Antitrust Considerations in International Corporate Activity- Tec

8/3/2019 Antitrust Considerations in International Corporate Activity- Tec

1/26

Boston College Law Review

Volume 12Issue 3 The Tax Reform Act Of 1969

Article 7

2-1-1971

Antitrust Considerations in InternationalCorporate Activity: Technical Assistance

Agreements and Foreign AcquisitionsTimothy E. Kish

This Comments is brought to you for free and open access by Digital Commons @ Boston College Law School. It has been accepted for inclusion in

Boston College Law Review by an authorized administrator of Digital Commons @ Boston College Law School. For more information, please contact

[email protected].

Recommended CitationTimothy E. Kish,Antitrust Considerations in International Corporate Activity: Technical AssistanceAgreements and Foreign Acquisitions, 12 B.C.L. Rev. 453 (1971), http://lawdigitalcommons.bc.edu/bclr/vol12/iss3/7
http://lawdigitalcommons.bc.edu/bclrhttp://lawdigitalcommons.bc.edu/bclr/vol12http://lawdigitalcommons.bc.edu/bclr/vol12/iss3http://lawdigitalcommons.bc.edu/bclr/vol12/iss3http://lawdigitalcommons.bc.edu/bclr/vol12/iss3/7mailto:[email protected]:[email protected]://lawdigitalcommons.bc.edu/bclr/vol12/iss3/7http://lawdigitalcommons.bc.edu/bclr/vol12/iss3http://lawdigitalcommons.bc.edu/bclr/vol12http://lawdigitalcommons.bc.edu/bclr


2/26


3/26

B O S T O N C O L L E G E IND US T R IA L A N D C O M M E R C IA L L A W R E V I EWfirms, and to lessen competition in the sale of products to purchaserslocated in the United States; (2) eliminate Westinghouse as a com-petitor in, and to lessen com petition in, the export of products from theUnited States to Japan; and (3) deprive the public of the benefits offree and open competition. 8As an example of these effects, the government cites the periodfrom January, 1966 to March, 1967 wherein Mitsubishi Electricreceived a number of specific bid inquiries for the sale of electricalequipment to the United States, including projects for the SacramentoMunicipal Utility District, the California Department of WaterResources, the Turlock & Modesto Irrigation District (California),and the Bureau of Reclamation, United States Department of theInterior. It is alleged that in each instance W estinghouse, after inquiryfrom Mitsubishi Electric, refused to allow Mitsubishi Electric to bidon the projects" On the basis of these effects, the government allegesthat the agreements constitute an unreasonable restraint of trade andcommerce between the United States and Japan, and are, therefore,in violation of Section 1 of the Sherm an A ct."In the second suit, the government is seeking to block GilletteCompany's acquisition of Braun Aktiengesellschaft" (Braun), alleg-edly the third largest European producer and seller of electric razors.'In this suit, the government claims that the effect of the acquisitionmay be substantially to lessen competition, or to tend to create a mo-nopoly in violation of Section 7 of the Clayton Act." The crux of thecomplaint is that Braun will be eliminated as a potential substantialindependent entity in the domestic shaving industry." The suit againstGillette is significant because it marks the first time that the JusticeDepartment has challenged in court a U.S. company's acquisition of aforeign concern."This com ment w ill examine the general question of the applicabilityof the Sherm an and C layton Acts to United States technical assistanceagreem ents with, and direct ac quisitions of, foreign corporations. Spe-cifically, the article will discuss the jurisdictional problems that mayarise, the validity of the typical defense that the challenged territorialrestrictions are ancillary to the primary purpose of the agreement, thecharacteristics of potential competition, and the possible judicial

8 Id. at 9, 10.9 Id. at 9.10 15 U.S.C. 1 (1964).11 See complaint, supra note 1.12 Id. at 4.la 15 U.S.C. 18 (1964).14 See complaint, supra note 1, at 6, 7.15 In United States v. Jos. Schlitz Brewing Co., 253 F. Supp. 129 (ND. Calif.190), the government challenged the legality of Schlitz's acquisition of a Canadiancorporation. However, since the Canadian corporation was the owner of a domesticcompetitor of Schlitz, the court treated the case as if it were simply the acquisition ofa domestic competitor .

45 4


4/26

A N T IT R U S T A N D I NT E R N A T I O N A L C O R P O R A T E A C T I V I T Yremed ies available, Finally, it will be dem onstrated that w here territo-rial restrictions are a major incident in an agreement between twofirms, the test of legality is not whether the restrictions are ancillaryto the main objectives of the agreement, but rather, whether theparties are engaged in substantial mutual competition.'

