before or after the effective date of this Act.
(d) The term "person" or "persons" shall include corporations and associa-
tions existing under or authorized by the laws of the United States, any of the
Territories, any State, or any foreign country, and shall include any ijerson con-
trolling, controlled by, or under common control with a person.
COMMENTS TO ACCOMPANY PBOPOSEa) PATENT LEGISLATION
Section 1. Filing of License Agreements.
(a) This provision implements our recommendation that patent licenses be
filed, to expose possible antitrust violations to the light of day. There is legisla-
tive precedent for such a requirement in existing law, which requires that inter-
ference settlements be filed. Information filed should be adequate to permit anti-
trust enforcement authorities to determine whether additional information is
needed. If so, it may be obtained pursuant to the Antitrust Civil Process Act.
If the patent law is revised along the lines of pending bills which provide for
a pre-grant infringement remedy, references to patents should be expanded in
section 1 and elsewhere in the Act to include patent applications with respect to
which a pre-grant Infringement remedy is available.
325
This provision should be enacted even if the other sections of the proposed
patent legislation are not. In addition, it is a necessary adjunct to the nondis-
criminatory licensing requirement of section 3.
(b) This subsection is designed to add effective sanctions to the filing require-
ment. The disabilities are intended to create sufficient financial risk so that patent
owners will file on time. Criminal penalties are probably inappropriate in view
of the somewhat open ended definition of "license" and the possibility of differ-
ences in interpretation of the filing requirement.
Section 2. Failure to Enforce Patents.
This provision is designed to avoid concealed discrimination and circumven-
tion of the filing requirement by failure to enforce patents against others. It does
not require that an infringement action have been instituted against the third
party, since it might be reasonable for the owner of the patent to settle without
litigation. The introduction of a standard of reasonableness avoids requiring the
patent owner to vindicate his patent by bringing action against infringements
which are de minimis.
In general, action to enforce a patent will be reasonable if the owner of the
patent pursues one or more representative test cases in good faith and makes
reasonable arguments to notify other known infringers and to ensure that other
alleged infringements will abide the result of such test cases.
This provision should be enacted even if the other sections of the proposed
patent legislation are not In addition, it is a necessary adjunct of the non-dis-
criminatory licensing requirement of section 3 and a desirable adjunct of the
filing requirement of section 1.
Section S. Nondiscriminatory Grant of Licenses.
(a) The requirement of nondiscriminatory licensing is intended to minimize
the possibility that license agreements can confer a share of patent monopoly
profits on licensees. In general, such an arrangement suggiests that the patent ia
either legally vulnerable or not economically valuable. In such eases, patent
licenses can serve to neutralize those who are most likely to launch a successful
attack on the patent, and they may serve as a pretext for cartelization.
The applicant is entitled to a license "neither more restrictive nor less favorable
in any re. pect than any license previously issued." This language would entitle
the applicant to a license identical to any license previously issued. It would not
entitle him to pick a favorable royalty provision from one license, a favorable
field of use provision from another license, and so on.
Although a license may still be made in consideration of a cross-license, the first
proviso establishes a strong incentive for granting separate licenses, each with a
cash royalty. If a subsequent licensee were required to comply v^dth provisions in
the original license which, by their terms or otherwise, could be complied with
only by the original licensee or a small group of licensees, the purpose of the Act
in promoting open licensing (except as provided in the second exception in sub-
section (d) ) might be frustrated. The three phrases in this proviso are intended
to exclude this possibility and to give the courts ample power to deal with un-
foreseeable types of provisions which have the effect of making licenses exclusive.
(b) The foregoing provisions might induce patent owners who would otherwise
enter into cross-license agreements to license each other for cash royalties which
are higher than they would ordinarily be but which are intended to be offsetting.
The effect would be to exclude third parties entitled to licenses unless they were
willing to pay inflated royalties. This provision is designed to increase the risks in
establishing high but offsetting royalties. Since each license agreement may be
enforr»ed without regard to the enforceability of the other, a patent owner will
hesitate to agree to royalties which are above the fair value of a patent but are
intended to be offsetting.
