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Antitrust Laws - To Promote Innovation and Competition


 

Table of Content

 

The robber barons dominated the American economy in the nineteenth century. A small group of people controlled more wealth and power than the entire country. For this reason, they would work together to keep the rest of the world away. As a result of their conspiracy, these robber barons deprived everyone else of a fair chance. Antitrust laws were enacted to prevent this from happening.


Since antitrust law's inception in the late 1800s, the relationship between patent law and antitrust law has perplexed legal minds. One promotes monopoly, while the other discourages it. Patent law grants the power to exclude competitors, although antitrust law punishes those who do so.


On the route to dominance, antitrust law identifies some prohibited types of behaviour. Monopolization or attempted monopolization is used to describe this type of behaviour. Patent law has long permitted patent holders to suppress their ideas, which means that customers will receive nothing for the duration of the patent. As a result, the commonly held belief that a patent holder is a monopolize, understates the degree of harm that we would tolerate from a patent holder. Understanding the various shades of meaning is essential for navigating the patent-antitrust junction. Antitrust enforcement agencies in the United States now acknowledge a much deeper and intertwined relationship between antitrust and intellectual property rights.


What Exactly Is Antitrust?

Antitrust laws are rules designed to promote competition by reducing a company's market power. This frequently entails ensuring that mergers and acquisitions do not concentrate market power, create monopolies, and dismantle monopolies. Antitrust laws also prohibit numerous businesses from collaborating or creating a cartel to stifle competition through activities like price-fixing. Antitrust law has established unique legal expertise due to the difficulty of determining what behaviours may hinder competition.


A Brief History of Antitrust

During the 1950s and 1960s, the pendulum swung back, and IPRs were subjected to strict antitrust investigation and were to be construed narrowly. The establishment of formalistic rules accompanied this, dubbed the "Nine No No's" by Antitrust Division officials in 1970, that barred certain licensing arrangements and other agreements involving IPRs regardless of their actual competition impact.


They included outright prohibitions on:

  • Mandatory package licensing (also known as patent pools)

  • Tying of unpatented supplies

  • Compulsory payment of royalties in amounts not reasonably related to sales of the patented product

  • Mandatory grant backs

  • Classical vertical distribution restraints such as post-sale restrictions on resale by purchasers of patented products, specifying the price licensees could charge upon resale of licensed products, and tie-outs.

Fortunately, the introduction of economic rigor into antitrust research in the late 1970s and 1980s abandoned almost all of these per se norms. Patent law gave intellectual property owners additional valuable rights during the same period. The work of the newly formed Federal Circuit reflected this trend. It adopted a more systematic investigation into the anticipated competitive impacts of specific behaviour or business arrangements.


The Present Scenario

Currently, three federal antitrust statutes are in effect.

The Federal Trade Commission and the United States Department of Justice are in charge of enforcing antitrust laws. The Sherman Act, the Federal Trade Commission Act, and the Clayton Act are the three acts in effect. The former is primarily concerned with areas of the economy where consumer spending is high. In contrast, the latter has exclusive antitrust jurisdiction over industries such as telephones, banking, railroads, and airlines and can impose criminal punishments.


The Sherman Act (15 U.S.C. § 1)

Outlaws "every contract, combination, or conspiracy in restraint of trade," and any "monopolization, attempted monopolization, or conspiracy or combination to monopolize."

The Sherman Act, the first antitrust law, was passed in 1890 and was described as a "complete charter of economic liberty aimed at safeguarding open and unrestricted competition as the rule of commerce." It prohibits all contracts, combinations, and conspiracies that unreasonably restrain interstate trade (Section 1 violations). The Sherman Act also prohibits any efforts to monopolize any part of interstate commerce (Section 2 violations).


The Sherman Act only prohibits unjustifiable trade restraints, not all restraints. Trade restrictions may be imposed by activities such as the establishment of a partnership, although they are not excessive. It carries criminal penalties of up to $100 million for corporations and $1 million for individuals, as well as a maximum sentence of 10 years in jail. If one of those amounts is more than $100 million, federal law allows the maximum fine to be enhanced to twice the amount the conspirators made from the illegal conduct or twice the money lost by the victims of the crime.


Sherman Act violations can be divided into two main categories:

Violations “per se”

"Per se" violations are actions that virtually always restrict trade and need little research into their impact on competition. The aim of the activity does not need to be shown when prosecuting a per se offence; simply the fact that the action occurred does. Price fixing, market division schemes, bid rigging, and group boycotting are examples of this type of infringement.


Violations of the “rule of reason”

Some business operations require a context analysis, often known as a "rule of reason" examination. If a company conduct is judged to be unreasonably restricting commerce, it is found to be in violation of the Sherman Act under a "rule of reason" examination. Monopolies, tying, exclusive deals, and price discrimination are examples of per se Sherman Act breaches.


The Federal Trade Commission Act, which established the FTC, and the Clayton Act were passed by Congress in 1914. These are the three fundamental federal antitrust statutes that still exist today, with minor changes.

