Cadence Design Systems, Inc.; Analysis to Aid Public Comment

FEDERAL TRADE COMMISSION

[File No. 971-0033]

Cadence Design Systems, Inc.; Analysis to Aid Public Comment

AGENCY: Federal Trade Commission.

ACTION: Proposed consent agreement.

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SUMMARY: The consent agreement in this matter settles alleged

violations of federal law prohibiting unfair or deceptive acts or

practices or unfair methods of competition. The attached Analysis to

Aid Public Comment describes both the allegations in the draft

complaint that accompanies the consent agreement and the terms of the

consent order--embodied in the consent agreement--that would settle

these allegations.

DATES: Comments must be received on or before July 14, 1997.

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

Room 159, 6th St. and Pennsylvania Ave. NW., Washington, DC 20580.

FOR FURTHER INFORMATION CONTACT:

William J. Baer, Federal Trade Commission, H-374, 6th St. and

Pennsylvania Ave. NW., Washington, DC 20580, (202) 326-2932. Howard

Morse, Federal Trade Commission, S-3627, 6th St. and Pennsylvania Ave.

NW., Washington, DC 20580, (202) 326-2949.

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 above-captioned 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. The following Analysis to Aid

Public Comment describes the terms of the consent agreement, and the

allegations in the accompanying complaint. An electronic copy of the

full text of the consent agreement package can be obtained from the

Commission Actions section of the FTC Home Page (for May 8, 1997), on

the World Wide Web, at ``http://www.ftc.gov/os/actions/htm.'' A paper

copy can be obtained from the FTC Public Reference Room, Room H-130,

Sixth Street and Pennsylvania Avenue NW., Washington, DC 20580, either

in person or by calling (202) 326-3627. Public comment is invited. Such

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

available for inspection and copying at its

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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)).

Analysis of Proposed Consent Order to Aid Public Comment

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

to final approval, an Agreement Containing Consent Order

(``Agreement'') from Cadence Design Systems, Inc. (``Proposed

Respondent''). The proposed Order is designed to remedy anticompetitive

effects stemming from Cadence's proposed acquisition of Cooper & Chyan

Technology (``CCT''). On October 28, 1996, Cadence and CCT entered into

an Agreement and Plan of Merger and Reorganization whereby Cadence will

acquire 100 percent of the issued and outstanding shares of CCT voting

securities in exchange for shares of Cadence voting securities valued

at more than $400 million (the ``Proposed Merger'').

The Commission has reason to believe that the Proposed Merger may

substantially lessen competition in violation of Section 7 of the

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

Federal Trade Commission Act, as amended, 15 U.S.C. Sec. 45, unless an

effective remedy eliminates likely anticompetitive effects. The

Agreement Containing Consent Order would, if finally accepted by the

Commission, settle charges that Cadence's acquisition of CCT may

substantially lessen competition or tend to create a monopoly in the

research, development, and sale of constraint-driven, shape-based

integrated circuit routing tools.

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

(60) days. The Commission invites the submission of comments by

interested persons, and comments received during this period will

become part of the public record. After sixth (60) days, the Commission

will again review the Agreement, as well as any comments received, and

will decide whether it should withdraw from the Agreement or make final

the Agreement's proposed Order.

The Proposed Complaint

According to the Commission's proposed complaint, Cadence is a

company that sells various electronic design automation products and

services, including integrated circuit layout environments. An

integrated circuit (more commonly known as a microchip) is a complex

electronic circuit that consists of as many as five million or more

miniature electronic components on a piece of semiconductor material

smaller than a postage stamp. Integrated circuit design consists of two

distinct phases, logical design and physical design. Integrated circuit

layout environments, which are used during the physical design phase,

are software infrastructures within which integrated circuit designers

access integrated circuit layout tools. Approximately $70 million of

Cadence's annual worldwide sales of approximately $741 million are

attributable to sales of integrated circuit layout environments.

The proposed complaint further alleges that CCT is a company that

sells integrated circuit routing tools and related services, which

account for approximately $13 million of CCT's annual worldwide sales

of approximately $37.6 million. An integrated circuit routing tool,

which is a type of integrated circuit layout tool, is software used to

automate the determination of the connections between electronic

components within an integrated circuit.

According to the Commission's proposed complaint, a relevant line

of commerce within which to analyze the competitive effects of the

Proposed Merger is the market for the research, development, and sale

of constraint-driven, shape-based integrated circuit routing tools. As

integrated circuit designs have become smaller, denser, and faster, the

routing of the interconnections between components has become an

increasingly important phase of the integrated circuit design process.

Routing issues are critical at deep submicron scales of integrated

circuit design, which are scales of design smaller than .35 micron (a

micron is a millionth of an inch). The current state-of-the-art design

scale is .35 micron, but in the future, integrated circuit designs will

shrink to .25 micron and then .18 micron design scales. At deep

submicron scales of integrated circuit design, routing is complicated

by ``cross talk'' and other types of electrical interference, timing

concerns, design density, and other problems. A constraint-driven,

shape-based integrated circuit routing tool is the only kind of routing

tool that can correctly accommodate these unique deep submicron

integrated circuit routing issues.