(c) This provision is necessary to avoid exclusion of the operation of the Act
by contract. It does not prevent a patentee from excluding his own practice of
the patent.
(d) The first exception protects the patent owner from financially and other-
wise irresponsible licensees. The second is analogous to the judicially created ex-
ception to section 3 of the Clayton Act for exclusive dealerships necessary to ob-
tain dealers. For the patentee's own protection, as well as to avoid litigation, the
question of such necessity must be determined before any license is granted in
a particular field or area of use. Such necessity would arise only in cases where
exploitation could not be obtained through conveyance of the patentee's entire
interest for a consideration based on future use.
326
Section 4- Action to Obtain License.
This section suspends the patent owner's injunctive remedy for infringement
pending the resolution of an action to obtain a license. Thus, prolonged litigation
will not frustrate the purpose of the Act.
Sections. Definitions.
(a) This definition of "license" is designed to be suflBciently broad to reach
any agreement with respect to any patent or industrial property right, other than
an agreement transferring the owner's entire interest. In that case, the statute
would apply to any license granted by the transferee. Under this definition, a sub-
license of a patent would not be a patent license, because the licensee granting
sublicenses would be neither a patentee nor a transferee of the entire right, title
and interest in a patent. Thus, a licensee could himself discriminate among sub-
licensees ; their appropriate resjwnse would be to apply for direct licenses.
The definition is limited to licenses granted after the effective date of the Act.
Therefore, the terms of licenses granted prior to the effective date of the Act need
not be made freely available to all. If the Act had been in effect, a patent owner
might not have granted a license, or might have granted a license on other terms.
The first proviso is designed to avoid interference with transactions which are
not primarily licensing arrangements. The "including" phrase in the second
proviso is designed to permit a patent owner to dispose of his patent to another
in a better position to exploit it. An acquisition falling within the proviso might,
however, be an asset acquisition within the meaning of section 7 of the Clayton
Act or might be in violation of section 1 or section 2 of the Sherman Act.
(b) "Industrial property right" is a term broad enough to encompass patents,
but is not limited to patents.
(c) Patents are restricted to United States patents. Unlike the license defini-
tion, which refers only to licenses granted after the effective date of the Act, the
patent definition is not so restricted. There is no real problem of retroactivity,
since it is not likely that knowledge that the Act would be passed would have in-
fluenced decisions to apply for or acquire a patent.
(d) The definition is similar to the definition of "firm" in the other proposed
statutes. Since the Act rests on the patent power and not on the commerce power,
it is not limited to persons engaged in interstate and foreign commerce.
APPENDIX Ei. ADDITIONAL LEGISLATION
I. Amendment to Antitrust Civil Process Act To Require Premerger Notification
Section 3 of the Antitrust Civil Process Act is amended by adding thereto a new
subsection (g) which shall read as follows :
(g) The Attorney General may by regulation require that any person or per-
sons acquiring, or planning, proposing or agreeing to acquire, any other person
or i)ersons, or any person or persons being acquired by, or planning, proposing
or agreeing to be acquired by, any other person or persons, and any oflScer, di-
rector or partner or any siuch person, file with the Attorney General, at such
time or times, not earlier than 30 days prior to the effective date of an acquisi-
tion, as shall be specified in such regulation, such documentary material and
other information as shall be specified in such regulation ; provided, however,
that such regulation shall not impose any requirement which, by reason of sub-
section (c) of this section 3, could not be contained in a civil investigative
demand.
Comment: This provision auhorizes the Attorney General to adopt regula-
tions establishing advance reporting requirements for mergers, and imposing re-
sponsibility for compliance on specified oflicers of firms involved in such mergers.
Such reporting requirements will permit more efficient enforcement of the
merger prohibitions in the antitrust laws and in merger legislation proposed in
the Report. In many cases, particularly under legislation proposed in the Report,
it should be possible to resolve merger actions before consummation of mergers,
rather than unscrambling mergers after consummation. In order to prevent un-
duly burdensome requirements, the statute limits the timing of required reports
to 30 days in advance of a merger, and it prevents the Attorney General from re-
quiring any information privileged under the Antitrust Civil Process Act.
