Sensormatic Electronics Corporation; Proposed Consent Agreement With Analysis To Aid Public Comment

FEDERAL TRADE COMMISSION

[File No. 941 0126]

Sensormatic Electronics Corporation; Proposed Consent Agreement

With Analysis To Aid Public Comment

AGENCY: Federal Trade Commission.

ACTION: Proposed consent agreement.

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SUMMARY: In settlement of alleged violations of federal law prohibiting

unfair acts and practices and unfair methods of competition, this

consent agreement, accepted subject to final Commission approval, would

prohibit, among other things, Sensormatic Electronics Corporation, a

Florida-based manufacturer of electronic-article surveillance systems

from acquiring patents and other exclusive rights for manufacturer

installed disposable anti-shoplifting labels from Knogo Corporation. In

addition, the consent agreement would require Sensormatic, for ten

years, to obtain Commission approval before acquiring certain rights in

connection with Knogo's SuperStrip, or any significant acquisition of

entities engaged in, or assets used for, the research, development or

manufacture of disposable labels, or acquisitions of patents or other

intellectual property for such purposes.

DATES: Comments must be received on or before March 28, 1995.

ADDRESSES: Comments should be directed to: FTC/Office of the Secretary,

Room 159, 6th Street and Pennsylvania Avenue NW., Washington, DC 20580.

FOR FURTHER INFORMATION CONTACT:

Ann Malester, Arthur Strong or Melissa Heydenreich, FTC/S-2224,

Washington, DC 20580. (202) 326-2682, 326-3478 or 326-2543.

SUPPLEMENTARY INFORMATION: Pursuant to Section 6(f) of the Federal

Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46 and Section 2.34 of

the Commission's Rules of Practice (16 CFR 2.34), notice is hereby

given that the following consent agreement containing a consent order

to cease and desist, having been filed with and accepted, subject to

final approval, by the Commission, has been placed on the public record

for a period of sixty (60) days. Public comment is invited. Such

comments or views will be considered by the Commission and will be

available for inspection and copying at its principal office in

accordance with Section 4.9(b)(6)(ii) of the Commission's Rules of

Practice (16 CFR 4.9(b)(6)(ii).

Agreement Containing Consent Order

The Federal Trade Commission (``Commission''), having initiated an

investigation of the proposed acquisition by Sensormatic Electronics

Corporation (``Sensormatic'') of certain assets of the Knogo

Corporation (``Knogo''), and it now appearing that Sensormatic,

hereinafter sometimes referred to as ``proposed respondent,'' is

willing to enter into an agreement containing consent order to cease

and desist from making certain acquisitions, and providing for other

relief:

It is hereby agreed by and between Sensormatic, by its duly

authorized officer and its attorney, and counsel for the Commission

that:

1. Proposed respondent Sensormatic is a corporation organized,

existing, and doing business under and by virtue of the laws of

Delaware, with its offices and principal place of business located at

500 NW. 12th Avenue, Deerfield Beach, Florida 33442.

2. Proposed respondent admits all the jurisdictional facts set

forth in the draft of complaint.

3. Proposed respondent waives:

a. Any further procedural steps;

b. The requirement that the Commission's decision contain a

statement of findings of fact and conclusions of law;

c. All rights to seek judicial review or otherwise to challenge or

contest the validity of the order entered pursuant to this agreement;

and

d. Any claim under the Equal Access to Justice Act.

4. This agreement shall not become part of the public record of the

proceedings unless and until it is accepted by the Commission. If this

agreement is accepted by the Commission it, together with the draft of

complaint contemplated thereby, will be placed on the public record for

a period of sixty (60) days and information in respect thereto publicly

released. The Commission thereafter may either withdraw its acceptance

of this agreement and so notify the proposed respondent, in which event

it will take such action as it may consider appropriate, or issue and

serve its complaint (in such form as the circumstances may require) and

decision, in disposition of the proceeding.

5. This agreement is for settlement purposes only and does not

constitute an admission by proposed respondent that the law has been

violated as alleged in the draft of complaint, or that the facts as

alleged in the draft complaint, other than jurisdictional facts, are

true.

