Antitrust Law Blog

FTC Testifies Before House of Representatives on Patent Reform

• On February 15, 2007, Suzanne Michel, Deputy Assistant Director for Policy and Coordination in the FTC's Bureau of Competition testified before the House of Representatives' Subcommittee on Courts, the Internet, and Intellectual Property on the subject of patent reform. In this testimony, Ms. Michel noted that patent protection serves many public policies. Patent protection encourages firms to compete in the race to invent new products, eases the ability of innovators to attract funding and develop relationships needed to commercialize inventions, and facilitates the public disclosure of scientific and technical information that can stimulate further scientific progress. However, the testimony noted, competition is also a major spur for innovation and patents of "questionable quality i.e. patents that are too broad or of dubious validity – can harm competition and innovation

The testimony outlined several specific ways in which patents of questionable quality may harm competition and innovation. For example, patents that should not have been granted at all raise the costs of innovation because if a competitor chooses to pursue research and development in the area covered by the patent without a license, it risks expensive, time-consuming, and wasteful litigation with the patent holder. Similarly, follow-on innovation may be deterred if the scope of a patent is broader than it should be because firms may be discouraged from research and development in the areas that the patent improperly covers by the substantial costs and risks of patent infringement litigation. Questionable patents may be particularly problematic in industries characterized by "patent thickets," such as computer hardware and software. In such industries, firms might be confronted with dozens, hundreds, or even thousands of existing patents when trying to produce just one commercial product. In these circumstances, firms may pay licensing fees or royalties for weak patents because there is no economically feasible way to evaluate the claims and possibility of infringement of all of the relevant patents prior to making an investment. Further, firms facing patent thickets may spend resources obtaining "defensive patents," not to protect their own innovation but rather to have bargaining chips to obtain access to others' patents through cross-licenses or to counter allegations of infringement. Such patents may be obtained in response to questionable patents and may be questionable themselves.

To address these problems, the FTC made several recommendations for patent reform in its October 2003 report, To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy. Ms. Michel's testimony elaborated on three key recommendations from this report:

(1)The FTC recommends the creation of a new administrative procedure of post-grant review of patents that allows for meaningful challenges to patent validity by third parties short of federal court litigation. In support of this recommendation, the testimony noted that patent prosecution is ex parte even though third parties in the same field may have relevant information and expertise to the evaluation of a patent application and that patent litigation in federal court is extremely costly and lengthy and is not an option unless the patent owner has threatened the potential challenger with patent infringement litigation. A post-grant opportunity to challenge a patent would be a more efficient way of rooting out questionable patents.

(2)The FTC also recommends that Congress enact legislation to require, as a predicate for liability for willful infringement, either actual written notice of infringement from the patentee or deliberate copying of the patentee's invention, knowing it to be patented. Because a court may award treble damages after finding that patent infringement was undertaken willfully, some firms do not read their competitors' patents out of concern for possibly being subjected to these treble damages. This reluctance to review competitors' patents undermines the public disclosure function of patents, encourages wasteful duplication of effort, delays follow-on innovation that could derive from patent disclosures, and discourages the development of competition. According to the FTC, requiring actual, written notice of infringement or deliberate copying of the patentee's invention, knowing it to be patented, would make firms more likely to look at their competitors' patents while still preserving a viable willfulness doctrine that protects wronged patentees.

(3)The FTC's third key recommendation was to require publication of all patent applications eighteen months after filing. Under current law, patent applicants do not have to publish their applications if they did not seek corresponding foreign patents. Requiring publication of all patent applications eighteen months after filing would increase business certainty, promote rational planning, and reduce the problem of "submarine patents" that surprise the market.

DOJ Requires Mittal Steel to Divest Sparrows Point Steel Mill as Remedy for Mittal's Acquisition of Arcelor After Mittal is Unable to Divest Dofasco

• On August 1, 2006, the Department of Justice filed suit in the U.S. District Court in Washington, D.C. to block Mittal Steel's acquisition of Arcelor as well as a proposed consent decree. Mittal Steel is a steelmaker that manufactures, among other products, finely rolled tin or chrome coated steel sheets known as "Tin Mill Products." These products are used in manufacturing steel cans for packaging a wide range of food and non-food products. Arcelor is also a manufacturer of Tin Mill Products. According to the Department of Justice's complaint, the largest Tin Mill Products manufacturer accounts for 44 percent of Tin Mill Products sold in the Eastern United States, the relevant geographic market. Mittal Steel is the second largest participant in this market with 31 percent, while Arcelor accounts for 2 percent and a subsidiary acquired by Arcelor in February 2006, Dofasco, accounts for 4 percent. The DOJ complains that allowing Mittal Steel to acquire Arcelor would mean that the two largest suppliers of Tin Mill Products in the Eastern United States would account for over 81 percent of the market, remove current constraints on coordination and increase the incentives of the two largest firms to coordinate their behavior.

To remedy these problems, the DOJ's proposed consent decree required Mittal Steel to divest Dofasco. However, the DOJ anticipated the possibility that Mittal might be unable to do so because Arcelor had, in an attempt to defeat Mittal's hostile takeover bid, placed legal title to Dofasco into a Dutch foundation. Thus, in the event that Mittal was unable to divest itself from Dofasco, the proposed consent decree gave the DOJ the right to select for divestiture either Mittal Steel's Sparrows Point mill, located in Baltimore, Maryland, or its Weirton mill, located in Weirton, West Virginia.

As anticipated, Mittal was unable to sell Dofasco. The DOJ has now determined that divestiture of Sparrows Point will most reliably remedy the anticompetitive effects of the acquisition. According to the DOJ, Sparrows Point is a profitable and diversified facility that has the capacity to produce more than 500,000 tons of Tin Mill Products annually. Sparrows Point also operates as an integrated facility that itself produces the steel slabs that are necessary inputs in the manufacture of Tin Mill Products. By contrast, the Weirton mill does not itself produce these steel slabs and would have to develop its own sources of supply for this input on being divested from Mittal. As such, the DOJ feels that divestiture of the Sparrows Point mill would best preserve competition the market for Tin Mill Products in the Eastern United States.