11998 Lawrence B. Landman.

Fellow, Roskilde University, Denmark. J.D. 1984, Boalt Hall School of Law, UC Berkeley; B.A. 1980, SUNY, Stony Brook; M.B.A. 1990, Columbia Business School. I would like to thank Mary Lou Steptoe of Skadden, Arps, Slate, Meagher & Flom for her valuable insights. Any errors, however, remain my own.

2. See, e.g., Christine A. Varney, Antitrust and the Drive to Innovate: Innovation Markets in Merger Review Analysis, 9 ANTITRUST 16, 17 n.7 (1995).

3. National Cooperative Research and Production Act of 1993, 15 U.S.C. 4301-05. (1993) (formerly National Cooperative Research and Production Act, 15 U.S.C. 4301-05 (1984)).

4. Id. 4302.

5. See infra parts IV-V.

6. Id.

7. 15 U.S.C. 4302 (1993).

8. S. REP. NO. 98-427 202 (1984).

9 Id. 202.

10. See Department of Justice and Federal Trade Commission Antitrust Guidelines for the Licensing of Intellectual Property, 4 Trade Reg. Rep. (CCH) 13, 132 (1995) [hereinafter I.P. Guidelines].

11. Richard J. Gilbert & Steven C. Sunshine, Incorporating Dynamic Efficiency Concerns in Merger Analysis: The Use of Innovation Markets, 63 ANTITRUST L.J. 569 (1995). When the authors wrote this article they were Deputy Assistant Attorney Generals for, respectively, Economics and Mergers. Further, Dr. Gilbert headed the task force that drafted the I.P. Guidelines, and Mr. Sunshine participated actively in this effort. The authors, therefore, to some extent, wrote on behalf of the DOJ. See Robert J. Hoerner, Innovation Markets: New Wine in Old Bottles?, 64 ANTITRUST L.J. 49, 52 n. 14 (1995).

12. Thomas N. Dahdouh & James F. Mongoven, The Shape of Things to Come: Innovation Market Analysis in Merger Cases, 64 ANTITRUST L.J. 405 (1996). When they wrote this article, the authors were staff attorneys with the Office of Policy and Evaluation of the Bureau of Competition of the FTC. The authors therefore, to some extent, wrote on behalf of the FTC.

13. I.P. Guidelines, 20, 738.

14. See 1992 Department of Justice and Federal Trade Commission Horizontal Merger Guidelines, 4 Trade Reg. Rep. (CCH) 13,104 [hereinafter Merger Guidelines].

15. Id.

16. I.P. Guidelines, supra note 9, 3.2.3.

17. Id.

18. Id.

19. See Gilbert & Sunshine, supra note 10, at 594.

20. Id. at 595.

21. A "future goods market" includes a market in which firms sell the same goods at a lower price.

22. See Gilbert & Sunshine, supra note 10, at 595-96.

23. Id. at 595.

24. See Merger Guidelines, supra note 13, 1.3.

25. See Gilbert & Sunshine, supra note 10, at 595.

26. Id.

27. See generally Merger Guidelines, supra note 13.

28. Id. 1.3.

29. Id. 3.2.

30. See Gilbert & Sunshine, supra note 10, at 595.

31. Id.

32. The Merger Guidelines require the agencies to analyze only the barriers to entry to a market. In the usual case, therefore, the agencies do not identify potential competitors. See Merger Guidelines, supra note 13, 3.1.

33. See Gilbert & Sunshine, supra note 10, at 595.

34. Id. at 596.

35. Id. In this passage, therefore, the authors acknowledge that the barriers to entry to an innovation market are so low that the number of potential competitors of the innovation market will always be infinite. If it is impossible to predict the sources of innovation, then it is impossible to predict which firms will successfully innovate. And if it is impossible to predict which firms will successfully innovate, then it certainly is impossible to predict which firms will even try to innovate.

Thus, even if Gilbert and Sunshine did not require the agencies to identify potential competitors, the agencies still could not use the authors' methodology. Even if, consistent with the 1992 Merger Guidelines, the authors only asked the agencies to identify the likelihood of entry into the innovation market, the agencies still could not find innovation markets. Because the agencies will never be able to say which firms, or even how many firms, may even try to innovate, the agencies will never be able to say that entry into the innovation market is so unlikely that they can conclude that the market is not sufficiently competitive. In other words, because an infinite number of firms may try to develop a given innovation, an innovation market will always have an infinite number of potential competitors.

