Antitrust Watchdogs Target High-Tech Business
A revamped antitrust division at the Department of Justice puts the agency on a collision course with high tech
Microsoft Corp. appeared to emerge unscathed -- and nearly unrepentant -- when it signed a consent decree with the Department of Justice July 15. At first, the company gave little ground beyond agreeing to limit the scope of its licensing agreements with PC manufacturers -- despite the threat of having to split its two main lines of business, operating systems and applications.
But in this case, appearances may be misleading. Evidence is growing that the Microsoft agreement is a bellwether for sweeping and irreversible changes in government antitrust enforcement -- with high-tech industries high on the list for scrutiny. Those changes could mean nothing less than a whole new way of doing business, at least as practiced under the Reagan and Bush administrations.
"You don't need to be 70 percent dominant," like Microsoft was, to worry about changes in software intellectual property laws, said Mark Gidley, an antitrust specialist at the Shaw Pittman, Potts & Trowbridge law firm.
Justice recently issued new guidelines for antitrust enforcement and intellectual property, which put antitrust enforcement at odds with exclusive protections provided by copyright and patent rights. Copyrights and patents grant exclusive control over a technology, while antitrust regulations seek to reduce and even dilute control.
In preparation, Justice has doubled the number of intellectual property staff attorneys, though the guidelines have yet to be put in practice.
What this means is that high-tech firms, particularly those in the computer and hardware business, must now weigh antitrust considerations they didn't have to think about in the 1980's.
The person responsible for these changes is Anne Bingaman, President Clinton's assistant attorney general for antitrust. She has made no secret of her intent to become the most active trust-buster since Thurman Arnold, Franklin D. Roosevelt's assistant AG for antitrust from 1938 to 1943. She has revamped the antitrust division, which lost 250 lawyers during the Reagan and Bush administrations, bringing the number of attorneys up to more than 300 -- equal the number during the early 1970's.
And she is attempting to redress the balance in cases her division pursues. Antitrust investigations used to involve about 50 percent criminal cases, 38 percent merger-related, and 12 percent civil. Bingaman's aim is toward an even split in these areas -- largely by focusing where legal ground rules are fuzzy and ill-defined.
One such area is Justice's authority in breaking up cartels abroad. In a move that frightens many free-market advocates and libertarian groups, Justice is pushing for the authority to subpoena documents from foreign companies.
In a speech last spring, she proclaimed: "I am now, and I will continue to, enforce the U.S. antitrust laws to the full extent intended by Congress, which includes action against individuals or firms, foreign or domestic, that violate the U.S. antitrust laws, regardless of whether the conduct occurs in the U.S. or elsewhere."
If the Microsoft case is any indication, Justice's movement seems to be toward restricting how owners of intellectual property license and sell their products. Software licenses that prevent the use of competitive products, known as "tying," are immediately suspect. The practice was at the heart of the case against Microsoft.
Further, Justice has shown hostility to coordinated, exclusive licensing arrangements -- another one of the criticisms in its final decision against Microsoft. Justice's course appears to mirror facets of continental European law provisions regarding distributors and other commercial agents.
"Exclusive licenses set off a lot of alarms," said Christopher Millard, with the British law firm Clifford Chance.
Bingaman's logic is simple: Because trade is increasingly global, U.S. companies and consumers must have open access to foreign markets to ensure the prosperity of the U.S. economy.
If that access is denied, she will use U.S. antitrust law to help bring those trade barriers down -- in effect, using Justice's antitrust division to enforce the General Agreement on Tariffs and Trade.
Last March, in a speech before the Japan Society in New York City, she scolded the Japanese government for nearly nonexistent antitrust enforcement.
"The question still remains whether there has really been any meaningful change in Japan," she said, adding it is necessary to ensure "governmental trade restraints painstakingly eliminated through generations of multilateral trade negotiations are not simply replaced by private conduct with the same trade-restricting results."
Again, the case against Microsoft is the most visible result of this new international thrust. Bingaman's office, for instance, jointly conducted investigation of the Redmond, Wash.-based software giant with the agency's European Union counterpart.
And both simultaneously reached and announced agreements with Microsoft -- an unprecedented move in the history of antitrust enforcement, and one suggesting a convergence in antitrust law and its enforcement worldwide.
"Convergence in antitrust law is inevitable. It's happening already," said Gidley.
Meanwhile, Justice has also stepped up its scrutiny of proposed mergers, halting the union of TCI and Liberty Media, and delaying for a year a deal between British Telecommunications and MCI.
Justice has also said it will pay close attention to proposed mergers in the defense business which, along with healthcare and telecommunications, make up the three primary areas the agency will focus its merger reviews.
One indication of how far Justice is willing to go: The agency's suit against the proposed acquisition of GM's Allison Division by ZF Friedrichshagen, a deal that would essentially combine two relatively small businesses for bus transmissions.
The department's main complaint was not so much a potential monopoly in the bus transmission business, but the combination of R&D assets.
The resistance to combining R&D efforts emerges as a little-noticed theme in Bingaman's public statements -- and it signals a major shift in executive branch high-tech policy.
"The Division understands that innovation competition often means duplicating R&D assets, but believes that...the benefits of competition can outweigh the unavoidable redundancies," said Bingaman in a speech last January.
That position pits Bingaman against one of the most salient tech-policy initiatives of the 1980's: the formation of research consortia such as the Microelectronics and Computer Corp. and Sematech. And it also appears to violate at least the spirit of the 1984 Cooperative Research and Development Act, which relaxed antitrust restrictions to allow the formation of these consortia.
All of these changes add up to a radical shift in U.S. technology policy -- and the laws that govern technology commerce.
"There is a mistaken belief that antitrust enforcers are not interested in smaller guys," said Steven Meltzer of Shaw, Pittman. "The legal system is proceeding very quickly. Companies will get caught flat-footed."