The regulations would probably not be as broad as the statute. For example, the
formation of a subsidiary other than a joint venture would generally not be of
327
antitrust si^ificance. In addition, acquisition involving a small acquiring or
acquired firm should probably be excluded, as should most portfolio investments
and some kinds of partial asset acquisitions.
II. Crmvinal Provisions Relating to Prcmerffer Notification
Add the following section to title 18 of the United States Code :
(a) Any person, or any officer, director or partner of any person, who will-
fully fails to file any report required to be filed by such person or officer, director
or partner pursuant to regulation under authority of section 3(g) of the Anti-
trust Civil Process Act shall be fined not more than $ , or imprisoned not
more than or both. Such failure with respect to each day of failure to file
shall constitute a separate offense.
(b) Any person, or any officer, director or partner of any person, who wilfully
files or causes to be filed any report required to be filed by such person or officer,
director or partner pursuant to regulation under authority of section 3(g) of
the Antitrust Civil Process Act, which report is false or incomplete in any sub-
stantial respect, shall be fined not more than $ or imprisoned not more
than , or both. Such failure with respect to each report shall constitute a
separate offense.
Comment: This section implements the premerger notification requirement by
Imposing criminal penalties. Subsection (a) penalizes failure to file, and makes
each day of failure to file a separate offense. Subsection (b) penalizes wilfully
filing false or incomplete reports. Under both subsections, officers, directors or
partners made responsible for filing under the regulations would be criminally
liable.
III. Amendments to Antitrust Civil Process Act To Cover Legislation Proposed
by Task Force
Section 2 of the Antitrust Civil Process Act hereby amended to read as follows :
(a) The term "antitrust law" includes :
(3) The Merger Act;
(4) The Concentrated Industries Act;
(5) Any statute hereafter enacted by the Congress which prohibits, or makes
available to the United States in any court of the United States any civil rem-
edy with respect to (a) any restraint upon or monopolization of interstate or
foreign trade or commerce, or (b) any unfair trade practice in or affecting such
commerce ;
(d) The term "antitrust violation" means any act or omission in violation of
any antitrust law or any antitrust order, or any state of facts which would
justify an investigation under section 1(a) or a judgment under section 1(c)
of the Concentrated Industries Act ;
Comment: Paragraphs (3) and (4) are added to subsection (a) and subsec-
tion (d) is added to cover other legislation proposed in the Report. Paragraph
(5) is identical to former paragraph (3).
IV. Addition of Section ^C to the Clayton Act
A new section 4C is added to the Clayton Act, to read as follows:
Any action to enforce any cause of action arising by reason of violation of
section 7 of an Act entitled "An Act To supplement existing laws against unlaw-
ful restraints and monopolies, and for other purposes," approved October 15,
1914, as amended, or section 1 of the Merger Act or by reason of an acquisition
in violation of section 1 or section 2 of an Act entitled "An Act To protect trade
and commerce against unlawful restraints and monopolies," approved July 2,
1890, as amended, shall be forever barred unless commenced within ten years
after the latest of the following dates : the date of such acquisition, the date of
filing any report required to toe filed with respect to such acquisition pursuant
to regulation adopted under subsection (g) of section 3 of the Antitrust Civil
Process Act or the effective date of this Act. Xo cause of action barred under ex-
isting law on the effective date of this Act shall be reviewed by this Act.
Cofiitnent: This provision imposes a ten-year statute of limitations for pro-
ceedings under section 7 of the Clayton Act, the proposed Merger Act, or acqui-
328
sitions in violation of section 1 or 2 of the Sherman Act. It does not prevent
consideration, in a monopolization action under section 2, of a time-liarred mer-
ger not itself alleged to be unlawful but part of a pattern of monopolization. The
provision does not require the Government to proceed prior to consummation of
a merger. It provides a ten-year grace period for proceedings against mergers
occurring prior to its effective date. The statutory period is tolled if a required
premerger notification is late.
