Summit Technology, Inc.; and VISX, Inc.; Analysis To Aid Public Comment

FEDERAL TRADE COMMISSION

[Docket 9286]

Summit Technology, Inc.; and VISX, Inc.; Analysis To Aid Public

Comment

AGENCY: Federal Trade Commission.

ACTION: Proposed consent agreements.

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SUMMARY: The two consent agreements in these matters settle 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 complaint that

the Commission issued on March 24, 1998, and the terms of the consent

orders--embodied in the consent agreements--that would settle most of

these allegations.

DATES: Comments must be received on or before November 2, 1998.

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

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

FOR FURTHER INFORMATION CONTACT:

William Baer or Willard Tom, FTC/H-374, Washington, DC 20580. (202)

326-2932 or 326-2786.

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

Trade

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Commission Act, 38 Stat. 721, 15 U.S.C. 46 and Section 3.25(f) of the

Commission's Rules of Practice (16 CFR 3.25(f)), notice is hereby given

that the above-captioned consent agreements containing consent orders

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

final approval, by the Commission, have 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 agreements, and the

allegations in the complaint. An electronic copy of the full text of

the consent agreement packages can be obtained from the FTC Home Page

(for August 21, 1998), on the World Wide WEb, at ``http://www.ftc.gov/

os/actions97.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

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 has accepted agreements to proposed

consent orders from Summit Technology, Inc. (``Summit''), located at 21

Hickory Drive, Waltham, Massachusetts 02154 and VISX, Inc. (``VISX''),

located at 3400 Central Expressway, Santa Clara, California 95051.

The proposed consent orders (``Orders'') have 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 agreements and the comments received and will decide

whether it should withdraw from the agreements or make final the

agreements' proposed orders.

On March 24, 1998, the Commission issued a complaint alleging that

Summit and VISX violated Section 5 of the FTC Act, as amended, 15

U.S.C. Sec. 45 (the ``Complaint''). The Orders, if issued by the

Commission, would settle all of the allegations of the Complaint

against Summit and settle part of the allegations of the Complaint

against VISX (the ``Complaint'').

The Complaint alleges that Summit and VISX are competitors in the

market for photorefractive keratectomy (``PRK''), a form of eye surgery

that corrects refractive vision disorders through the use of

specialized, computer-guided laser equipment that reshapes the cornea.

Summit and VISX each own patents related to PRK, and are also the only

firms whose PRK laser systems have received marketing approval from the

U.S. Food and Drug Administration.

As set forth in the Complaint, on or about June 3, 1992, VISX and

Summit pooled most of their existing patents related to PRK (as well as

certain future ones) in a newly created partnership called Pillar Point

Partners (``PPP''). According to the Complaint, this pooling

arrangement eliminated horizontal competition between VISX and Summit.

The U.S. Department of Justice and the Federal Trade Commission's

Antitrust Guidelines for the Licensing of Intellectual Property (April

6, 1995) (the ``Guidelines'') address the analysis of intellectual

property licensing in general, and patent pool arrangements such as

that between Summit and VISX in particular. The Guidelines recognize

that intellectual property licensing arrangements are ``typically

welfare-enhancing and procompetitive.'' Guidelines Sec. 3.1. However,

``antitrust concerns may arise when a licensing arrangement harms

competition among entities that would have been actual or likely

potential competitors in a relevant market in the absence of the

license''--what the Guidelines call a ``horizontal relationship'' Id.

With respect to pooling arrangements, the Guidelines repeat the same

analytical principles. The Guidelines note that pooling arrangements

``may provide procompetitive benefits by integrating complementary

technologies, reducing transaction costs, clearing blocking positions,

and avoiding costly infringement litigation.'' Guidelines Sec. 5.5.

However, where pooling arrangements ``are mechanisms to accomplish

naked price fixing or market division,'' or where they ``diminish

competition among entities that would have actual or likely potential

competitors in a relevant market in the absence of the cross-license''

they are subject to challenge. Id.

In this case, the Complaint alleges that Summit and VISX were

horizontal competitors at the time they formed PPP, because they could

and would have competed with one another in the sale or lease of PRK

equipment by using their own technology embodied in their respective

patents. In addition, Summit and VISX could have engaged in competition

with each other in connection with the licensing of technology related

to PRK. The pooling arrangement restricted both forms of competition.

Price competition in the sale or lease of PRK equipment was restricted

because, under the PPP agreement, VISX and Summit were required to pay

a fixed ``per procedure fee'' to PPP for each PRK procedure performed

with its machinery That ``per procedure fee''--set at the higher of the

two proposals submitted by VISX and Summit to PPP ($250)--functioned as

a price floor. Because each firm was obligated to pay $250 per use into

the pool, neither had any incentive to lower the usage charge below

that level. In the absence of the pool, Summit and VISX would have

competed with each other, resulting in lower prices to doctors and

consumers for the use of each company's PRK equipment.