Antitrust laws prohibit illegal mergers and commercial practices in general, leaving it up to the courts to determine which are unlawful based on the facts of each case. Courts have applied antitrust laws to evolving marketplaces from horse and buggy days to the digital age.


The Federal Trade Commission (FTC) Act (15 U.S.C §§ 41-58) bans "unfair methods of competition" and "unfair or deceptive acts or practices."

According to the Supreme Court, all violations of the Sherman Act also violate the FTC Act. Although the FTC does not have the authority to enforce the Sherman Act, it can pursue actions under the FTC Act against the same illegal activities under the Sherman Act. Other acts that impair competition but do not fit neatly into the types of conduct explicitly outlawed by the Sherman Act are also covered by the FTC Act. The FTC Act allows only the FTC to file lawsuits.


Activities of the Federal Trade Commission (FTC)

The FTC, in conjunction with the U.S. Department of Justice Antitrust Division, enforces federal antitrust laws in the United States. Its responsibilities include:

Prosecuting companies for federal antitrust law violations

Evaluating pre-merger notifications to determine the merger’s impact on competition

Developing policy for continued protection against anticompetitive activity

Educating consumers and businesses about current laws and regulations


The Clayton Act (15 U.S.C. § 12)

Congress passed the Clayton Act in 1914. As the FTC explains:

“With the Sherman Act in place, and trusts being broken up, business practices in America were changing. But some companies discovered merging as a way to control prices and production (instead of forming trusts, competitors united into a single company.

The Clayton Act helps protect American consumers by stopping mergers or acquisitions that are likely to stifle competition.”


The Clayton Act targets tactics like mergers and interlocking directorates that the Sherman Act does not expressly prohibit (the same person making business decisions for competing companies). The Clayton Act, (Section 7), forbids mergers and acquisitions that "may materially decrease competition or tend to create a monopoly."


The Clayton Act, amended by the Robinson-Patman Act of 1936, prohibits certain discriminatory rates, services, and allowances in merchant dealings. The Hart-Scott-Rodino Antitrust Improvements Act of 1976 revised the Clayton Act again, requiring corporations seeking big mergers or acquisitions to notify the government in advance. When private parties are damaged by conduct that violates either the Sherman or Clayton Acts, the Clayton Act allows them to sue for triple damages and get a court order barring the anticompetitive to practise in the future.


Prohibited Actions under the Clayton Act

The Clayton Act adds to the Sherman Act's prohibitions by outlawing practises that are likely to stifle competition. By allowing businesses to run more effectively, many mergers enhance competition and customers. However, some mergers alter market dynamics, resulting in higher costs, fewer or lower-quality goods or services, and less innovation.


The Clayton Act forbids mergers and acquisitions that have the potential to "significantly decrease competition or tend to create a monopoly." The main concern is whether the planned combination will establish or strengthen market power, or facilitate its exercise. Proposed mergers between direct competitors raise the most antitrust concerns.


The Clayton Act also prohibits anti-competitive conduct which may take place through:

  • Exclusive Dealings: requiring a buyer or seller to do buy or sell all or most of a certain product from a single supplier such that competitors are unable to compete in the market.

  • Price Discrimination: selling similar goods to buyers at different prices.

  • Tying & Bundling: selling a product or service on the condition that the buyer agrees to also buy a different product or service.

These Acts serve three major functions. First, Section 1 of the Sherman Act forbids price fixing and cartel activity, as well as other collusive actions that restrict commerce unreasonably. Second, Section 7 of the Clayton Act prohibits organizations from merging or acquiring each other in a way that reduces competition or creates a monopoly. Third, monopolization is prohibited under Section 2 of the Sherman Act.


Antitrust Guidelines for Intellectual Property Licensing

The FTC and DOJ jointly issued the Antitrust Guidelines for the Licensing of Intellectual Property ("IP Guidelines") in 1995, which explain the agencies' current complementary approach to applying antitrust principles in matters involving intellectual property rights.

In collaboration with the intellectual property bar, the IP Guidelines were created.


Three essential elements underpin the IP Guidelines' integrated approach. To begin, antitrust regulators in the United States apply the same broad antitrust rules to conduct involving intellectual property as they do to conduct involving any other type of property. However, the agencies acknowledge that intellectual property has crucial distinguishing characteristics, such as the ease with which it might be misappropriated. Such distinctions are taken into account in antitrust investigations concerning intellectual property. Nonetheless, the antitrust principles that govern are the same.

The second criterion is that the agencies do not assume that intellectual property provides market power in the antitrust context.


The third principle is that the agencies often consider intellectual property licensing procompetitive. This is significant because it shows a refinement of antitrust enforcement theory from prior decades. The authorities understand that intellectual property licensing allows businesses to integrate complementary production elements. Licensing can also aid in the integration of additional intellectual property. Licensing may help consumers by increasing access to intellectual property and reducing the time and cost of bringing new products to market.