I. JURISDICTIONAL CONSIDERATIONSAny investigation of the applicability of the antitrust laws toagreements between domestic and foreign parties must examine thecontention that some of the activities involved may have taken placeoutside the territorial boundaries of the United States, and thus arebeyond the jurisdiction of the federal courts. It is necessary then, asa prelude to an examination of the agreements themselves, to explorethe jurisdictional problems that might arise.Generally, obtaining personal jurisdiction over corporations in-volved in substantial international activity presents no problem. Bydefinition, all domestic corporations can be found somewhere in theUnited States. With respect to the jurisdiction of the courts over theforeign party to the transaction, Section 12 of the Clayton Act pro-vides that "[a]ny suit, action, or proceeding under the antitrust lawsagainst a corporation may be brought not only in the judicial districtwhereof it is an inhabitant, but also in any district wherein it may befound or transacts business. . . .""The extent to which the courts are willing to go in interpreting"may be found or transacts business" is indicated in United States v.Scophony Corp. of America." In this case, Scophony Ltd., a Britishcorporation with its principal place of business in London, and nopermanent office in the United States, had entered into a series ofallegedly illegal contractual arrangements with various Americancorporations. Notice was served in New York on a director of thecorporation who held a comprehensive power of attorney to protectScophony's interests in the United States. The Supreme Court heldthat the mere a dministration and surveillance of corporate agreem ents

was "transacting business" within the meaning of Section 12 of theClayton Act."Since most ma jor agreem ents between dome stic and foreign firmsrequire at least some surveillance and protection of interests in theUnited States by a representative of the foreign party, it appears thatpersonal jurisdiction over the foreign corporation will rarely presenta problem. Mere there is no such representative, it is highly unlikely10 For an excellent discussion of the antitrust aspects of international business seeDonovan, Antitrust Considerations in the Organization and Operation of American

Business Abroad, 9 B.C. Ind. & Com. L, Rev. 239 (1968).1715 U.S.C.2 (1964).19 333 U.S. 795 (1948).19 Id. at 814-18. 455


5/26

B O S T O N C O L L E G E IN DU S T R I A L A ND C O M M E R C I A L L A W R E V I E Wthat the agreemen t is of sufficient impo rtance to justify an antitrustaction.

With respect to subject matter jurisdiction, there has been aplethor a of scholar ly discussion." It can be seen that certain pro blemsmay arise when attempting to apply the antitrust laws to activitytaking place o utside o f the United States. The p ro blem is particularly,acute in the situation where the challenged activity is legal in thecountry o f its making. In A m erica Banana Co. v . United Fruit C o., 2 1M r. Justice Ho lmes rem ark ed: "But the general and almo st universalrule is that the character of an act as lawful or unlawful must bedetermined who lly by the law o f the co untry w here the act is do ne." 2 2In this case, the Amer ican Banana Co mpany, a competitor o f UnitedFr uit, charged that United had "instigated"" the gover nment o f Co staRica to seize the plaintiff's banana plantation and transportationfacilities, and, by outb idding, had driven all other pur chasers o ut ofthe marketall of this allegedly in furtherance of developing amo no po ly. In dismissing the com plaint, the Co urt no do ubt was im-pressed by the fact that it was the government of Costa Rica thatactually seized the plantation. In com menting o n this aspect o f thecase, the Co ur t said, "it is a contradictio n in term s to say that w ithinits jurisdiction it is unlawful to per suade a so vereign pow er to br ingabout a result that it declares by its conduct to be desirable andpro per."" As fo r the acts o f the defendant itself in o utbidding com -petitors, the Court again looked at the legality of the act in CostaRica, saying that "it is enough to say that we have no ground forsupposing that it was unlawful in the countr ies where the purchaseswer e made!'"The A m erican Banana case, o f cour se, told o nly one side of thestor y. It addressed its inquiry o nly to the activities and their effectsin the for eign co untry. B y dismissing the co mplaint rather than reach-ing a decisio n o n the merits, the Co urt w as implying that wher e thereis no allegation that U .S. for eign o r interstate co mm erce is affected,the Cour t has no jurisdiction to decide the case.. Two years later the Supreme Court decided United States v.A m erican Tob acco C o.," the first in a series of cases" to consider