The proposed complaint further alleges that there are no acceptable

substitutes for constraint-driven, shape-based integrated circuit

routing tools. Routing tools based on other technology cannot

accommodate the unique deep submicron integrated circuit routing issues

described above and thus cannot route deep submicron integrated circuit

designs accurately. Routing inaccuracies create serious performance

problems, and correcting these problems causes significant design

delays. Nor is it commercially feasible for integrated circuit design

engineers to route integrated circuit designs without automation (i.e.,

by ``pointing and clicking'' between each individual component and each

other component to which it must be connected, then going back and

correcting any interference or other problems that arise as the routing

progresses). Given the sheer complexity and density of deep submicron

integrated circuit designs, as well as the intense time-to-market

pressures faced by semiconductor companies in today's fast-paced

electronics industry, hand routing is not an alternative for the timely

and accurate design of integrated circuits.

The proposed complaint further alleges that CCT is currently the

only firm with a commercially viable constraint-driven, shape-based

integrated circuit routing tool, although at least one other firm is in

the process of developing a constraint-driven, shape-based integrated

circuit routing tool that would compete with CCT's product. The

complaint further alleges that Cadence is the dominant supplier of

integrated circuit layout environments. The competitive significance of

Avant! Corporation, Cadence's leading competitor in the supply of

integrated circuit layout environments, is limited by the fact that

Avant! has been charged criminally with conspiracy and theft of trade

secrets from Cadence. Several top Avant! executives have been charged

criminally as well.

The Commission's proposed complaint further alleges that there are

high barriers to entry in the market for constraint-driven, shape-based

integrated circuit routing tools, which are technologically complex and

difficult to develop. De novo entry takes approximately two to three

and a half years for a company that already possesses certain

underlying core technology that can be used to develop a constraint-

driven, shape-based integrated circuit router (for example, shape-based

routing technology for printed circuit boards). Entry is likely to take

even longer for a company that does not already possess such

technology.

According to the Commission's proposed complaint, integrated

circuit designers achieve the necessary compatibility between

integrated circuit layout tools by selecting tools that have interfaces

to a common integrated circuit layout environment. As a result,

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a constraint-driven, shape-based routing tool that lacks an interface

into a Cadence integrated circuit layout environment is less likely to

be selected by integrated circuit designers than a constraint-driven,

shape-based routing tool that possesses such an interface. Similarly,

an integrated circuit layout environment is not likely to be selected

by integrated circuit designers unless a full set of compatible

integrated circuit design tools is available.

The proposed complaint further alleges that it is in Cadence's

interest to make available to users of Cadence integrated circuit

layout environments a complete set of integrated circuit design tools,

because to do so makes a Cadence integrated circuit layout environment

more valuable to customers. Historically, Cadence has provided access

to its integrated circuit layout environments to suppliers of

complementary integrated circuit layout tools that Cadence does not

supply. Cadence does not, however, have incentives to provide access to

its integrated circuit layout environments to suppliers of integrated

circuit layout tools that compete with Cadence products. Cadence

historically has been reluctant to provide access to its integrated

circuit layout environments to suppliers of competing integrated

circuit layout tools.

According to the Commission's proposed complaint, prior to the

Proposed Merger, Cadence did not have a commercially viable,

constraint-driven, shape-based integrated circuit routing tool. As a

result of the Proposed Merger, Cadence will own the only currently

available commercially viable constaint-driven, shape-based integrated

circuit router. Thus, as a result of the Proposed Merger, Cadence will

become less likely to permit potential suppliers of competing

constraint-driven, shape-based integrated circuit routing tools to

obtain access to Cadence integrated circuit layout environments.

The Commission's proposed complaint alleges that, absent access to

Cadence integrated circuit layout environments, developers will be less

likely to gain successful entry into the market for constraint-driven,

shape-based routing tools. The proposed complaint further alleges that

the Proposed Merger will make it more likely that successful entry into

the constraint-driven, shape-based integrated circuit routing tool

market would require simultaneous entry into the market for integrated

circuit layout environments. The need for dual-level entry will further

decrease the likelihood of entry into the market for constraint-driven,

shape-based integrated circuit routing tools.

The Commission's proposed complaint alleges that the Proposed

Merger may substantially lessen competition or tend to create a

monopoly in the market for constraint-driven, shape-based routing

tools, which, among other things, may lead to high prices, reduced

services, and less innovation.

The Proposed Order

The proposed Order would remedy the alleged violations by

eliminating a significant impedment to entry in the market for

integrated circuit routing tools. The proposed Order would require that

Cadence permit developers of commercial integrated circuit routing

tools to participate in the Cadence Connections ProgramTM,

any successor program thereto, or other licensing programs, promotional

programs or other arrangements (collectively, ``Independent Software

Interface Programs'') which enable independent software developers to

develop and sell interfaces to Cadence integrated circuit layout tools

and Cadence integrated circuit layout environments.

The proposed Order would require that Cadence allow independent

developers of commercial integrated circuit routing tools to

participate in Cadence's Independent Software Interface Programs on

terms no less favorable than the terms applicable to other

participants. Cadence currently has over 100 partners in its

Independent Software Interface Programs.

