Innovation Markets

• Pages: 471-502

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CHAPTER XII

INNOVATION MARKETS

A. Introduction

In their joint Antitrust Guidelines for the Licensing of Intellectual

Proper ty (IP Guidelines), the Department of Justice (DOJ) and the

Federal Trade Commission (FTC) state: “An innovation market consists

of the research and development directed to particular new or improved

goods or processes, and the close substitutes for that research and

development.”1 The distinguishing characteristic of innovation markets

is competition to develop new goods and services. Innovation markets

competition is competition in research and development (R&D) itself, as

opposed to traditional competition to sell existing goods and services.

Thus, unlike in traditional merger analysis, where the focus is largely on

competition in actual goods, in analyzing mergers in innovation markets,

the focus is on competition in potential goods.2

As the DOJ and the FTC state in the IP Guidelines, licensing

arrangements or mergers between companies may have competitive

effects on innovation that cannot be adequately addressed through the

traditional analysis of goods or technology markets.3 For instance, “the

1. U.S. DEP’T OF JUSTICE & FED. TRADE COMM’N, ANTITRUST GUIDELINES

FOR THE LICENSING OF INTELLECTUAL PROPERTY § 3.2.3 (1995) availa ble

at http://www.justice.gov/atr/public/guidelines/0558.pdf [hereinafter IP

GUIDELINES]. The Horizontal Merger Guidelines do not spec ifically

refer to innovation markets, but they do consider the possibility that a

merger will reduce competition in innovation. U.S. DEP’T OF JUSTICE &

FED. TRADE COMM’N, HORIZONTAL MERGER GUIDELINES § 6.4 (2010),

reprinted in 4 Trade Reg. Rep. (CCH) ¶ 13,100, availab le at

http://www.justice.gov/atr/public/guidelines/hmg-2010.html [hereinafter

2010 MERGER GUIDELINES].

2. Rosa M. Abrantes-Metz, C hristopher P. Adams & Albert D. Metz,

Empirical F acts and Innova tion Markets: Analysis of the Phar maceutical

Industry, THE ANTITRUST SOURCE, Mar. 2005, at 1.

3. “Technology markets consist of . . . technologies or goods that are close

enough substitutes significantly to constrain the exercise of market power

472 Market Definition in Antitrust

arrangement may aff ect the development of goods that do not yet exist”

or, alternatively, “affect the development of new or improved goods or

processes in geographic markets where there is no actual or likely

potential competition in the relevant goods.”4

The earliest official statement that relevant antitrust marketscould be

defined around R&D activities was in the National Cooperative Research

Act (NCRA) of 1984.5 As part of NCRA, Congress mandated that

cooperative research be subject to an evaluation of competitive effects

“in properly defi ned, relevant research, development, product, process

and service markets.”6

Innovation markets were first alleged by the FTC in 1990, when it

opposed Roche’s acquisition of a controlling interest in Genentech.7 At

the time, Roche and Genentech had overlapping manufacturing or

research interests in three therapeutic areas: Vitamin C, human growth

hormone, and CD-4-based AIDS/HIV treatments. As discussed in

greater detail in part E.1 below, the FTC alleged that the acquisition

would lessen competition in the research, development, production, and

marketing in these three therapeutic areas.8

However, the term “innovation markets” was not used until 1993,

when the DOJ opposed the merger between Allison Transmission, a

division of General Motors, and ZF Friedrichshafen, both leading

manufacturers of medium and heavy automatic transmissions for

commercial and military vehicles.9 The DOJ alleged several relevant

markets, includinga worldwide “innovation market.”10 According to the

DOJ, the production facilities of the merging firms were specialized

assets that were essential to the testing of innovations in that market.

In 1994, the DOJ opposed on similar grounds the merger between

Flow International and Ingersoll-Rand’s Waterjet Cutting Systems

with respect to the intellectual property that is licensed.” IP GUIDELINES,

supra note 1, § 3.2.2, at 8-10.

4. Id. § 3.2.3, at 10-11.

5. 15 U.S.C. § 4302.

6. Id.; see also Richard T. Rapp, The Misapplication of the Innovation

Market Approach to Merger Analysis, 64 ANTITRUST L.J. 19, 21 (1995).

7. Complaint, Roche Holdings, 113 F.T.C. 1086 (1990).

8. The firms later entered into a consent decree, whereby Genentech

divested its Vita min C interests and Roche divested its human growth

hormone business. See part E in this chapter for an expanded discussion.

9. Complaint, United States v. Gen. Motors, Ci v. No. 93-530 (D. Del. Nov.

16, 1993).

10. Id. ¶ 39.

Innovation Markets 473

division.11 The DOJ asserted that competition between these two firms

extended to R&D and technological innovation, both of which would be

harmed by the merger.12 Subsequently, the FTC has brought complaints

against a number of other mergers on the basis of harm to competition in

innovation markets.

One of the most important mergers involving innovation markets

was Genzyme’s acquisition of Novazyme in 2001. Genzyme was a large

biotech company with sales of nearly $1 billion at the time of the

acquisition, while Novazyme was a small startup company with no

products on the market.13 Genzyme and Novazyme were the only two

companies known to be working on treatments for a rare and debilitating

genetic ailment called Pompe Disease. Therefore, unequivocally, the

merger would have left Genzyme as the only firm with a research

program to develop treatments for Pompe.

The FTC had to decide whether this merger would harm competition

and should, therefore, be challenged. After a lengthy investigation, the

FTC voted in 2004 to close its investigation of the transaction. Timothy

J. Muris, the then-FTC Chairman, summarized his views in support of

closing the investigation as follows:

[N]either economic theory nor empirical research supports an inference

regarding the merger’s likely effect on innovation (and hence patient

welfare) based simply on observing how the merger changed the

number of independent R&D p rograms. Rather, one must examine

whether the merged firm was likely to have a reduced incentive to

invest in R&D, and also whether it was likely to have the ability to

conduct R&D more successfully.14

The discussion below highlights the economic theory behind

innovation markets, as well as its inherent difficulty and limitations. In

addition, the chapter describes the issues that arise in defining an

11. Co mplaint, United States v. Flow Int’l & Ingersoll-Rand Co., Civ. No.

94-71320 (E.D. Mich. Apr. 14, 1994).

12. See United States v. Flow Int’l Corp., 6 Trade Reg. Rep. (CCH) ¶ 45094,

at 44,682 (E.D. Mich. 1994) (describing role of innovation market theory

in challenge to transaction).

13. State ment of Chairman T imothy J. Muris at 8, In r e Genzyme

Corporation/Novazyme Pharmaceuticals, Inc., No. 021-0026 (Jan. 1 3,

2004), availa ble at http://www.ftc.gov/os/2004/01/murisgenzymestmt.pdf

[hereinafter Muris Statement] . See parts C.1-2 and E.1 for a more

detailed discussion of the Genzyme/Novazyme merger.

14. Muris Sta tement, supra note 13, at 5-6 (footnote omitted).