36. See infra notes 55-59 and accompanying text.

37. Sensormatic Elecs. Corp., 60 Fed. Reg. 5428 (F.T.C. 1995). For discussion of the case, see infra text accompanying notes 104-119.

38. Ciba Geigy Ltd., FTC File No. 961-0055 (Dec. 5, 1996). For discussion of the case, see infra text accompanying notes 120-127.

39. Upjohn Co., 60 Fed. Reg. 56,153 (F.T.C. 1995) (complaint at " 5").

40. See Federal Food, Drug and Cosmetic Act, 21 U.S.C. 321.

41. Gilbert & Sunshine, supra note 10, at 596.

42. See infra text accompanying note 121.

43. See Gilbert & Sunshine, supra note 10, at 596-97 (footnotes omitted and emphasis added).

44. See Richard T. Rapp, The Misapplication of the Innovation Market Approach to Merger Analysis, 64 ANTITRUST L.J. 20, 33-36 (1995).

45. As another example, both the I.P. Guidelines and Gilbert and Sunshine say that they fear that an innovation market monopolist will retard the pace of research and development. See I.P. Guidelines, supra note 9, 3.2.3; Gilbert & Sunshine, supra note 10, at 590-93.

46. See Gilbert & Sunshine, supra note 10, at 588.

47. I.P. Guidelines, supra note 9, 3.2.3.

48. See id.

49. Id.

50. See id.

51. See Rapp, supra note 43, at 33-36.

52. See I.P. Guidelines, supra note 9, 3.2.3.

53. Id.

54. See infra notes 130-145 and accompanying text.

55. See Gilbert & Sunshine, supra note 10, at 570.

56. See infra notes 130-145 and accompanying text; see also Varney, supra note 1.

57. See Gilbert & Sunshine, supra note 10, at 585-86.

58. Id. at 591-92.

59. Id. at 591.

60. See United States v. Automobile Manufacturers Assoc., 307 F. Supp. 617 (C.D. Cal. 1969); McDonald v. Johnson & Johnson, 537 F. Supp. 1282 (D. Minn. 1982).

61. See Gilbert & Sunshine, supra note 10, at 597.

62. Department of Justice and Federal Trade Commission, Revision To Horizontal Merger Guidelines (Apr. 8, 1997) (available in 1997 WL 166999 (D.O.J.)).

63. Federal Trade Commission, Hearings on Global and Innovation-Based Competition (Dec. 13,1995) <http://www.ftc.gov/speeches/other/speech.htm>.

64. See ANTICIPATING THE 21ST CENTURY: COMPETITION POLICY IN THE NEW HIGH-TECH, GLOBAL MARKETPLACE, A REPORT BY THE FEDERAL TRADE COMMISSION STAFF (1996).

65. See Gilbert & Sunshine, supra note 10, at 581-86.

66. See id at 581-82.

67. See Ciba Geigy Ltd., FTC File No. 961-0055 (Dec. 5, 1996); Sensormatic Elecs. Corp., 60 Fed. Reg. 5428 (F.T.C. 1995).

68. See Sensormatic Elecs. Corp., 60 Fed. Reg. 5428 (F.T.C. 1995).

69. See Lawrence B. Landman, Innovation Markets in Europe, 19 EUR. COMPETITION L. REV. 21 (1998).

70. Compare John Temple Lang, European Community Antitrust Law: Innovation Markets and High Technology Industries, 20 FORDHAM INT. L. REV. 717 (1997) (the European Commission can and has analyzed incentives to innovate), with Lawrence B. Landman, The Economics of Future Goods Markets, 21 WORLD COMPETITION L. & ECON. REV. 63 (1998) (like the Americans, the Europeans too cannot analyze a firm's incentives to innovate in the manner innovation market analysis requires).

71. United States v. General Motors Corp., No. 93-530 (D. Del. filed Nov. 16, 1993).

72. See id.

73. See id. at 2. Paragraph 42 of the complaint first assigns to each firm the same share of the alleged innovation market that it has of the related goods market. The paragraph then assigns GM over 75% of the innovation market, and ZF 14% of this market.

74. See Dahdouh & Mongoven, supra note 11, at 431. These authors and the complaint refer to the market for medium and heavy duty automatic transmissions. For the sake of simplicity, this article will use the term "heavy duty" to mean both "medium and heavy duty."