20 See K. Br ewster, Antitrust and Am erican Business Abro ad (1958) . W. Fugate,Fo reign Co mmerce and the Antitrust Laws (1958); Dono van, Antitrust Considerationsin the Or ganization and O peration of A merican Business Abro ad, supra no te 16; Blo ch,Extraterritorial Jurisdiction of U.S. Courts in Sherman Act Cases, 54 A.B.A.J. 781(1968); Note, Extraterr itorial Application of Feder al Antitrust Laws: Delimiting theReach of Substantive Law U nder the Sherman Act, 20 Vend. L. Rev. 1030 (1967 ).21 213 U.S. 347 (1909).22 Id. at 356.28 Id. at 354.24 Id. at 358.23 Id. at 359.26 221 U.S. 106 (1911).97 Thomsen V. Cayser, 243 U.S. 6 6 (1917); United States v . Sisal Sales Cor p., 274U.S. 26 8 (1927). Fo r an excellent summary see Bloch, supra note 20.

456


6/26

A N T IT R U S T A N D I NT E R N A T I O N A L C O R P O R A T E A C T I V I T Ythe effects of a foreign agreement on U.S. commerce. In AmericanTobacco there wer e numero us firm s invo lved in varied and com plexagreements which the Co urt found to b e in violation o f the Sherm anAct. The lower court, however, had dismissed the complaint as toImperial, a Br itish co rpo ration, . which as a part o f a contract withAmerican Tobacco had agreed to limit its business to the UnitedKingdom. T he reasons given by the low er co urt for dismissing thecom plaint wer e that the contr act was made in Br itain and was validunder the laws o f that co untry. The Supreme Co urt, how ever, heldthat "the assailed comb ination . . . including the for eign co rpo rationsin so far as by t he contracts mad e by them they becam e cooperatorsin the comb inationcom es within the prohibitions of the . . . Anti-trust Act. . . M E I (Emphasis added.)The expansion of jurisdiction in antitrust cases culminated inUnited States v . Aluminum C o. of Am erica," wher e Judge LearnedH and stated: "O n the o ther han d, it is settled law . . . that any statemay impo se liabilities, even upo n per son s no t w ithin its allegiance,for conduct o utside its bo rder s that has consequences within its bor derswhich the state reprehends. . . ." 8 This case involved agr eementswher eby a for eign cor por ation or ganized by foreign companies fixedquo tas o n aluminum pro ductio n for its shareho lders and fixed a priceeach year at w hich it wo uld buy any part o f a shareho lder's quotaw hich it had not sold. The agreement further pr o vided that no share-holder w as to buy, bor ro w , fabricate, or sell aluminum pro duced byanyone not a shareholder, except with the consent of the board ofgover nor s. The cour t held that the agreements wo uld have been unlaw-ful if made w ithin the Un ited States, and hence wer e unlaw ful eventhough m ade abro ad if they wer e intended to and did affect impo rts.The Repo rt o f the Attor ney General's Natio nal Com mittee to S tudythe Antitrust Laws (1955) relied heavily on the language of theAluminum case and set for th the follo wing guidelines:

[T] he Sherm an Act applies o nly to those arr angements be-tween A mer icans alone, or in concert with foreign firms,w hich have such substant ial anticom pet itive effects on thiscountry 's trad e or com m erce . . . as to constitut e unreasonablerestraints . . . .[C] onspiracies between for eign com petitor s alo ne shouldcome w ithin the Sherman A ct only w here they are intendedto, and actually do, result in substantial anticompetitiveeffects on our foreign com m erce. (Emphasis added.) 8 1

29 221 U.S, at 184.29 148 F.2d 416 (2d Cir. 1945).80 Id. at 443.81 Report of the Attorney General's National Committee to Study the AntitrustLaws at 76 (1955).

45 7


7/26

B O S T O N C O L L E G E IN DU S T R I A L A ND C O M M E R C I A L L A W R E V I E WThe language in the cases discussed abo ve seems to hav e mer gedtwo issuesthe question of jurisdiction of the court over matters

outside the territorial boundaries of the United States, and the issueof the reach of the Sherman Act's provisions. To the extent that theSherm an Act pro hibits every contract or combination in restraint oftrade, apparently without regard to the country w herein the contracto r co mb inatio n takes place, the act itself mer ges the issues. NeVer the-less, implicit in these cases is the principle that the court has juris-diction to r eview any acts invo lving for eign parties, o ccurr ing within oroutside the country, which have substantial effects in the UnitedStates.' Whether or not the court invokes this power will, of course,depend upon the existence of a law governing the particular activityin questio n.If the principle is a general one, and not dependent upon thethe particular law being applied, then the test of "substantial effectsin the United States" should also apply to the Clayton Act. In fact,the statute itself sets forth this test by focusing its application on the"effect" of an acquisition o n com petition in any section of the country . 8 8Whether the potential effects of eliminating a potential competitor,such as Braun in the Gillet te case, are sufficient to justify jur isdictionin the case o f a for eign acquisition w ill be discussed below .II. TERRITORIAL RESTRICTIONS ACCOMPANYING THE EXCHANGE OF