The purpose of these requirements is to ensure that Cadence's

acquisition of CCT's constraint-driven, shape-based integrated circuit

routing tools does not create incentives for Cadence to prevent

competing suppliers of constraint-driven, shape-based integrated

circuit routing tools from participating in Cadence's Independent

Software Interface Programs; to prevent a need for dual-level entry in

the markets for constraint-driven, shape-based integrated circuit

routing tools and integrated circuit layout environments; to ensure

that independent software developers will continue to invest the

resources necessary to develop and sell constraint-driven, shape-based

integrated circuit routing tools that would compete with CCT's

constraint-driven, shape-based integrated circuit routing tool; and to

remedy the lessening of competition as alleged in the Commission's

complaint.

In addition, the proposed Order would prohibit Cadence from

acquiring certain interests in any other concern which, within the year

preceding such acquisition, engaged in the development or sale of

integrated circuit routing tools in the United States, and also would

prohibit Cadence from acquiring any assets used or previously used (and

still suitable for use) in the development or sale of integrated

circuit routing tools in the United States, without prior notice to the

Commission, for a period of ten (10) years. Absent this prior notice

requirement, Cadence might be able to undermine the purposes of the

proposed Order by acquiring a developer of integrated circuit routing

tools without the Commission's knowledge, where such acquisition would

not be subject to the reporting requirements of the Hart-Scott-Rodino

Antitrust Improvements Act of 1976.

Cadence and the Commission also have entered into an Interim

Agreement whereby Cadence has agreed to be bound by the terms of the

proposed Order, pending and until the Commission's issuance of the

proposed Order.

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

proposed Order. This analysis is not intended to constitute an official

interpretation of the Agreement or the proposed Order or in any way to

modify the terms of the Agreement or the proposed Order.

Donald S. Clark,

Secretary.

Statement of Chairman Robert Pitofsky and Commissioners Janet D.

Steiger and Christine A. Varney in the Matter of Cadence Design

Systems, Inc./Cooper & Chyan Technology, Inc.; File No. 971-0033

The consent agreement negotiated in this matter, which the

Commission has today accepted and placed on the public record for

comment, eases competitive concerns raised by Cadence Design Systems,

Inc.'s (``Cadence'') acquisition of Cooper & Chyan Technology, Inc.

(``CCT'').

The Commission's complaint alleges that Cadence is the dominant

supplier of complete software ``layout environments'' for the physical

design of integrated circuits, or ``chips,'' the postage-stamp sized

electronic components used in devices as diverse as personal computers

and kitchen appliances. CCT sells a software tool, called a ``router,''

that works within a layout environment and allows users to plot the

connections among the millions of components within an integrated

circuit. The proposed complaint alleges that CCT is the only firm to

have developed a ``constraint-driven, shape-based'' router, state-of-

the-art technology that is expected to solve the

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next generation of problems that will face integrated circuit producers

designing ever more powerful chips.

The Commission's proposed complaint alleges a well-established

vertical theory of competitive harm, laid out in the 1984 Merger

Guidelines.\1\ The Guidelines explain that a vertical merger can

produce horizontal anticompetitive effects by making competitive entry

less likely if (1) as a result of the merger, there is a need for

simultaneous entry into two or more markets and (2) such simultaneous

entry would make entry into the single market less likely to occur.\2\

While the dissenting Commissioners may take issue with the ``dual-level

entry'' theory of vertical mergers that the 1984 Guidelines articulate,

the available evidence suggests that the Cadence/CCT merger, which

combines Cadence's dominant position in integrated circuit layout

environments with CCT's current monopolistic position in constraint-

driven, shape-based integrated circuit routers, presents a

straightforward case of anticompetitive effects caused by vertical

integration. We believe that this type of competitive harm merits our

attention.\3\

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\1\ See U.S. Department of Justice Merger Guidelines, 4 Trade

Reg. Rep. (CCH para. 13,103 (June 14, 1984) (hereinafter ``1984

Merger Guidelines''). When the agencies issued the 1992 Horizontal

Merger Guidelines, U.S. Department of Justice and Federal Trade

Commission Horizontal Merger Guidelines, 4 Trade Reg. Rep. (CCH)

para. 13,104 (April 7, 1992), they explained that ``[s]pecific

guidance on non-horizontal mergers is provided in . . . [the] 1984

Merger Guidelines.'' U.S. Department of Justice and Federal Trade

Commission Statement Accompanying Release of Revised Merger

Guidelines, 4 Trade Reg. Rep. (CCH) para. 13,104 (April 2, 1992).

See generally Herbert Hovenkamp, Federal Antitrust Policy Secs. 9.4,

9.5 (1994) (suggesting that vertical mergers may create barriers to

entry when one of the parties is a monopolist or near-monopolist).

\2\ See 1984 Merger Guidelines Sec. 4.21.

\3\ Contrary to Commissioner Starek's assertions that

enforcement action here, in the context of a merger, leads logically

to enforcement action against internal vertical expansion, see

Dissenting Statement of Commissioner Roscoe B. Starek III at n.8 &

accompanying text, such unilateral action has been known to present

a completely different set of questions under the antitrust laws for

more than one hundred years.