6. This agreement contemplates that, if it is accepted by the

Commission, and if such acceptance is not subsequently withdrawn by the

Commission pursuant to the provisions of Section 2.34 of the

Commission's Rules, the Commission may, without further notice to

proposed respondent, (1) Issue its complaint corresponding in form and

substance with the draft of complaint and its decision containing the

following order in disposition of the proceeding, and (2) make

information public with respect thereto. When so entered, the order

shall have the same force and effect and may be altered, modified, or

set aside in the same manner and within the same time provided by

statute for other orders. The order shall become final upon service.

Delivery by the United States Postal Service of the complaint and

decision containing the agreed-to order to proposed respondent's

address as stated in this agreement shall constitute service. Proposed

respondent waives any right it may have to any other manner of service.

The complaint may be used in construing the terms of the order, and no

agreement, understanding, representation, or interpretation not

contained in the order or the agreement may be used to vary or

contradict the terms of the order.

7. Proposed respondent has read the proposed complaint and order

contemplated hereby. Proposed respondent understands that once the

order has been issued, it will be required to file one or more

compliance reports showing that it has fully complied with the order.

Proposed respondent further understands that it may be liable for civil

penalties in the amount provided by law for each violation of the order

after it becomes final.

[[Page 5429]]

Order

I

It is ordered that, as used in this order, the following

definitions shall apply:

A. ``Respondent'' or ``Sensormatic'' means Sensormatic Electronics

Corporation, its predecessors, subsidiaries, divisions, and groups and

affiliates controlled by Sensormatic Electronics Corporation, their

directors, officers, employees, agents, and representatives, and their

successors and assigns.

B. ``Knogo'' means Knogo Corporation, its predecessors,

subsidiaries, divisions, and groups and affiliates controlled by Knogo,

their directors, officers, employees, agents, and representatives, and

their successors and assigns.

C. ``KNA'' means Knogo North America, Inc., the successor

corporation to Knogo Corporation's business and assets in the United

States and Canada to be formed pursuant to the Contribution and

Divestiture Agreement between Knogo Corporation and Knogo North

America, Inc., its subsidiaries, divisions, and groups and affiliates

controlled by Knogo North America, Inc., their directors, officers,

employees, agents, and representatives, and their successors and

assigns.

D. ``Commission'' means the Federal Trade Commission.

E. ``Acquisition'' means the transaction described in the Agreement

and Plan of Merger among Sensormatic, Knogo, and KNA, dated August 14,

1994.

F. ``Hard goods EAS systems'' means electronic article surveillance

systems and components designed principally to protect against

shoplifting of hard goods merchandise (e.g., books, audio recordings,

health and beauty aids, groceries, and home center merchandise), by

means of electronic hardware capable of detecting disposable labels

attached to such merchandise, whether the systems or components

generate, detect, or employ radio frequency, electromagnetic,

microwave, acoustic magnetic, or other electronic signals. Such systems

and components may include electronic signal transmitters and

receivers, signal processing equipment, computer software, label

activation equipment, label deactivators, automatic and manual label

applicators, and other related devices.

G. ``Disposable labels'' means labels that can be affixed to or

embedded in retail merchandise and used in conjunction with hard goods

EAS systems.

H. ``Source labelling'' means the process by which manufacturers,

packagers, or independent wholesalers apply disposable labels to retail

merchandise or its packaging.

I. ``SuperStrip'' means:

1. The material, described in Exhibit A attached hereto and made a

part hereof, used or intended for use in disposable labels; and

2. Disposable labels incorporating such material.

J. ``SuperStrip Technology'' means all existing patents,

inventions, trade secrets, know-how, concepts, designs, technical

information, processes, and intellectual property relating to the

design, manufacture, or use of SuperStrip.

K. ``SuperStrip Improvements'' means all improvements.

modifications, developments, revisions, or enhancements of SuperStrip

or SuperStrip Technology, whether or not covered by a patent or

otherwise protected against disclosure or unauthorized use by law.

L. ``Supply Agreement'' means Exhibit B to the Contribution and

Divestiture Agreement, attached as Exhibit C to the Agreement and Plan

of Merger among Sensormatic, Knogo, and KNA, dated August 14, 1994,

that requires Sensormatic to purchase products and materials for hard

goods EAS systems from KNA upon the terms and conditions set forth

therein.

M. ``United States'' means the fifty states, the District of

Columbia, and Puerto Rico.