V. Duration of Antitrust Decrees
Any order, decree, or injunction issued by the Federal Trade Commission or
any court, by consent or otherwi.se, to enforce any of the antitru.st laws (as de-
fined in section 1 of the act entitled "An Act To supplement existing laws
against unlawful restraints and monopolies, and for other purposes," approved
October 15, 1914 as amended) or the Federal Trade Commission Act, shall re-
main in effect for a limited time reasonably related to the nature of the vio-
lation or threatened violation, and in no case shall an order, decree or injunc-
tion remain in effect more than ten years after the date of issue (or, in the case
of an order, decree or injunction issued prior to the effective date of this Act,
more than ten years after the effective date of this Act) ; provided, however,
that upon appropriate motion made prior to the expiration of such limited time
or ten-year period, the Federal Trade Commission or court which issued the
order, decree or injunction (including any extension thereof pursuant to this
proviso) may extend the same in its original form or as modified for a further
period of not more than ten years.
Comment: This provision is designed to minimize the possibility that changing
conditions will render a decree obsolete, either becau.se it is ineffective or be-
cause it is anticompetitive in effect. Since the proviso permits any number of
ten-year extensions, the Federal Trade Commission or court will retain ample
power to deal with situations which require an order of longer duration than ten
years. Our proposed revision of the Robinson-Patman Act would limit decrees
and orders under that Act to five years, with no provision for renewal.
APPENDIX F. GLOSSARY
Acquisition: We use this term interchangeably with merger. It includes all
forms of mergers and acquisitions, including statutory mergers and acquisitions
of stock or assets, whether for cash or securities or both.
Clayton Act: Enacted in 1914. Section 7, amended in 1950 by the Celler-Ke-
fauver Act, prohibits mergers or acquisitions of stock or assets where the effect
may be substantially to lessen competition or to tend to create a monopoly in
any line of commerce in any section of the country. Other provisions include a
prohibition on price discrimination (which, as amended, is referred to as the
Robinson-Patman Act), prohibitions on exclusive dealing and tying arrange-
ments, and various procedural provisions (including a provision for private ac-
tions for violations of the antitrust laws) .
Concentration ratio: The aggregate market share of the number of firms with
respect to which the concentration ratio is computed, e.g., four-firm concentra-
tion ratio.
Conglomerate: Refers to an acquisition which is neither vertical nor horizontal.
Includes product extension and market extension mergers.
Digits: See SIC.
Four-digit product or industry: See SIC.
Horizontal: Refers to an acquisition involving comi>etitors in the same market.
Market: A collection of buyers and sellers whose transactions determine the
price of a commodity or service. The buyers or sellers, or both, may and do trade
in various parts of the market, which may be accessible areas within which
traders or commodities or .services move, or accessible products whose prices
exert a decisive influence upon the price of the commodity or service in question.
Market extension: Refers to a conglomerate merger involving two firms which
produce goods which are identical or substitutable but are sold in different geo-
graphical markets.
Merger: We use this term interchangeably with acquisition. It includes all
forms of mergers and acquisitions, including statutory mergers and acquisitions
o^ «+ock or assets, whether for cash or securities or both.
329
Product extension: Refers to a conglomerate merger involving two firms which
produce goods which are not identical or substitutable but may be related in
methods of production or distribution.
Rohinson-Patman Act: The price-discrimination law; originally section 2 of
the Clayton Act.
Sherman Act: The first major antitrust law, enacted in 1890. Section 1 pro-
hibits contracts, combinations and conspiracies in restraint of trade. Section 2
prohibits monopolization or attempts to monopolize.
SIC: The Standard Industrial Classification developed by the Bureau of the
Budget for statistical purposes, and usually considered as including the Census
product classification. Products or industries are classified by number. The num-
ber of digits in the classification is an indication of the detail of the classifica-
tion. An example of a two-digit major industry groups is Group 28, Chemicals
and Allied Products. An example of a four-digit industry is 2841, Soap and other
detergents, except specialty cleaners. An example of a five-digit product class is
28412, Soaps, except specialty cleaners, bulk. An example of a seven-digit prod-
uct is 28412 41, Scouring cleaners, with or without abrasives. These categories do
not necessarily reflect relevant markets.