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When considering the effects of mergers in dynamic, innovative

high-tech markets, such as those present here, it is particularly

important to investigate whether such mergers will create barriers to

entry. New entrants often bring innovation to the market, and the

threat of entry leads incumbents to innovate. Therefore, we must be

vigilant to preserve opportunities for entry.

As the Analysis to Aid Public Comment explains, unless a would-be

supplier of routing tools had the ability to develop an interface to

the Cadence integrated circuit layout environment, it would not be able

to market its routing product effectively to the vast majority of

potential customers which use the Cadence layout environment.\4\

Without an expectation that it could design software compatible with

Cadence's installed base, a would-be entrant might well decide not to

compete.\5\

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\4\ Not only is Cadence the dominant layout environment, but its

competitors are in a state disarray. For example, Cadence's most

significant competitor, Avant! Corporation, and several of its top

executives have recently been charged with the theft of trade

secrets from Cadence.

\5\ CCT decided that it was so important to gain access to

Cadence's layout environment that when Cadence refused to allow the

IC Craftsman product (CCT's constraint-driven, shape-based router

technology) to interface with the Cadence layout program through the

``Connections'' Program, CCT induced a third party that was a

Connections partner to write an interface to the Connections Program

for IC Craftsman without Cadence knowledge. Cadence thereafter

sought to impede CCT's attempts to gain access to the Cadence

integrated circuit layout environment by suing CCT.

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After the proposed Cadence/CCT merger, Cadence would have an

incentive to impede attempts by companies developing routing technology

competitive with CCT's constraint-driven, shape-based router

technology, IC Craftsman, to gain access to the Cadence integrated

circuit layout environment. Following the proposed merger, successful

entry into the routing tool market is more likely to require

simultaneous entry into the market for integrated circuit layout

environments. Without a consent that mandates access to Cadence's

layout environment, and thus lowers the barriers to entry in the

market, a combined Cadence/CCT will face less competitive pressure to

innovate or to price aggressively. Thus, competition would likely be

reduced as a result of the proposed acquisition.

The proposed remedy in this matter preserves opportunities for new

entrants with integrated circuit routers competitive with IC Craftsman

by allowing them to interface with Cadence's layout environments on the

same terms as developers of complementary design tools.\6\

Specifically, the proposed order would require Cadence to allow

independent commercial router developers to build interfaces between

their design tools and the Cadence layout environment through Cadence's

``Connections Program.'' The Connections Program is in place now and

has more than one hundred participants who have all entered a standard

from contract with Cadence.

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\6\ At the same time, the proposed order preserves any

efficiencies of vertical integration resulting from the proposed

merger, which may benefit customers.

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The separate statements by Commissions Azcuenaga and Starek

question this enforcement action. We respectfully disagree.

First, Commissioner Azcuenaga argues that the Commission should

have brought an action based upon a horizontal theory of competitive

harm. We certainly agree that horizontal competitive concerns deserve

our close attention and recognize that horizontal remedies often cure

vertical problems. If we had credible support for the theory that the

proposed merger would combine actual or potential horizontal

competitors and would substantially lessen competition in an integrated

circuit routing market or an innovation market for integrated circuit

routers, we would not hesitate to advance that case. But after a

thorough investigation by Commission staff, we have not found

sufficient evidence to conclude that, absent the acquisition, Cadence

would have been able to enter the market for constraint-driven, shape-

based integrated circuit routers successfully in the foreseeable

future.

The dissenting statements fail to give full weight to all the

incentives at work in the vertical case. It is true that Cadence would

be motivated by the entry of new, promising routing technology to allow

an interface to its layout environment to seek more of its

complementary products. And absent the merger, that would be its only

incentive. But with the merger, Cadence clearly also has an incentive

to prevent loss of sales in its competing products. And while these two

incentives may compete as a theoretical matter, the evidence in this

case indicates that Cadence has acted historically according to the

latter incentive. There is some reason to believe that Cadence in the

past has thwarted attempts by firms offering potentially competitive

technology to develop interfaces to its layout environment (including

at one point, CCT). Now that it has a satisfactory router to offer its

customers, there is no reason to think that absent the consent, Cadence

would treat developers of routers that would compete with IC Craftsman

any differently than it once treated CCT.

Commissioner Azcuenaga also suggests that the consent order is

unnecessary because a company developing a router to compete with IC

Craftsman could proceed, as CCT did, without an interface to Cadence's

design layout environment. The evidence shows, however, that CCT's

management thought that ensuring compatibility with Cadence's layout

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environment was critical and that marketing without that compatibility,

which it had done, was not sufficient.\7\ It took the extreme measure

of inducing a third party to write software for CCT to interface IC

Craftsman with the Cadence layout environment without Cadence's

knowledge. Moreover, despite CCT's success in developing a routine

program, its sales were modest before the merger announcement.\8\

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\7\ Interfacing with another firm's design layout environment is

also not a feasible alternative because of Cadence's dominant

position in the market. Without hope of marketing to the vast

majority of customers, developers of an alternative router have

minimal incentives to compete. In addition, the competitive's

significance of Cadence's few competitors is questionable.

\8\ Products offering incremental innovation rather than the

revolutionary breakthrough of IC Craftsman would have an even more

difficult time entering.