KNOW-HOW: THE ANCILLARY DOCTRINEThere appears to be no doubt today that an agreement betweencom peting firms to restrict the marketing of pr oducts in their respectiveterritories, standing alone, is a clear violation of the Sherman Act."However, the more significant question is whether the same resultcan be reached and justified by resort to an arrangement commonlyknown as a technical assistance agreement. While a standard legaldefinition for such an agreement is lacking, for the purposes of thiscomment, it will be defined as a grant or exchange of know-how be-tween com peting firm s. Kno w -how has been defined as:[i'jnventio ns, pro cesses, for mulae, or designs which ar e eitherunpatented or unpatentable; it may be evidenced by someform of physical matter, such as blue-prints, specifications,or drawings; . . . and it may involve accumulated technicalexperience and skills which can best, or perhaps only, becom municated thro ugh the medium of per sonal services."

82 Accor d, Restatement (Second) of the Fo reign Relations Law of the U nited States 18, 30 (1965).33 15 U.S.C. 18 (1964).84 See United States v. National Lead Co., 63 F. Supp. 513, 523 (S.D.N.Y. 1945),aff'd, 332 U.S. 319 (1947).85Creed & Bangs, "Know-H ow " L icensing and Capital Gains, 4 P atent Tr ade andCo pyright Jour nal of Research and Education 93 (1960).

4 5 8


8/26

A N T IT R U S T A N D I NT E R N A T I O N A L C O R P O R A T E A C T I V I T Y

The sim plest example of the use of the technical assistance agree-ment to restrain competition is the situation where the recipient ofthe know -how is prohibited, as a condition of receiving such assistance,from marketing the resulting products in the market territory of thegrantor. In most instances, there is a mutual exchange of such know-how and a corresponding mutual m arket restriction.In defending the legality of such an agreem ent, the parties usuallyassert that know-how is a property right, and that historically thecourts have held that territorial restrictions could be exacted in agrant of property rights." Although scholars have debated the legalstatus of know-how for many years," from an antitrust standpoint theresolution of this question is of little importance. The Sherman Actstates: "Every contract . . . in restraint of trade . . . is . . . illegal."(Emphasis added.) 8 This language has been construed as applyingonly to "unreasonable" restraints of competition." Thus, the questionis not whether know-how is a property right, but rather, whether thecontract or arrangem ent unreasonably restrains competition.Some early cases expressed the view that the grant or sale ofproperty or secret processes would justify an agreement not to com-pete. The doctrine has com e to be know n as the ancillary doctrine." Inthe latter part of the 1940's and early 1950's, several cases" weredecided, which, according to one writer, constituted an attack on theancillary doctrine." Another comm entator has concluded that althoughthe cases evidence some hostility toward the ancillary doctrine, they

Bo The territorial restriction has its origins in the classical ancillary restraints ruleunder which a man could buy a business and with it obtain a covenant from the sellernot to compete in the same area for a given period of time. Mitchel v. Reynolds, 24 Eng.Rep. 347 (Ch. 1711) upheld an agreement by a baker not to compete for five years withthe person to whom he sold his bakery business. Eventually, this was expanded to permittransfer of a trade-name with the sale of the business. See Fowle v. Park, 131 U.S. 88(1889). It also became the basis for licensing the manufacture of a product under aparticular process and restricting its sale under a licensed name to a specified territory.See Apollinaris Co. v. Scherer, 27 Fed. 18 (S.D.N.Y. 1886), The basic transaction wasthe transfer, in whole or in part, of a business or a capital assetin short, property. SeeMcLaren, Territorial and Customer Restrictions, Consignments, Suggested Resale Pricesand Refusals to Deal, 37 ABA Antitrust L.J. 137, 138 (1967); see also Brewster, supranote 20, at 161.87 Nash, The Concept of "Property" in Know-how as a Growing Area of IndustrialProperty: Its Sale and Licensing, 6 Patent Trade-Mark and Copyright Journal of Re-search & Education 289, 290 (1962).88 15 U.S.C. 1 (1964).80 Standard Oil Co. of New Jersey v. United States, 221 U.S. 1 (19I1); NorthernPacific Ry. Co. v. United States, 356 U.S. 1 (1958).40 See supra note 36.41 United States v. Imperial Chemical Indus. Ltd., 100 F. Supp. 504 (S.D.N.Y.195I); United States v. Timken Roller Bearing Co., 83 F. Supp. 284 (N.D. Ohio 1949),