75. See United States v. General Motors Corp., No. 93-530 (D. Del. filed Nov. 16, 1993) (complaint at 19-34).

76. See Rapp, supra note 43, at 19-20, 23.

77. See Richard J. Gilbert, Remarks Before the FTC Hearings on Global and Innovation-based Competitions, Washington, D.C. (October 25, 1995) (available at <http://www.ftc.gov/opp/global/GC102595.htm>).

78. The European Commission's threat to block Boeing Corp.'s merger with McDonnell Douglas strained relations between the European Union and the United States. At one point the United States seemed on the verge of a trade war with Europe. Vice President Al Gore, for example, threatened to "take whatever action is appropriate" to stop the Commission from blocking the merger. See EU/US Clash Over Airline Merger, GLOBAL COMPETITION REVIEW, June/July 1997, at 5. All this occurred in a case where the European Commission clearly had jurisdiction. One shudders when contemplating the White House's reaction if the Europeans had found that Boeing and McDonnell Douglas competed in a global innovation market, and on this basis blocked the transaction.

79. Dahdouh & Mongoven, supra note 11, at 431.

80. Id.

81. United States v. General Motors Corp., No. 93-530 (D. Del. filed Nov. 16, 1993) (complaint at 42).

82. See supra text accompanying notes 31-32.

83. See supra text accompanying notes 42-62.

84. This period could be longer than the two year period the Merger Guidelines use, and which Gilbert and Sunshine say the agencies should adopt. In Upjohn the FTC anticipated events seven years into the future. See supra text accompanying note 38.

85. See Subway to the Sky: How a Reserved Canadian Turned a Family Snow-mobile Firm into the Nearest Challenger to Boeing and Airbus, THE ECONOMIST, August 23, 1997, at 52; see also Meherdad A. Baghai, et al, The Growth Philosophy of Bombardier, 2 MCKINSEY QUARTERLY 4 (1997).

86. United States v. Flow Int'l Corp., No. 94-71320 (E.D. Mich. filed Apr. 4, 1994).

87. Id. (complaint, at 1).

88. Montedison S.p.A., 60 Fed. Reg. 5,414 (F.T.C. 1995).

89. Shell-Montecatini, Case No. IV/M. 269 (June 3, 1994), O.J. L.332/48 (Dec. 22, 1994).

90. The Commission probably expected the FTC to issue this order. The Commission and FTC had discussed possible remedies in this case, and, at the parties' request, the European Commission reserved the right to change its decision should the FTC issue an order, as it did in fact do, making the Commission's order superfluous. See Robert Pitofsky, International Antitrust: An FTC Perspective, TWENTY-SECOND ANNUAL PROCEEDINGS OF THE FORDHAM CORPORATE LAW INSTITUTE 1, 7-8 (B. Hawk ed., 1996); see also Shell-Montecatini, supra note 88, at point 121.

In fact, in light of the FTC's decision the Commission did allow Montedison to bring its separate polypropylene business back into its joint venture with Shell. Shell-Montecatini, O.J. No. L.294 (Nov. 19, 1996).

91. Dahdouh & Mongoven, supra note 11, at 433.

92. See supra text accompanying note 88.

93. For the definition of an opportunistic market, see supra text accompanying note 40.

94. Wright Medical Technology, Inc., 60 Fed. Reg. 460 (F.T.C. 1995).

95. See Rapp, supra note 43, at note 85.

96. See Commissioner, Federal Trade Commission, Mary L. Azcuenaga, Intellectual Property and Antitrust: A Perspective from the FTC, Speech before the American Law Insitute-American Bar Association, San Francisco, California (1995) (available at <http://www.ftc.gov/speeches/azcuenaga/ali-aba.htm>).

97. Boston Scientific Corp., 60 Fed. Reg. 12,948 (F.T.C. 1995).

98. Glaxo plc., 60 Fed Reg. 16,139 (F.T.C. 1995).

99. Upjohn Co., 60 Fed. Reg. 56,153 (F.T.C. 1995).

100. Case No. IV/M. 631 (Sept. 28, 1995).

101. The FTC said that, worldwide, only "a very small number" of firms were engaged in research similar to that of the merging firms. The FTC also said that because the information was highly confidential it could not disclose how small this number was. Presumably the FTC discovered the same three other research programs the European Commission discovered, and, therefore, unlike the Commission, the FTC considered three to be a very small number. This would be consistent with the I.P. Guidelines' statement that the agencies will probably challenge a transaction unless at least 4 competitors were doing similar R&D. See Analysis of Proposed Consent Order to Aid Public Comment, 60 Fed. Reg. 56,159 (F.T.C. 1995); I.P. Guidelines, supra note 9, at 3.2.3 ex. 4; see also supra text accompanying note 97 (where, in Glaxo-Wellcome, the European Commission implied that it would find a market with only two other competitors sufficiently competitive).