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Commissioner Azcuenaga is further concerned that mandating access

to the Connections Program for developers of routing software on terms

as favorable as for other Connections participants might have

unintended consequences. In particular, she is concerned that the order

may prompt Cadence to charge higher prices to all Connections partners.

But the Connections Program is an existing program with over one

hundred members, and Cadence would have significant logistical

difficulties, and would risk injuring its reputation, if it suddenly

altered the terms of the program. Also, Cadence has good reasons for

having so many Connections partners--they offer Cadence customers

valuable tools, most of which do not compete with Cadence products. It

seems unlikely that Cadence would be motivated to make the Connections

Program less appealing to those partners.

Both Commissioners Azcuenaga and Starek suggest that the proposed

remedy may be difficult to enforce. Any time this Commission enters an

order, it takes upon itself the burden of enforcing the order, which

requires use of our scarce resources. However, we think the proposed

order, which simply requires Cadence to allow competitors and potential

competitors developing routing technology to participate in independent

software interface programs on terms no less favorable than the terms

applicable to any other participants in such programs, is a workable

approach.\9\ Connections partners all sign the same standard-form

contract and there has been a consistent pattern of conduct with

respect to the program to use as a baseline for future comparisons.

Moreover, the Commission has had experience with such non-

discrimination provisions, and can rely on respondent's compliance

reports required under the order as well as complaints from independent

software developers to ensure compliance with the consent. We think the

dissenting Commissioners' scenarios about intractable compliance issues

are unfounded.

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\9\ The language of the consent is clear in requiring that terms

for routing companies be no less favorable than for any other

participant in the Connections Program. Thus, we do not understand

Commissioner Starek's conclusion that the consent could be

interpreted to require routing companies to pay a ``fee no higher

than the highest fee.'' And as his own dissent acknowledges, if the

order could be interpreted to allow Cadence to terminate router

developers from the Connections Program after thirty days, the

proposed order would be meaningless.

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In sum, we believe that the consent order will preserve competition

in the market for cutting-edge router technology by reducing barriers

to entry.

Statement of Commissioner Mary L. Azcuenaga Concurring in Part and

Dissenting in Part in Cadence Design Systems, Inc., File No. 971-0033

The acquisition of Cooper & Chyan Technology, Inc. (Cooper &

Chyan), by Cadence Design Systems, Inc. (Cadence), combines the only

firm currently marketing a constraint-driven, shape-based integrated

circuit routing tool with a firm that was, at least until the

acquisition, on the verge of entry into this market. I find reason to

believe that the proposed merger would violate Section 7 of the Clayton

Act under a horizontal, potential competition theory of law. I dissent

from the complaint because it fails to allege a horizontal violation of

law and because I do not find reason to believe that the transaction

would violate the law under the vertical theory that is alleged in the

complaint. I support the part of the order that addresses the

horizontal problem, although I question whether it is sufficient. The

classic horizontal remedy would be divestiture of either the Cooper &

Chyan routing tool or the Cadence routing tool that has not yet reached

the market. I do not support the rest of the order.

Despite the absence of a horizontal allegation in the complaint,

the majority nevertheless has addressed the horizontal competition

issue in paragraph III of the proposed consent order, which imposes a

ten-year prior notice provision. Under the Commission's policy, prior

notification provisions are imposed to prevent a recurrence of an

anticompetitive merger.\1\ This prior notice provision seems to address

the prospect of another anticompetitive, horizontal merger in the

market for ``Integrated Circuit Routing Tools.'' Any further

acquisition by Cadence of a firm marketing such a tool would present

obvious horizontal issues, but should not require any additional

vertical cure. To the extent that this proposed order provides a

vertical remedy for any possible market foreclosure or increased

barriers to entry, a duplicate vertical order against Cadence would be

unnecessary.

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\1\ According to the ``Statement of Federal Trade Commission

Policy Concerning Prior Approval and Prior Notice Provisions'' (June

21, 1995), the Commission imposes such prior notice requirements

only on a finding of ``credible risk that a company that engaged or

attempted to engage in an anticompetitive merger would, but for an

order, engage in an otherwise unreportable anticompetitive merger.''

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Paragraph II of the proposed order requires Cadence to allow

developers of ``Commercial Integrated Circuit Routing Tools'' to

participate in its connections program on ``terms no less favorable

than'' the terms offered to any other participant. According to the

Analysis to Aid Public Comment at page 7, this provision is intended to

eliminate the need for dual level entry so that a future developer of

``Commercial Integrated Circuit Routing Tools'' will not also need to

develop an environment comparable to Cadence's environment.

I question this aspect of the case for several reasons.\2\ First,

Cooper & Chyan was successful in developing and marketing its routing

program before it obtained access to Cadence's environment program.

This success suggests that access to Cadence's environment is not

necessary to the success of an entrant in the routing tool market.