II

It is further ordered that:

A. As of the date this order becomes final, respondent shall not

hold, possess, receive, or otherwise obtain, or have held, possessed,

received, or otherwise obtained, the SuperStrip Technology from Knogo

or KNA. Provided, however, that no provision of this Order shall

prohibit an acquisition by respondent from Knogo or KNA of: (1) a non-

exclusive license of the SuperStrip Technology to practice and use

SuperStrip and SuperStrip Technology in the United States and Canada;

and (2) ownership of, or other exclusive or non-exclusive legal or

equitable rights to practice and use, SuperStrip, SuperStrip

Technology, and SuperStrip Improvements outside of the United States

and Canada.

B. Respondent shall comply with the terms and conditions of the

Supply Agreement.

III

It is further ordered that, for a period of ten (10) years from the

date this order becomes final, respondent shall not, without the prior

approval of the Commission, directly or indirectly, through

subsidiaries, partnerships, or otherwise:

A. Acquire any legal or equitable rights to practice and use

SuperStrip, SuperStrip Technology, or SuperStrip Improvements in the

United States and Canada other than: (1) Rights to manufacture in the

United States for export only; or (2) a non-exclusive license that is

also offered to other manufacturers of hard goods EAS systems or

disposable labels in connection with adoption of a retail segment

standard;

B. Acquire any stock, share capital, equity or other interest in

any person or concern, corporate or non-corporate, engaged at the time

of such acquisition in, or within the two (2) years preceding such

acquisition engaged in, the research, development, or manufacture of

disposable labels designed or used for source labelling; provided,

however, that individual employees or directors of respondent and each

pension, benefit, or welfare plan or trust controlled by respondent may

acquire, for investment purposes only, an interest of not more than one

(1) percent of the stock or share capital of such person or concern; or

C. Acquire any patents, intellectual property, or other tangible or

intangible assets, other than a non-exclusive license, used in or

previously used in (and still suitable for use in) the research,

development, or manufacture of disposable labels designed or used for

source labelling.

Provided, however, that an acquisition pursuant to Paragraph III.B.

or III.C. shall be exempt from the prior approval requirements of this

Paragraph III if: (1) The stock, share capital, equity, or assets are

acquired from a person or concern that had less than $2 million in

annual sales in the United States of disposable labels in either of the

two (2) most recent calendar years preceding such acquisition; (2) the

acquisition is of assets relating solely to the manufacture of,

improvements of, or accessories to Sensormatic products that are in

existence as of the time of the acquisition; (3) the acquisition is of

assets from or an interest in a joint venture in which respondent is

one participant and in which no other joint venture participant was at

the time of the commencement of the venture engaged in the research,

development, or manufacture of disposable labels in the United States;

(4) the acquisition is of rights or other assets to be used solely in

commercial or industrial (i.e., non-retail) applications; or (5) the

[[Page 5430]] acquisition is of rights or other assets (other than

United States or Canadian marketing rights to patents, trade secrets

and other intellectual property) to be used solely for products sold

outside the United States and Canada.

IV

It is further ordered that within sixty (60) days after the date

this order becomes final, one year (1) from the date this order becomes

final, and annually for the next nine (9) years on the anniversary of

the date this order becomes final, and at such other times as the

Commission may require, respondent shall file a verified written report

with the Commission setting forth in detail the manner and form in

which it has complied and is complying with this order.

V

It is further ordered that respondent shall notify the Commission

at least thirty (30) days prior to any proposed change in the corporate

respondent such as dissolution, assignment, sale resulting in the

emergence of a successor corporation, or the creation or dissolution of

subsidiaries or any other change in the corporation that may affect

compliance obligations arising out of the order.

VI

It is further ordered that, for the purpose of determining or

securing compliance with this order, subject to any legally recognized

privilege and upon written request with reasonable notice, respondent

shall permit any duly authorized representatives of the Commission:

A. Access, during office hours and in the presence of counsel, to

inspect and copy all books, ledgers, accounts, correspondence,

memoranda and other records and documents in the possession or under

the control of respondent relating to any matters contained in this

order; and

B. Upon five (5) days' notice to respondent and without restraint

or interference from it, to interview officers, directors, or employees

of respondent, who may have counsel present regarding such matters.