102. See supra text accompanying note 97.

103. American Home Prods. Corp., 59 Fed. Reg. 60,807 (F.T.C. 1995).

104. The European Commission also reviewed this transaction. It did not, however, discuss the market for vaccines and Rotavirus infections in humans. It therefore, apparently, did not see any antitrust problem in this market. See Case No. IV/M. 500 (Sept. 19, 1994).

105. Sensormatic Elecs. Corp., 60 Fed. Reg. 5428 (F.T.C. 1995).

106. See id. (complaint, at 16). This complaint alleges that the transaction would lower only Knogo's incentive to innovate. The complaint does not allege that the transaction would lower Sensormatic's incentive to innovate. Apparently the FTC felt that, because the cross-license provision forced Knogo to share the fruits of its R&D efforts with Sensormatic, the provision lowered Knogo's incentive to invest in the R&D in the first place. This reasoning is plausible, but should apply equally to Sensormatic, which would have to share the fruits of its R&D efforts with Knogo. While this limited allegation, which related only to Knogo, may have been sufficient to allow the FTC to consider how the cross-license agreement effected the transaction, this article will nevertheless assume that the logic of the allegation applies equally well to both firms. The article will therefore assume that the FTC feared that the agreement would lower each firm's incentive to innovate.

107. Id. (complaint, at 14).

108. Dahdouh & Mongoven, supra note 11, at 424.

109. Sensormatic Elecs. Corp., 60 Fed. Reg. 5428 (F.T.C. 1995) (complaint, at 16).

110. See Dahdouh & Mongoven, supra note 11, at 426-27.

111. See I.P. Guidelines, supra note 9, 5.4.

112. Id. 5.5.

113. See Dahdouh & Mongoven, supra note 11, at 424.

114. See James J. Anton and Dennis A. Yao, Standard-Setting Consortia, Antitrust, and High-Technology Industries, 64 ANTITRUST L.J. 247 (1995).

115. Dahdouh & Mongoven, supra note 11, at 426.

116. See also supra text accompanying note 59.

117. See Gilbert & Sunshine, supra note 10, at 597.

118. See supra text accompanying note 59.

119. See, e.g., Gilbert & Sunshine, supra note 10, at 594-95.

120. Statement of Commissioner Mary L. Azcuenaga, concurring in part and dissenting in part, 60 Fed. Reg. 5428, 5431 (F.T.C. 1995).

121. Ciba Geigy Ltd., FTC File No. 961-0055 (Dec. 5, 1996).

122. Id. (complaint at part IV).

123. One could make this point about other cases as well. In Upjohn-Pharmacia, for example the FTC also alleged that the transaction would harm the market for "research, development, manufacture and sale. Upjohn Co., FTC 60 Fed. Reg. 56, 153 (F.T.C. 1995). In this case, however, the FTC alleged that the firms competed in a broad gene therapy market. It is therefore particularly important to note that in this case that the FTC alleged, not only that the firms competed in the broad gene therapy market, but also that they competed in the four specific future goods markets.

124. The first paragraph of the relevant part of the complaint says that: "One relevant line of commerce in which to analyze the effects of the proposed merger is gene therapy technology and research and development of gene therapies, including ex vivo and in vivo gene therapy. Specific gene therapy products, in which the effects of the proposed merger may be analyzed include the research and development, manufacture and sale of: [ the four specific product markets] . " Ciba Geigy Ltd., FTC File No. 961-0055 (Dec. 5, 1996) (complaint at part IV). Thus the complaint does not clearly state that the general research and development market is a market separate and distinct from the four specific product markets.

125. Id. at part V.

126. See I.P. Guidelines, supra note 9, 5.4.

127. When the FTC protected competition in these future markets, it simply did what it always does. It acted to ensure that the market was competitive, and would therefore, hopefully, drive the relevant firms to innovate. See Landman, supra note 69.