Second, although Cadence initially denied Cooper & Chyan access to its

connections program, it reversed course and granted the access. To the

extent that Cadence may have capitulated to pressure from customers to

grant access, that capitulation would suggest that Cadence has little

or no power to deny access to its connections program to a product that

its customers want. Third, this remedy is premised on the allegation in

paragraph 16 of the Complaint that ``Cadence does not, however, have

incentives to provide access to a Cadence integrated circuit layout

environment to suppliers of integrated circuit layout tools that

compete with Cadence products.'' To the extent that a Section 7 order

may be based on incentives, the incentives appear to be at least as

likely to go the

[[Page 26795]]

other way. If another company develops an innovative, advanced router,

one would assume that Cadence would have incentives to welcome the

innovative product to its suite of connected design tools, thereby

enhancing the suite's utility to customers.

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\2\ The majority is mistaken to the extent they believe I take

issue with Section 4 of the U.S. Department of Justice Merger

Guidelines (June 14, 1984). See Statement of Chairman Robert

Pitofsky and Commissioners Janet D. Steiger and Christine A. Varney

written in response to this statement and the dissenting statement

of Commissioner Starek.

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Paragraph II of the proposed order may be counterproductive and may

result in substantial enforcement costs for the Commission. Because

Paragraph II bars Cadence from charging developers of ``Commercial

Integrated Circuit Routing Tools'' a higher access fee than developers

of other design tools, one possible, unintended consequence of the

order is that Cadence may reduce or eliminate discounting of access

fees. In addition, enforcement of the provision of the order requiring

Cadence to provide access to the connections program to developers of

``Commercial Integrated Circuit Routing Tools'' on terms ``no less

favorable than the terms applicable to any other participants'' may

well embroil the Commission in complex commercial disputes.

I concur in the acceptance of Paragraph III of the proposed order

and dissent from the acceptance of Paragraph II of the proposed order.

Dissenting Statement of Commissioner Roscoe B. Starek, III in the

Matter of Cadence Design Systems, Inc. and Cooper & Chyan Technology,

Inc., File No. 971 0033

I respectfully dissent from the Commission's decision to accept a

consent agreement with Cadence Design Systems, Inc. (``Cadence''), a

supplier of software for the design of integrated circuits (``ICs'').

The proposed complaint alleges that the merger of Cadence and Cooper &

Chyan Technology, Inc. (``CCT'')--a producer of software complementary

to Cadence's--is likely substantially to lessen competition in

violation of Section 7 of the Clayton Act, 15 U.S.C. Sec. 18, and

Section 5 of the Federal Trade Commission Act, 15 U.S.C. Sec. 45. To

justify the proposed complaint and order, the Commission once again

invokes the specter of anticompetitive ``foreclosure'' as a direct

consequence of the transaction. As I have made clear on previous

occasions,\1\ foreclosure theories are generally unconvincing as a

rationale for antitrust enforcement. The current case provides scant

basis for revising this conclusion.

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\1\ See Dissenting Statement of Commissioner Roscoe B. Starek,

III, in Time Warner Inc., et al., Docket No. C-3709 (consent order,

Feb. 3, 1997); Dissenting Statement of Commissioner Roscoe B.

Starek, III, in Waterous Company, Inc. and Hale Products, Inc.,

Docket No. C-3693 & C-3694 (consent orders, Nov. 22, 1996);

Dissenting Statement of Commissioner Roscoe B. Starek, III, in

Silicon Graphics, Inc. (Alias Research, Inc., and Wavefront

Technologies, Inc.), Docket No. C-3626 (consent order, Nov. 14,

1995); Remarks of Commissioner Roscoe B. Starek, III, ``Reinventing

Antitrust Enforcement? Antitrust at the FTC in 1995 and Beyond,''

remarks before a conference on ``A New Age of Antitrust Enforcement:

Antitrust in 1995'' (Marina del Rey, California, Feb. 24, 1995).

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The theory of harm presented here is the same as--and thus shares

all of the defects of--that offered in Silicon Graphics, Inc.

(``SGI'').\2\ In SGI, the Commission alleged that the merger of a

computer hardware manufacturer (SGI) and two software vendors (Alias

and Wavefront) would result in the post-acquisition ``foreclosure'' of

other independent software suppliers, leading to monopoly prices for

graphics software. The Commission claimed that because the acquisition

would give SGI its own in-house software producers, SGI no longer would

allow unaffiliated software vendors access to its hardware platform.

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\2\ Supra note 1.

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In the current incarnation of this theory, Cadence is cast in the

role of SGI and CCT in the role of the software vendors. The Commission

alleges that Cadence no longer will allow independent suppliers of

``routing'' software--the type of software sold by CCT--to wire

programs that can interface with other IC layout programs in the

Cadence suite. To mitigate these supposed anticompetitive incentives,

the proposed order would require Cadence to provide independent vendors

of routing software access to its ``Independent Software Interface

Programs'' (e.g., to its ``Connections Program'') on terms ``no less

favorable'' than the terms offered to other independent software

vendors.\3\

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\3\ Proposed order, para. II.A.