The IP Guidelines apply the concepts of specific licensing procedures, such as cross-licensing, pooling, or acquisition of intellectual property, and outline fundamental principles. These examples can evaluate the analysis and see if it applies to other practices.


Case Study: NVIDIA+ARM Merger

The Federal Trade Commission filed a lawsuit to stop Nvidia Corp. from buying Arm Ltd., a chip design company based in the United Kingdom, for $40 billion.


Nvidia Corp., Arm Ltd., and Softbank Group Corp. are named in the lawsuit. The administrative complaint was issued by a 4-0 vote of the Commission. On August 9, 2022, the administrative trial is set to commence. The acquisition was also met with opposition in China, where authorities were more likely to oppose the deal if it had received clearance elsewhere.


Background

Arm, which is owned by Softbank Group Corp. of Tokyo, does not manufacture or sell finished computer chips or devices. It develops and licenses microprocessor designs and architectures, referred to in the complaint as Arm Processor Technological, to other technology businesses, including Nvidia. These firms, in turn, rely on Arm Processor Technology to create computer processors that power everything from smartphones to tablets to driver-assistance systems to enormous datacenter computers.

California-based Nvidia is one of the world's largest and most valuable computing companies. Nvidia is a company that creates and sells computer chips and devices. Both Nvidia and its major competitors rely on Arm's technology to produce their own competing products in these areas.


The lawsuit claimed that the acquisition will stifle competition by giving Nvidia access to competitively sensitive information from Arm's licensees, some of whom are Nvidia's competitors, and that it will reduce Arm's incentive to pursue innovations that are perceived to be in competition with Nvidia's business interests.


Insights

  • Arm's licensees now routinely exchange competitively sensitive material with Arm, including Nvidia's competitors. According to the complaint, licensees rely on Arm for assistance in creating, designing, testing, debugging, troubleshooting, maintaining, and upgrading their products. Because Arm is a neutral partner, not a competitor chipmaker, licensees share competitively sensitive information with Arm. According to the complaint, the acquisition is likely to result in a significant loss of trust in Arm and its ecosystem.

  • The acquisition is also likely to hurt innovation competitiveness by preventing Arm from pursuing breakthroughs that it would have undertaken if it weren't for Nvidia's ambitions getting in the way. If Nvidia determines that new features or innovations will harm Nvidia, the merged company will have less incentive to create or enable them, according to the complaint.

  • In partnership with Arm, SBG also announced that Arm public offering will commence in the fiscal year ending March 31, 2023. Arm's technology and intellectual property, according to SBG, will continue to be at the forefront of mobile computing and artificial intelligence development. In partnership with Arm, SBG also announced that it will commence preparations for an Arm public offering in the fiscal year ending March 31, 2023. Arm's technology and intellectual property, according to SBG, will continue to be at the forefront of mobile computing and artificial intelligence development.

Another similar case was in the news when Qualcomm dropped its $44 billion, two-year pursuit of Dutch chipmaker NXP in 2018 after failing to gain approval in China, a victim of a trade war between Beijing and Washington.


Conclusion

Intellectual Property and innovation have become increasingly important in our economy and, as a result, in antitrust enforcement. Several aspects of intellectual property law are being changed or expanded to adapt to new technologies. Authorities, for example, are exploring measures to strengthen intellectual property protection for factual databases and other information collections. States also strive to establish a standardized mechanism for enforcing intellectual property license agreements.


Because antitrust laws and patent rights are mutually beneficial, both promote innovation and competition. However, because both patent rights and antitrust laws utilize similar terminology, it can be challenging to understand the concepts underpinning both areas of law when discussing the competition. Even though the terms are identical, their meaning is not, which confuses. Conflict emerges mainly due to this, and the laws are more generic than specific.


References-

https://www.ftc.gov/public-statements/1999/05/antitrust-and-intellectual-property-law-adversaries-partners

https://www.justice.gov/atr/speech/antitrust-and-intellectual-property

https://www.mondaq.com/unitedstates/patent/750422/ip-antitrust-know-how-2018

https://www.investopedia.com/ask/answers/09/antitrust-law.asp#:~:text=3%EF%BB%BF-,What%20Are%20Antitrust%20Laws%3F,in%20an%20open%2Dmarket%20economy.

https://www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws/antitrust-laws

https://www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws

https://web.stanford.edu/dept/law/ipsc/pdf/feldman-robin.pdf

https://blog.ipleaders.in/patent-rights-antitrust-laws-usa/

https://www.nowlandlaw.com/2019/03/23/famous-antitrust-cases-of-the-last-century/

https://aon.mediaroom.com/2021-07-26-Aon-and-Willis-Towers-Watson-Mutually-Agree-to-Terminate-Combination-Agreement https://www.ftc.gov/news-events/press-releases/2021/12/ftc-sues-block-40-billion-semiconductor-chip-merger

https://www.nytimes.com/2021/12/02/technology/ftc-nvidia-arm-deal.html

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