128. See Ciba Geigy/Sandoz, Case No. IV/M.737 (July 17, 1996), O.J.L.201 (July 29, 1997).

129. Id. at point 106.

130. Lockheed Martin Corp., 61 Fed. Reg. 18732 (F.T.C. 1996).

131. The Boeing Company, 61 Fed. Reg. 66038 (F.T.C. 1996).

132. FEDERAL TRADE COMMISSION STAFF, supra note 63.

133. Id. at 34 (citations omitted).

134. Id. at 34, n.119.

135. Accord Dennis A. Yao and Susan S. DeSanti, Innovation Issues Under the 1992 Merger Guidelines, 61 ANTITRUST L.J. 505, 510-11 (1993).

136. Commissioner, Federal Trade Commission, Mary L. Azcuenaga, Speech before the American Law Institute-American Bar Association, Ritz-Carlton Hotel, Boston, Massachusetts, (April 24, 1997) (available at <http://www.ftc.gov/speeches/azcuenaga/ali-aba97.htm>).

137. Roche Holdings Ltd., 113 F.T.C. 1086 (1990).

138. See Rapp, supra note 43.

139. Azcuenaga, supra note 135 (emphasis added). Commissioner Azcuenaga repeated this analysis in December 1997 when she said that the FTC is "continuing to allege a diminution of competition in research and development markets for specific products." Commissioner, Federal Trade Commission, Mary L. Azcuenaga, Panel Discussion on Technological Innovation, International Trade and Competition Policy, Remarks before the Japan Fair Trade Commission 50th Anniversary Symposium, Tokyo, Japan (December 1, 1997) (available at <http://www.ftc.gov/speeches/azcuenaga/japan97.htm>).

140. Director, Bureau of Competition, Federal Trade Commission, William J. Baer, Federal Trade Commission Before the American Bar Association Antitrust Section Spring Meeting 1997, Washington, D.C., (April 9-10 1997) (available at <http://www.ftc.gov/speeches/other/abaspg97.htm>).

141. Id. (footnotes omitted).

142. Id.

143. Id.

144. Id. Director Baer repeated these remarks in November 1997, saying of Ciba Geigy: "There were relatively few potential competitors for this technology, because the merging firms controlled critical patents." Director, Bureau of Competition, Federal Trade Commission, William J. Baer, New Myths and Old Realities: Perspectives on Recent Developments in Antitrust Enforcement, Address before the Bar Association of the City of New York, New York, (November 17, 1997) (available at <http:// www.ftc.gov/speeches/other/bany.htm>).

145. Azcuenaga, supra note 135.

146. Id.

147. Id.

148. Commissioner Azquenaga did not say that in Ciba Geigy the FTC feared that the agreement would lower Novartis' incentives to innovate. Yet even if the FTC did harbor such fears, it still does not follow that the FTC found an innovation market in this case. The agencies stop firms from using patents, and other intellectual property rights, to monopolize markets because the agencies fear that, as monopolists, the firms will face a lesser incentive to innovate. Therefore, whenever the agencies analyze the scope and breath of any patent or patent acquisition they inevitably consider the relevant firms' incentives to innovate.

Further, in this case, as in all these so-called innovation market cases, the FTC could not analyze the merged firm's incentives to innovate, at least not in the manner innovation market analysis requires. See supra text accompanying notes 43-59.

149. Acting Assistant Attorney General Joel I. Klein, Department of Justice: Cross-Licensing and Antitrust Law, Address before the American Intellectual Property Law Association (May 2, 1997).

150. Gilbert and Sunshine say competition in an innovation market relates to firms that are not likely potential competitors. See supra text accompanying note 55.

151. Steven P. Reynolds, Antitrust and Patent Licensing: Cycles of Enforcement and Current Policy, 37 JURIMETRICS J. 129 (1997).

152. See, e.g., Neil Campbell and Jeffrey Roode, The 'Highest Common Denominator' Effect, GLOBAL COMPETITION REVIEW, Aug.-Sept. 1997, at 29 (explaining how the FTC applied Gilbert and Sunshine's innovation market methodology in Ciba Geigy.)

153. See Gilbert & Sunshine, supra note 10, at 570.

154. James Kobak, Jr., Running the Gauntlet: Antitrust and Intellectual Property Pitfalls on the Two Sides of the Atlantic, 64 ANTITRUST L.J. 341, 360-61, (1996).

155. Id. at 361.