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Technical Innovation, Cooperation and Antitrust

October 1991

Recent indications suggest that the United States Justice Department and Federal Trade Commission may be awakening from the decade-long dormancy that characterized antitrust enforcement in the 1980s. It is only a slight overstatement to say that during that decade price fixing was prosecuted, and all other supposed abuses were virtually ignored. Now, the Justice Department and FTC reportedly are conducting investigations into the joint research and development activities of at least one high technology consortium, and perhaps others as well.

It would be a serious mistake for the federal enforcement agencies to return to the policies of the 1970s. We believe that Congress and President Bush should confront the possibility that many of this nation’s antitrust laws, supposedly designed to promote competition, may be preventing U.S. industry from competing in an environment of world competition that scarcely could have been imagined when these laws were enacted in the late 19th and early 20th centuries. In the form that they now exist, these laws too often are an obstacle to cooperative innovation, such as joint research and joint production ventures. Accordingly, we believe that the antitrust laws should be amended to eliminate the inhibitions which uncertain judicial interpretations and the fear of punitive judgments create, and to encourage U.S. industry to join in the benefits of pro-competitive industry cooperation.

Our views are based on an appreciation of the history of the antitrust laws and the evolution of the global marketplace. From about 1945-1970, the U.S. was the world leader across a broad range of industrial technologies. The hallmark of U.S. industry during this period was the nation’s industrial autonomy and the lack of coordination between government and industry.

However, in the late 1970s and early 1980s, as it became apparent that foreign competition and the worldwide market-place were maturing, this situation began to change. A few tentative “national” responses resulted, such as the formation of the Semiconductor Research Corporation and the Microelectronics and Computer Technology Corporation, in reaction to Japanese competition in the computer industry. Sematech was a more substantial response to Japan’s emerging dominance. In 1989, U.S. industry attempted its largest response to Japanese competition, forming U.S. Memories, a joint production venture intended to manufacture 4 megabyte DRAM chips. This venture, which was analogized to “putting water on a desert in the hopes of regenerating a forest,” failed to attract or hold sufficient membership, and dissolved soon after it was created.

The formation of domestic and international coalitions of diverse companies for more general competitive purposes has been much more dramatic. Since 1988, the creation of strategic alliances, research consortia and joint production ventures has burgeoned. Organizations such as 88open Consortium Ltd., CAD Framework Initiative and Object Management Group (all firm clients) have been formed to develop technical standards based on broad industry participation. In contrast, the Open Software Foundation (“OSF”) was founded to develop a new version of the UNIX operating system to counter the hegemony of a particular developer (AT&T) in an important market. OSF not only establishes technical standards, but acquires and distributes technology. Most recently, IBM, Apple Computer and Motorola have formed a much publicized joint venture designed to develop and commercialize compatible microprocessor, software and hardware products. Other industry groups, large and small, continue to be formed to accomplished similar goals.

Notwithstanding the recent increase in activity involving cooperative research and production, U.S. antitrust law remains an inhospitable environment for collaborative innovation when compared with the antitrust laws of Japan and Western Europe. The possibility that this new wave of cooperative innovation may be chilled is very real. The potential for this result derives from several features of existing antitrust law. First, a government or private challenge to any joint activity of this sort would be judged under the venerable Rule of Reason, a doctrine of antitrust law which requires the courts to determine a cooperative arrangement’s legality by weighing its pro-competitive benefits against its anti-competitive harms. Although there is a strong argument that cooperation among companies has an obvious pro-competitive effect by permitting firms to compete on an equal footing in the world market, the outcome of the test remains highly uncertain in any particular case. Numerous court decisions demonstrate that assessing pro-competitive benefits under the Rule of Reason is a process that lacks clear guidelines.

Second, the courts also consider market power to be a critical factor in judging the legality of cooperative arrangements. However, there is a substantial degree of uncertainty as to how much market power is too much. Third, the fact that successful private plaintiffs can recover treble damages and attorney’s fees is a powerful incentive for plaintiffs to litigate, and a disincentive for businesses to form cooperative arrangements and strategic alliances. Although Congress commendably tried to ease the threat of treble damages by enacting the National Cooperative Research Act (“NCRA”) in 1984, the NCRA only goes so far: the applicability of the Act is limited to research, and commercial activity “reasonably required” for research. The minimal number of federal registrations under the NCRA (the Act requires registration to invoke its protection) attest to its limited usefulness.

While individual U.S. firms used to be able to “go it alone,” they no longer can do so. The sources of technology and the technical assets needed to address a given market often lie outside the research of individual firms, and even the nation: industry increasingly must engage in collaborative efforts, with domestic and foreign partners, to achieve product development, integration and commercialization.

After decades in which the law has discouraged cooperative innovation, pro-cooperative laws are necessary to encourage joint R&D activities, much as affirmative action laws were deemed to be needed to reverse the harm that has been done by racial discrimination. Some of the most necessary changes are as follows:

First, Congress should establish a market-power “safe harbour,” shielding those strategic alliances from antitrust liability which involve less than a specific percentage of the relevant market (e.g., 25%). Concurrently, Congress should address the issue of market definition, to ensure that companies have clear guidelines under which to measure such market shares.

Second, legislation should be enacted to require that the pace of technical change, the beneficial results of strategic coordination and commercialization, and the competitive position of a given U.S. industry in the world marketplace be expressly taken into account by the courts when they apply the Rule of Reason in any given case.

Third, the punitive aspects of the laws — mandatory treble damages and attorney’s fees for plaintiffs in the event of liability — should be limited to the “hard core” antitrust offenses of price fixing, boycotts and market division.

These amendments would represent a positive step toward assisting U.S. industry to maintain its position of competitiveness in high technology. However, such antitrust reforms should be only part of an integrated governmental “competitiveness” agenda. While Washington need not go as far as the central planning and coordination of MITI (the infamous Japanese Ministry of International Trade and Industry), it should assume a far more activist leadership role for U.S. industry, providing incentives and encouragement for high tech cooperation.