Exhibit A--SuperStrip Material

SuperStrip I

SuperStrip I is covered by Patent numbers 5,029,291 (docket number

85.151) and 5,304,987 (docket number 85.168) and one invention

disclosure (as described in docket number 85.184). These patents and

disclosure describe a new type of oxidized magnetic material with an

asymmetrical hysteresis curve and the ability to become magnetically

deactivated. SuperStrip I material is produced by a process, as

described in Knogo's patent, that involves the cutting of amorphous

magnetic material into short, tag-length segments and annealing these

segments for several hours in the presence of a magnetic field.

SuperStrip II

SuperStrip II is a modified version of Knogo's standard magnetic

tag. Short deactivation segments are electroplated onto the soft part

of the magnetic strip in a continuous process instead of being

mechanically cut and adhered to the strip. A U.S. patent application

(docket number 85.180) filed by Knogo is pending with respect to this

process.

SuperStrip III

SuperStrip III, which is the subject of a pending U.S. patent

application (docket #85.191) filed by Knogo is a recent development

involving the melt-spin casting of a specially formulated amorphous

magnetic material in such a way as to produce a unique hysteresis curve

in a manner similar to that of SuperStrip I, but without the use of any

additional processing steps beyond casting the material.

Analysis of Proposed Consent Order To Aid Public Comment

The Federal Trade Commission (``Commission'') has accepted, subject

to final approval, an agreement containing a proposed Consent Order

from Sensormatic Electronics Corporation (``Sensormatic''), which

prohibits Sensormatic from acquiring certain patents from Knogo

Corporation (``Knogo'') for the practice and use of SuperStrip

technology (``SuperStrip'') in the United States and Canada.

The proposed Consent Order has been placed on the public record for

sixty (60) days for reception of comments by interested persons.

Comments received during this period will become part of the public

record. After sixty (60) days, the Commission will again review the

agreement and the comments received and will decide whether it should

withdraw from the agreement or make final the agreement's proposed

Order.

On August 14, 1994, Sensormatic and Knogo entered into an agreement

whereby Sensormatic agreed to acquire through a merger all of Knogo's

assets outside of North America, along with patents related to

SuperStrip; the agreement also obligated Sensormatic and Knogo North

America, Inc. (``Knogo/NA''), a successor corporation to Knogo's

business and assets in the United States and Canada, to grant royalty-

free cross-licenses to one another for any improvements to patents or

trade secrets related to SuperStrip (``SuperStrip Improvements''). The

proposed complaint alleges that the proposed acquisition, if

consummated, would constitute a violation of Section 7 of the Clayton

Act, as amended, 15 U.S.C. Sec. 18, and Section 5 of the FTC Act, as

amended, 15 U.S.C. Sec. 45, in the market for the research and

development of disposable labels developed or used for source labelling

and the research and development of processes to manufacture disposable

labels in the United States and Canada.

Knogo has been developing SuperStrip for possible use as a

disposable source label with electronic article surveillance systems,

which are installed in retail stores as theft prevention devices.

Disposable source labels would be imbedded in goods or packaging at the

manufacturing or distribution level, and they would obviate the need

for retailers to install labels themselves. Sensormatic has been

developing one of its proprietary technologies for potential use as a

source label.

The proposed Consent Order would remedy the alleged violation by

prohibiting Sensormatic from acquiring the SuperStrip patents and

intellectual property in the United States and Canada. The proposed

order allows Sensormatic to acquire a non-exclusive license to use the

technology for products manufactured or sold in the United States and

Canada, and it allows Sensormatic to acquire exclusive rights to such

technology outside the United States and Canada. Finally, the proposed

Consent Order would require Sensormatic to comply with the terms and

conditions of a supply agreement between Sensormatic and Knogo/NA

The proposed Order will also prohibit Sensormatic, for a period of

ten (10) years, from acquiring, without Federal Trade Commission

approval, other legal or equitable rights to use the SuperStrip

technology or SuperStrip Improvements, any stock in any concern engaged

in the research, development, or manufacture of disposable labels

designed or used for source labelling, or any patents or other

intellectual property used in the research, development, or manufacture

of disposable labels designed or used for source labelling. The prior

approval provisions contain several provisos, which exempt certain

acquisitions from the prior approval requirements.

Under the provisions of the Consent Order, Sensormatic is also

required to provide to the Commission a report of its compliance with

the Order within [[Page 5431]] sixty (60) days after the date this

Order becomes final, one (1) year from the date this order becomes

final, and annually thereafter for the next nine (9) years. The Consent

Order also requires Sensormatic to notify the Commission at least

thirty (30) days prior to any change in the structure of Sensormatic

resulting in the emergence of a successor.

