Making Antitrust Fit High Tech

Uncle Sam's balancing act: Patent rights vs. competition

The 11th-hour deal to settle a federal antitrust suit before it went to trial gave both Intel Corp. and the Federal Trade Commission a chance to claim victory. Intel CEO Craig Barrett said: "We view this compromise agreement as a win-win for both the FTC and Intel."

But on closer scrutiny, the FTC seems to have come out ahead. While many details remain secret, the agency did force Intel to make a key concession: The chip giant will no longer withhold vital data about its products from customers with whom it has patent disputes. Because of Intel's dominance, the FTC alleged, this practice effectively gave Intel the means to force other companies to turn over their patented technology.

That may seem a narrow victory for the feds. But coming as it does when Microsoft appears in danger of losing its antitrust case to the Justice Dept., it shows that trustbusters are scoring points as they try to apply antitrust law to even the mightiest forces of the New Economy. Says Silicon Valley antitrust lawyer Rich Gray: "The government is getting more technically savvy. Any market leader had better be very careful that its antitrust i's are dotted and t's are crossed before the feds come calling."

ABUSE. In the Intel case, the feds have sketched a new approach to the high-tech industry's holy of holies: intellectual property--the patents, trade secrets, and other proprietary information that give a competitor the edge. While not a true legal precedent, the settlement establishes that intellectual-property rights do not trump all others. When it comes to halting anticompetitive behavior and stopping a monopolist from abusing its power, the FTC is saying, the government can set conditions on how a company can use its intellectual property.

That's a departure from Reagan-era policy, which frowned on any encroachment on intellectual-property rights. And some experts warn that if patent holders can't fully control their property, it might chill innovation. "People are more likely to make investments if they know they will be able to capture 100% of the benefits," says San Francisco lawyer Christopher B. Hockett.

Clinton Administration trustbusters insist they won't go too far. "You don't want to over-enforce the antitrust laws and diminish incentives to innovate," says FTC Chairman Robert Pitofsky. "But you don't want to under-enforce and give companies a pass. Striking the right balance is one of the most important matters that judges and law enforcers have faced in a generation."

Intellectual-property and antitrust laws also are colliding in Justice's courtroom battle against Microsoft Corp. A key Microsoft argument is that copyright law allows it to stop computer makers from changing its software. The government counters that dominant companies can't use copyright to harm competition--as Microsoft allegedly did when it told PC makers not to alter the icons for Internet browsers on Windows' opening screen. Intellectual property also looms large as trustbusters consider possible remedies in case Microsoft loses.

The early readings from high-tech entrepreneurs are that the government is taking the right approach. Grant Pierce, CEO of chip startup Sonics Inc., says the message from the FTC settlement is: "If you have an invention, and it's desirable to somebody else, then no matter how small you are, you have some strength." David Lin, CEO of chipmaker Rise Technology Corp., which makes Intel-compatible chips, agrees: "The playing field is more level. Customers [such as PC makers] won't be as afraid of offending the big guy."

In the proposed FTC deal, which the four-member commission must still approve, Intel retreated from its position that it could refuse to give some customers early information on next-generation chips. Now, the chip giant is promising it will not withhold this information unless it has "legitimate" business reasons to do so, such as when a customer refuses to pay for merchandise. Intel could still withhold data on products in the early "definitional" stage as it pleases.

Although the settlement doesn't have the force of law beyond Intel, the FTC's position "signals a fundamental change in our concept of property protection from the dominant view of the last 20 years," says Washington antitrust lawyer Douglas Rosenthal. During the Reagan and Bush Administrations, regulators argued that a patent's value lay in an owner's right to control its use.

WEDGES. Now, the Feds argue that companies with monopoly power must operate under tougher rules--because their power could stifle rival innovations. Regulators argue that dominant companies should not use their intellectual property as a weapon or an excuse to force deals from weaker partners. Trustbusters also worry that companies might try to use the monopoly power derived from patents as a wedge to enter adjacent markets. For instance, as part of the FTC's continuing probe of Intel, the agency is still assessing Intel's decision not to license the proprietary hardware interface used to connect Pentium II chips to other PC components. The FTC thinks that could be an abuse of monopoly power. Why? Without access to these specifications, other companies could not compete with Intel in chipsets, the companion chips that link a microprocessor to the computer.

The new approach to intellectual-property rights is getting backing from the courts. Last year, the Supreme Court declined to consider overturning a 1992 ruling that Eastman Kodak Co. could not refuse to sell patented parts to independent companies that repaired Kodak copiers. The court ruled against Kodak, citing as its intent: to prevent those companies from competing against Kodak in the service market.

Intellectual-property issues have become prominent in mergers, too. In 1997, the FTC allowed Ciba-Geigy and Sandoz to merge--provided that they licensed some patents to a third company, Rhone Poulenc Rorer. The FTC had argued that Ciba-Geigy and Sandoz were the only two companies close to bringing certain gene therapy products to market. The agency argued that preserving competition in "innovation markets" was the only way to ensure competition down the road.

As Federal trustbusters craft policy for the high-tech industry, they are looking beyond intellectual property, of course. One fertile area of inquiry has to do with so-called network effects. This involves situations in which an entire industry depends on the technology standards that one company sets. Trustbusters say that there's good reason to make sure that the standard-setters, whose behavior affects the ability of all companies in the network to compete, don't abuse their power.

Simply by pursuing its antitrust agenda, the Clinton Administration is influencing how high-tech companies behave. Intel has now licensed its interface technology to other companies to help defuse FTC scrutiny. Microsoft has allowed Dell Computer Corp. to delete the icon for Microsoft's browser from some PCs.

And, as if to prove the government's point, rivals of Microsoft and Intel are taking a free-love approach to intellectual property. On Mar. 31, Sun Microsystems Inc. will publish extensive details about its chips on a public Web site. Sun will negotiate a fee only if a company decides to actually license the technology. Mel Friedman, president of Sun's chip unit, says this will stimulate innovation by enabling inventors to experiment with the technology before committing funds to use it. And Linux, a freeware rival to Microsoft Windows NT, is spreading via free downloads. If that kind of behavior catches on, trustbusters could end up with time on their hands.

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