PPP has also had an anticompetitive effect in the market for PRK

technology licensing. Under the PPP agreement, only PPP can license to

third parties the PRK patents contributed by VISX and Summit, but VISX

and Summit each retain a veto power over licensing of any of the

patents in the pool. In effect, this provision of the pool gave each

firm a veto over the licensing of the other's patents. Whereas prior to

the pool, each firm could have licensed its own patents unilaterally,

after the pool no patent could be licensed without the consent of both

companies. Since its formation, the Complaint alleges that PPP has not

licensed its patents to any third-party manufacturers and any offers

have been economically prohibitive.

The Guidelines add that if a pooling arrangement has an

anticompetitive effect in the relevant markets, the Commission should

consider whether the pool is ``reasonably necessary to achieve

procompetitive efficiencies.'' Guidelines, Sec. 4.2. In analyzing

whether the pool is ``reasonably necessary,'' the Guidelines further

instruct that

The existence of practical and significantly less restrict

alternatives is relevant to a determination of whether a restraint

is reasonably necessary. If it is clear that the parties could have

achieved similar efficiencies by means that are significantly less

restrictive, then the [FTC] will not give weight to the parties'

efficiency claim. In making this assessment, however, the [FTC] will

not engage in a search for a theoretically least restrictive

alternative that is not realistic in the practical prospective

business situation faced by the parties.

Id.

Summit and VISX contended that PPP reduced the uncertainty and

expense associated with the patent litigation that would have

inevitably ensued without PPP, and PPP allows both parties to be in the

market, when patent infringement

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might have precluded one or both from coming to market. As to the first

part of that argument, Summit and VISX could have achieved these

efficiencies by any number of significantly less restrictive means,

including simple licenses or cross-licenses that did not dictate prices

to users or restrict entry. As to the second part of that argument, the

Complaint alleges that patent infringement would not have precluded

either firm from coming to market.

After concluding that there was reason to believe that the pooling

of patents by VISX and Summit was anticompetitive and that PPP was not

reasonably necessary to achieve any procompetitive efficientcies, the

FTC issued the Complaint. Thereafter, Summit and VISX decided to enter

into agreements with the FTC to end the dispute. The Order achieve all

of the goals of Counts I and II of the Complaint. As discussed below,

PPP has been dissolved and the Orders require Summit and VISX to make

pricing and licensing decisions independently. In essence, the Orders

return VISX and Summit to the status of competitors in the PRK

industry.

The Orders prohibit Summit and VISX (a) from agreeing in any way to

fix the prices they charge for the use of their PRK lasers and patents,

including the ``per-procedure fee'' charged to doctors each time he or

she uses one of the firms' PRK lasers, and (b) from agreeing in any way

to restrict each other's licensing rights and decisions for their PRK

lasers and patents.

The Orders require Summit and VISX to cross-license, on a royalty-

free and non-exclusive basis the patents each firm contributed to PPP.

Although the Complaint contends that VISX and Summit could have

competed absent the pool, subsequent sunk-cost investments in reliance

on the pool make a cross-license desirable to approximate the

competitive conditions that would have been achieved by this point in

time had the pool not been formed.

The Orders also require Summit and VISX (a) to take no action

inconsistent with the dissolution of PPP, except to the extent

necessary for PPP to wind up its affairs and to defend or settle

litigation in which it is a defendant, and (b) to return the PPP

patents to the firm that contributed them to PPP.

The Orders further require Summit and VISX to give notice of the

Orders to any person that previously requested a license to use any of

the PPP patents in the manufacture, assembly or sale of PRK equipment

since June 3, 1992 (the date PPP was created). Summit and VISX must

also give notice to their customers that they have the opportunity to

stop using the lasers without any penalty or continuing obligation

(with certain exceptions as set forth in the Orders). Customers that

entered into any agreement with Summit or VISX between June 3, 1992

(the date PPP was formed) and June 5, 1998 (the date of PPP's

dissolution) that included an obligation to pay a per-procedure fee to

license any of the PPP patents will have the opportunity to stop using

the laser covered by the patents and negotiate a new licensing

agreement with their current licensor or, alternatively, seek a

licensing agreement with a competitor. This provision is necessary to

restore competitive conditions to those which would have existed had

there been no pool at the time these contracts were entered into.

The Orders also compel Summit and VISX to fulfill certain standard

notification, reporting and inspection requirements.

The Orders will terminate upon the expiration of the last PPP

patent to expire.

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

Orders, and it is not intended to constitute an official interpretation

of the agreements and the Orders or to modify them in any way.

Additionally, the proposed consent orders have been entered into for

settlement purposes only, and do not constitute admissions by Summit

and VISX that the law has been violated as alleged in the Complaint.

By direction of the Commission.

Donald S. Clark,

Secretary.

[FR Doc. 98-23448 Filed 8-31-98; 8:45 am]

BILLING CODE 6750-01-M