Vertical: Refers to an acquisition involving two firms in a supplier-customer
relationship.
SEPARATE STATEMENT OF EOBEBT H. BORK
The Task Force's major recommendations seem to me to rest on erroneous
analysis and inadequate empirical investigations. Their net effect seems more
likely to injure consumers than to aid them.
THE CONCENTRATBa) INDUSTRIES ACT
This statute proposes to break up the leading firms in "concentrated" indus-
tries on the theory that such industry structures cause noncompetitive pricing
behavior. The evidence for this was certain studies which purported to show a
correlation between industry concentration and profitability.
My objection to the proposed statute is that the studies relied upon are shaky
and open to question and that the correlation, if it were shown to exist, would
prove nothing.
The latter point is by far the more important and I will discuss it alone.
In judging whether it is worthwhile to break up a concentrated industry struc-
ture it is necessary to estimate whether more will be gained through the pre-
dicted end to noncompetitive pricing or lost through the destruction of industrial
efficiency. When the structure has been created by recent merger or by predatory
business practices, neither of which necessarily demonstrates efficiency, a policy
of dissolution is intelligible. But those cases are taken care of, respectively, by
amended section 7 of the Clayton Act and section 2 of the Sherman Act. The
proposed statute, therefore, would have its impact almost entirely upon indus-
tries in which concentration had evolved through the growth of the leading firms
or through mergers that occurred years ago. Amended section 7 of the Clayton
Act now enables the government to reach any merger within the past 18 years,
and as time goes on the proposed statute will apply almost entirely to firms that
reached large size through internal growth.
The dissolution of such firms would be a disservice to consumers and to
national strength. When firms grow to sizes that create concentration or when
such a structure is created by merger and persists for many years, there is a very
strong prima facie case that the firms' sizes are related to efficiency. By effi-
ciency I mean "competitive effectiveness" within the bounds of the law, and
competitive effectiveness means service to consumers. If the leading firms in a
concentrated industry are restricting their output in order to obtain prices
above the competitive level, their efficiencies must be sufficiently superior to
that of all actual and potential rivals to offset that behavior. Were this not so,
rivals would be enabled to expand their market shares because of the abnormally
high prices and would thus deconcentrate the indu.stry. Market rivalry thus auto-
matically weighs the respective infiuences of efficiency and output restriction
and arrives at the firm sizes and industry structures that serve consumers best.
There is, therefore, no need for the proposed Concentrated Industries Act, and,
in fact, its results would be detrimental.
330
THE MEBGEE ACT
The rationale of the Merger Act is that conglomerate acquisitions should be
diverted from the leading firms in the industry in which the acquired firm op-
erates to the smaller firms. This diversion of the efficiencies created by conglom-
erate mergers will, it is contended, benefit consumers by deconcentrating the
industries involved.
This statute may easily be shown to be a prescription for decreasing the con-
sumer benefits that conglomerate acquisitions are capable of creating. A conglom-
erate acquisition is not a way of creating monopoly power. It adds nothing to
the market share of the acquired firm and any monopoly position that firm may
already have will be paid for in the purchase price. The investment will provide
only a competitive return unless the acquiring firm can bring efficiencies to the
acquired firm. If this is so, the acquiring firm's choice of one firm in the industry
rather than another as a merger partner must be dictated by considerations of
efficiency potential.
Thus, the statute will either shift the acquisition to a less preferred firm,
causing a decrease in the efficiencies realized, or cause the abandonment of any
plan to acquire a unit in that industry, causing a complete loss of expected
efficiencies.
It is no answer to say the frustrated acquiring firm could achieve the same
efficiencies by entering the market through growth. The same analysis as that
above shows that the forced shift from acquisition to growth would impose a