The purpose of this analysis is to facilitate public comment on the

proposed Order, and it is not intended to constitute an official

interpretation of the agreement and proposed Order or to modify in any

way their terms.

Donal S. Clark,

Secretary.

Statement of Commissioner Mary L. Azcuenaga Concurring in Part and

Dissenting in Part in Sensormatic Electronics Corp., File No. 941-0126

Today the Commission accepts for public comments a consent order

that would settle allegations that Sensormatic Electronics

Corporation's acquisition of Knogo Corporation's patents related to

SuperStrip and the agreement to cross-license improvements to

SuperStrip violate Section 7 of the Clayton Act and Section 5 of the

Federal Trade Commission Act. I find reason to believe the transaction

violates the law and concur in accepting the consent order for

publication. I dissent, however, from the allegations in the complaint

defining the relevant market and from paragraph II(B) of the order,

which requires that Sensormatic adhere to a private supply contract.

Sensormatic and Knogo produce and sell electronic article

surveillance (EAS) systems and components, used by retailers to protect

against shoplifting. EAS systems provide a warning when a special label

attached to merchandise by the retailer triggers an electronic signal

on hardware located at the store's exit unless the label has been

neutralized by store employees at the time of sale. Because Sensormatic

proposes to acquire only those assets of Knogo located outside North

America, the competitive analysis of the transaction does not focus on

the production and sale of existing EAS systems and labels to retailers

in the United States and Canada.

Sensormatic, Knogo, and other firms, however, are also engaged in

research and development to perfect a new ``source labelling'' system.

In such a system, manufacturers would apply the EAS label to the

merchandise or its packaging, which would eliminate the need for

retailers manually to affix a label to each protected item of

merchandise. No source labelling system is currently in use, but Knogo

has developed and patented SuperStrip technology for use in labels,

potentially including source labels, and other firms are developing

their own source labelling technologies.

I concur that the relevant market involves competition in research

and development, but question the market definition in paragraph 11 of

the complaint, which is narrowly limited to the research and

development of ``disposable labels developed or used for source

labelling'' and processes to make them. In a Section 7 case, the

Commission has the burden of proving the relevant product market, and

distinguishing research and development of source labelling from other

improvements in EAS systems may be difficult or impossible. I would not

limit the product market to research and development in source

labelling but would define the market as research and development in

EAS systems and components, including source labelling.

I also dissent from paragraph 12 of the complaint, which limits the

geographic market to the United States and Canada. Successful research

and development yields intellectual property that can move freely

across international boundaries. A foreign firm can license

intellectual property without establishing a manufacturing or sales

presence in the United States. Limiting the geographic market to the

United States and Canada excludes from the market the potentially

important research activity of at least one European firm. Even if

domestic firms are familiar with particular technologies and have a

sizable base of equipment already installed in retail stores, research

and development may yield an improvement significant enough to overcome

the advantages of current market leaders. The market should not be so

narrowly defined as to presume that only North American firms could

effect a significant breakthrough that might alter the current

competitive balance.

Applying Section 7 analysis to the products and geographic markets

as I would define them, I find reason to believe the transaction would

violate the law. The proposed acquisition would significantly increase

the concentration in the already highly concentrated world market for

EAS system research and development. The proposed transaction, the

transfer of patents from Knogo to Sensormatic and the agreement to

grant royalty-free cross licenses on any improvements to SuperStrip,

likely would diminish competition in research and development of new

EAS systems and components. Accordingly, I concur in paragraph II(A) of

the order.

Finally, I dissent from paragraph II(B) of the order, which

provides that Sensormatic ``shall comply with the terms and

conditions'' of a supply agreement between Sensormatic and Knogo North

America, Inc., the successor corporation to Knogo's North American

business. The supply agreement is a long, highly detailed commercial

contract that was negotiated as part of the acquisition in question.

The complaint contains no allegations establishing a relationship

between this contract and the state of competition in any antitrust

market. Absent a demonstrable link between the contract and

competition, the contract provides no basis for liability and

compliance with the contract does not appear necessary to effect

relief.

[FR Doc. 95-2062 Filed 1-26-95; 8:45 am]

BILLING CODE 6750-01-M