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The logic of the proposed complaint is fundamentally flawed. Even

if we assume arguendo--as the proposed complaint in this case does--

that Cadence is ``dominant'' in the supply of software components

complementary to the router,\4\ the fact remains that it has no

incentive to restrict the supply of routers. I noted in SGI that ``SGI

ha[d] strong incentives to induce expanded supply of SGI-compatible

software: increasing the supply of compatible software (or of any

complementary product) increases the demand for SGI's

workstations.''\5\ The same is true here: the introduction of lower-

priced or higher-quality routing program increases the value of

Cadence's ``dominant'' position in the sale of software complementary

to the router, because it increases the demand for Cadence design

software, thereby allowing Cadence to increase the price and/or the

output of these programs. Despite the majority's assertions to the

contrary,\6\ this is true whether or not Cadence has vertically

integrated into the sale of routing software, for efficient entry into

the production of routing software increases the joint profits of the

entrant and Cadence. If the Commission is correct that Cadence is

``dominant'' in the supply of software components

[[Page 26796]]

complementary to routers, then of course Cadence may be in a position

to expropriate--e.g., via royalties paid to Cadence by the entrant for

the right to ``connect'' to Cadence's software--some or all of the

``efficiency rents'' that otherwise would accrue to an efficient

entrant. This, however, would constitute harm to a competitor, not to

competition, and Cadence would have no incentive to set such rates so

high as to preclude entry.

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\4\ The anticompetitive theory requires Cadence to have

substantial monopoly power: if there were numerous good alternatives

to Cadence's suite, other independent vendors of routing software

could affiliate with them and there would be no ``foreclosure.''

\5\ Dissenting Statement in SGI, supra note 1, at 2. Moreover,

as was also true in SGI, the description of the premerger state of

competition set forth in the complaint itself tends to exclude the

possibility of substantial postmerger foreclosure. In SGI, the

complaint alleged that software producers other than Alias and

Wavefront were competitively insignificant prior to the merger, and

that premerger entry barriers were high. Similarly, the current

complaint (para.11) alleges that there are substantial premerger

barriers to entry into the market for the kind of ``router''

software that CCT produces. But one cannot find both that the

premerger supply elasticity of substitutable software is virtually

zero and that the merger would result in the substantial postmerger

foreclosure of independent software producers. If entry into

constraint-driven, shape-based IC router software is effectively

blocked premerger, as the complaint contends, if cannot also be the

case that the merger would cause a substantial incremental reduction

in entry opportunities.

\6\ The majority asserts that ``Cadence clearly also has an

incentive to prevent loss of sales in its competing products.''

(Majority Statement at 4; emphasis in original.) Similarly, the

Analysis of Proposed Consent Order to Aid Public Comment simply

asserts (at 5) that ``Cadence does not . . . have incentives to

provide access to its integrated circuit layout environments to

suppliers of integrated circuit layout tools that compete with

Cadence products.'' Because neither the majority statement nor the

Analysis to Aid Public Comment describes how this conclusion was

reached, it is difficult to identify precisely the source of the

erroneous reasoning. Chiefly, however, it seems to reflect a

manifestation of the ``sunk cost fallacy,'' whereby it is argued

that because Cadence has now sunk a large sum of money into

acquiring CCT, this in and of itself would provide Cadence with an

incentive not to deal with independent vendors of complements. This

reasoning, of course, is fallacious: the cost incurred by Cadence in

acquiring CCT--whether a large or a small sum--is irrelevant to

profit-maximizing behavior once incurred, for bygones are forever

bygones. The introduction of a superior new router, even if by an

independent vendor, will increase the joint profits of Cadence and

this vendor (irrespective of the amount spent in acquiring CCT), and

both parties will have a profit incentive to facilitate its

introduction.

Moreover, the majority also imputes a sinister motive to

Cadence's reluctance to deal with certain competitors, while failing

to acknowledge that this reluctance almost surely represents a

legitimate and well-founded interest in protecting its intellectual

property. As the Analysis to Aid Public Comment notes (at 4):

``Cadence's leading competitor in the supply of integrated circuit

layout environments, Avant! Corporation, has been charged criminally

with conspiracy and theft of trade secrets from Cadence, and several

top Avant! executives have been charged criminally as well.''

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The theory of harm and the remedy proposed here also share many of

the flaws that I pointed out in Time Warner.\1\ In that case the

Commission's action was based to a significant degree on the argument

that increased vertical integration into cable programming on the part

of Time Warner and Tele-Communications, Inc. would increase those

firms' incentives to reduce the supply of independently produced

television programming. Carried to its logical conclusion, this theory

of harm constitutes a basis for challenging any vertical integration by

large cable operators or large programmers--even vertical integration

occurring via de novo entry by a cable operator into the programming

market or de novo entry by a programmer into distribution.

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\7\ See my Dissenting Statement in Time Warner Inc., et al.,

supra note 1.

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Now apply this train of thought to the current matter. Contrary to

the analysis presented above, suppose that somehow Cadence could profit

anticompetively from denying interconnection rights to independent

router vendors. If that were so, then it would not be sufficient merely

to prevent Cadence from acquiring producers of complementary software.

