containing Consent Order (“Consent Agreement”) from Flow International

Corporation (“Flow”). The proposed Consent Agreement is designed to remedy the likely

anticompetitive effects arising from Flow’s proposed acquisition of OMAX Corporation

(“OMAX”). Under the terms of the Consent Agreement, Flow will grant a royalty-free license

to two Omax patents relating to waterjet controllers to any firm that seeks a license.

II. Background

Flow and OMAX are the leading manufacturers of waterjet cutting systems in the United

States. Waterjet cutting systems use high pressure water and garnet to cut a wide variety of

materials from steel to stone. The two companies have developed PC-based controllers that

automatically compensate for the unique characteristics of how the waterjet cuts, such as taper

(the waterjet expands after leaving the nozzle, forming a cone shape) and lag (the faster the

cutting head moves, the more the waterjet will trail behind the cut). The controllers and related

technology differentiate these two firms from other competitors in the marketplace. However,

the controllers and related technology are also the subject of ongoing litigation between the two

companies. In 2004, OMAX filed suit alleging that Flow’s products infringed its patents

pertaining to controllers. Flow counterclaimed alleging that OMAX infringed its patents

pertaining to controllers. 

Flow, a publicly traded company headquartered in Kent, Washington, is the leading

manufacturer of waterjet cutting systems in the United States market. OMAX is a privately-held

company headquartered in Kent, Washington. OMAX owns two very broad U.S. patents

covering its controller. OMAX’s controller is a significant factor behind its position as the

second leading supplier of waterjet cutting systems in the United States.

On December 5, 2007, Flow signed an exclusive option agreement to negotiate the

acquisition of OMAX. Under the agreement, Flow and OMAX will work to negotiate a

definitive agreement for Flow to acquire OMAX. Upon closing, Flow would pay approximately

$109 million in cash and stock with the potential for a contingent earn-out in two years of up to

$26 million. The closing will also settle the long-running and expensive patent litigation

between Flow and OMAX. 
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III. The Draft Complaint

The draft complaint alleges that the transaction may substantially lessen competition in

the market for the development, manufacture, marketing, and sale of waterjet cutting systems. A 

waterjet cutting system contains four main parts: (1) pump, (2) cutting head, (3) cutting table,

and (4) controller. 

Waterjet cutting systems are used by a wide variety of industrial machine tool customers. 

These customers range from job shops, which produce a wide variety of short-run parts, and use

waterjet cutting systems to complement their traditional milling machines, lasers and flame

cutters, to aerospace shops that use waterjet cutting systems because they cut without damaging

materials that are affected by heat, such as titanium and aluminum. Industrial machine tool

customers, as well as others, can increase cutting speed and minimize set-up time by using a

waterjet cutting system instead of an alternative cutting technology. Cutting speed is affected by

pump pressure, the number of cutting heads used on the system, and the sophistication of the

controller. Controllers are often the least expensive means of improving cutting speed and have

the further virtue of reducing set-up time if they are easily programmable. To compensate for

the unique characteristics of how the waterjet cuts, controllers can improve the quality of the cut

by, among other things, automatically adjusting the speed of the cut.

Both Flow and OMAX produce waterjet cutting systems that feature relatively

inexpensive yet sophisticated PC-based controllers that compensate for the unique characteristics

of how the waterjet cuts. These controllers make Flow and OMAX each other’s closest

competitors because only they manufacture waterjet cutting systems with the most advanced and

efficient controllers.

The relevant geographic market within which to analyze the likely effects of the

proposed transaction is the United States. The draft complaint further alleges that new entry

would not prevent or counteract the anticompetitive effects of this acquisition. New entrants and

existing competitors are deterred by the risk of violating the OMAX patents from developing

and producing competitive waterjet cutting systems. Developing an efficient controller that

clearly works-around the potential reach of OMAX’s patents would likely be an expensive and 

time-consuming process, with no guarantee of success. 

The draft complaint also alleges that Flow’s acquisition of OMAX, if consummated, may

substantially lessen competition in the market for the development, manufacture, marketing, and

sale of waterjet cutting systems in the United States in violation of Section 7 of the Clayton Act,

as amended, 15 U.S.C. § 18, and Section 5 of the Federal Trade Commission Act, as amended,

15 U.S.C. § 45, by eliminating direct competition between Flow and OMAX and increasing the

likelihood that Flow will unilaterally exercise market power.
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IV. The Terms of the Consent Agreement

The proposed Consent Agreement will remedy the Commission’s competitive concerns

about the proposed acquisition. Under the terms of the proposed consent order, Flow must grant

a royalty-free license to each competitor who seeks to license the two broad OMAX patents

relating to controllers that Flow will acquire with its acquisition of OMAX. 

Currently Flow and OMAX are each other’s closest competitor because they each offer

an efficient PC-based controller that compensates for the unique characteristics of how a waterjet

cuts. OMAX’s two patents make the development of such a controller substantially more

expensive and risky. Requiring Flow to grant a royalty-free license to these patents will ensure

that other firms are able to replace the competition that would otherwise have been eliminated by

the proposed acquisition. 

While Flow has two patents relating to controllers, its patents are significantly narrower

in scope than the OMAX patents and, as a result, do not prevent current or future competitors

from offering a viable waterjet cutting system. Current and future competitors will not need

licenses to these narrow patents in order to compete effectively in this market. Other aspects of

Flow’s and OMAX’s business, such as customer lists, brand names, key employees, or the other

parts of waterjet cutting systems, are easily duplicated by current competitors or future entrants. 

Consequently, to restore the competition lost by Flow’s acquisition of OMAX, the proposed

consent order eliminates the entry barrier faced by current waterjet cutting system competitors

and future entrants by giving them a royalty-free license to the OMAX patents.

V. Opportunity for Public Comment

The proposed consent order has been placed on the public record for 30 days for receipt

of comments by interested persons. Comments received during this period will become part of

the public record. After 30 days, the Commission will again review the proposed consent order

and the comments received and will decide whether it should withdraw from the agreement or

make the proposed consent order final.

By accepting the proposed consent order subject to final approval, the Commission

anticipates that the competitive problems alleged in the complaint will be resolved. The purpose

of this analysis is to invite public comment on the proposed consent order, in order to aid the

Commission in its determination of whether to make the proposed consent order final. This

analysis is not intended to constitute an official interpretation of the proposed consent order nor

is it intended to modify the terms of the proposed consent order in any way.