Rather, the Commission would have to take the further step of

preventing Cadence from developing its own routers, for under the

anticompetitive theory advanced in the complaint, any vertical

integration by Cadence into routers, whether accomplished by

acquisition or through internal expansion, would engender equivalent

post-integration incentives to ``foreclose'' independent vendors of

routing software \8\ Of course, as I noted in Time Warner, there is

likely to be little enthusiasm for such a policy because there is a

general predisposition to regard internal capacity expansion as

procompetive.\9\

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\8\ Thus, it is unclear how the Commission should respond, under

the logic of its complaint, were Cadence to introduce an internally

developed software program (now provided by one or more independent

vendors) that is complementary to its ``dominant'' suite of

programs. Obviously Cadence would be in a position (similar to that

alleged in the Commission's complaint) to block access to the

Cadence design software if it wanted to. Even if Cadence did not

terminate the independent vendors, consistent application of the

economic logic of the present complaint seemingly would require the

Commission to seek a prophylactic ``open access'' order against

Cadence similar to the order sought here. This enforcement policy

would of course have a number of adverse competitive consequences,

including deterrence of Cadence from efficiently entering

complementary software lines through internal expansion.

The observation in note 3 of the majority statement that

antitrust law has treated vertical integration by merger differently

from internal vertical integration ``for more than one hundred

years'' suggests that I do not recognize that the law provides for

differential treatment of mergers and internal expansion. I simply

intended to point out the illogically of finding vertical

integration with identical economic consequences to be illegal under

the Commission's standards of merger review, when that integration

would be of no concern (and might even be applauded) if it resulted

from simple internal expansion.

\9\ In the present case, as in Time Warner, the Commission has

alleged the existence of substantial pre-acquisition market power in

both vertically related markets (routing software and the rest of

the IC layout ``suite'' here, see complaint Paras. 9-11, and cable

television programming and distribution in Time Warner). Under these

circumstances, there is a straightforward reason why vertical

integration is both profitable and procompetitive (i.e., likely to

result in lower prices to consumers): vertical integration would

yield only one monopoly markup by the integrated firm, rather than

separate markups (as in the pre-integration situation) by Cadence

and CCT.

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Not only am I unpersuaded that Cadence's acquisition of CCT is

likely to reduce competition in any relevant market, but--as in SGI and

Time Warner--I would find the proposed order unacceptable even were I

convinced as to liability. As in Time Warner, the Commission seeks to

impose a ``most favored nations''clause that would require Cadence to

allow all independent router developers to participate in its software

interface programs on terms that are ``no less favorable than the terms

applicable to any other participants in'' those interface programs.

Even apart from the usual problems with ``most favored nations''

clauses in consent orders,\10\ this order--as in both SGI and Time

Warner--will require that the Commission continuously regulate the

prices and other conditions of access.

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\10\ As I noted in Time Warner, these clauses have the capacity

to cause all prices to rise rather than to fall. Dissenting

Statement, supra note 1, at 20. The majority (at 5) seems

comfortable with this outcome, provided that all vendors pay the

same price.

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Indeed, compared to the proposed order in the present case, the

order in Time Warner was a model of clarity and enforceability. What

does it mean to mandate treatment ``no less favorable than'' that

granted to others, when Cadence's current Connections Program--with

well over 100 participants--allows access prices to differ

substantially across participants and imposes substantial restrictions

on the breadth and scope of the permitted connection rights?\11\ Does

it mean that router vendors pay a connection fee no higher than the

highest fee paid by an existing participant? Or would they pay a fee no

higher than the current lowest fee? Or does it means something else?

Router vendors surely will argue for the second interpretation--a view

also apparently shared by the Commission majority\12\--yet there is no

obvious reason why router vendors should be entitled to such a

Commission-mandated preferential pricing arrangement, and neither the

majority nor the Analysis to Aid Public Comment has offered one.

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\11\ For example, CCT had been permitted to participate in the

Connection Program with its printed circuit board router but not

with its IC router.

\12\ See Majority Statement at note 9.

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Similarly, does the ``no less favorable'' requirement mandate that

the vendors of routing software obtain access rights as broad as the

broadest rights now granted, or simply no worse than the narrowest now

granted? And since the current Connections contracts are terminable at

will by either party with 30 days' notice, does ``no less favorable''

mean only that router vendors must be given the same termination terms

as other software vendors, or does it mean something else (e.g.,

termination only for cause, where the ``reasonableness'' of the

termination is subject to ex post evaluation by the Commission)? \13\

The former interpretation of the order seems the most straightforward;

however, it is also one that essentially would nullify the protection

of independent router vendors and thus would render the order

meaningless.\14\

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\13\ Moreover, does the terminability of the Connections

contract on 30 days' notice mean that the ``no less favorable''

requirement might need to be reviewed every 30 days?

\14\ The majority implies (Majority Statement at note 9) that

the exercise of this right would indeed constitute a violation of

the order.

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The preceding suggests strongly that the real (albeit unstated)

goal of the order is not to nullify any actual anticompetitive effects

from the proposed transaction, but rather to invalidate the principal

aspects of Cadence's ``Connections Program'' (i.e., the ability to

charge different connection fees and to terminate vendors at will)

without demonstrating that the program's provisions violate the law.

There is little reason to believe that this program is harmful to

competition, and there are strong efficiency reasons for allowing

Cadence to set different fees for different vendors. Moreover, setting

a uniform fee would result in price increases to at least some vendors.

[[Page 26797]]

Because I do not accept the majority's theory of liability in this

case, and because I find the proposed remedy at best unenforceable and

at worst competitively harmful, I dissent.

[FR Doc. 97-12753 Filed 5-14-97; 8:45 am]

BILLING CODE 6750-01-M