aff'd, 341 U.S. 593 (1951); United States v. General Elec. Co., 82 F. Supp. 753 (D.N.J.1949); United States v. General Elec. Co., 80 F. Supp. 989 (S.D.N.Y. 1948); UnitedStates v. National Lead Co., 63 F. Supp. 513 (S.D.N.Y. 1945), aff'd, 332 U.S. 319 (1947).42 Macdonald, Know-How Licensing and the Antitrust Laws, 62 Mich. L. Rev. 351,365 (1964).459


9/26

BOSTON COLL EGE INDUSTRIAL A ND COM MERCIAL L AW REVIEWdo no t pro hibit reaso nable terr itor ial limitatio ns in kno w -how licens-ing." Bo th wr iters agr ee, how ever , that the ultimate factual issue indetermining the validity of the agreement is whether the kno w -how issufficiently valuable to balance the loss of co mpetitio n r esulting fro mthe terr itor ial restrictions." T he test w as stated as follow s: "The so letouchsto ne o f legality, thus, is an analysis of the technical data grantedand used. If this techno logy is substantial, valuable and secret, therestraint shou ld be upheld as ancillary to it; if not, the r estraint fallsfor lack of ancillarity." 4 9It is submitted that the cases relied upon by bo th com mentator slead to the conclusion that the value of know-how is relevant onlyw hen the firm s involved in the exchange are no t in competitio n. This,o f cour se, is tantamo unt to saying that the ancillary do ctrine is no trelevant in cases invo lving alleged violations o f the antitrust laws. Thegenesis of the confusion that arises from these cases is the courts'penchant for d iscussing at length the ro le and character istics o f kno w-ho w . It is easy to interpr et this apparent concern as an indication thatthe courts consider the nature o f the know -how a determinative factorin the case. A closer examinatio n o f the opinion s, ho w ever, revealsthat in each case the cour ts ultimately loo k to the existence o r no n-existence o f com petition betw een the parties as the contr o lling factor .United St ates v . National L ead C o." involved a com bination andconspiracy in restraint of interstate and foreign commerce with respectto titanium pigments. A National Lead subsidiary entered into anagreement w ith a No rw egian patent holding com pany, which, in addi-tion to cr o ss-licensing titanium patents, also pr o vided for a divisio no f terr itor ies, an exchange o f technolo gy and kno w -how , a restrictionof impo rts on a territorial basis, and a provisio n that each party wo uldbe the sole agent in the o ther's terr itor y for all produ cts in the licensedfield. Th e cour t concluded that this co mb inatio n clearly affected theinterstate and foreign co mmer ce o f the United States. 4 7 The defendantscontended that their conduct was r easonable and pro duced evidencethat during the perio d of the agreement the art of titanium pro ductionhad advanced, pr o duction had increased and prices had sharply de-clined." The co ur t expressed doub t as to the causal r elatio nships in-vo lved and stated that "in the long r un, com petition is a mor e effectivepro d to pr oduction and a mo re trustwor thy regulator of pr ices thaneven an enlightened combination." 4 9In respo nse to the defendant's claim that the territo rial allocation

43 Barton, Limitations on Territory, Field of Use, Quantity and Price in Know-HowAgreement with Foreign Companies, 28 U. of Pitt. L. Rev. 195 (1966).44 Id. at 203; Macdonald, supra note 42, at 374.45 Macdonald, supra note 42, at 374.46 63 F. Supp. 513 (S.D.N.Y. 1945), aff'd, 332 U.S. 319 (1947).47 Id. at 522.48 Id. at 525.40 Id.

46 0


10/26

A N T I T R U S T A N D IN T E R N A T I O NA L C O R P O R A T E A C T IV I T Ywas justified as ancillary to the grant of a license under a patent,the court acknowledged the existence of the ancillary doctrine forpatents, but stated that this agreement went far beyond the doctrinesince it applied to patents not yet issued and to inventions not yetconceived." In summary, the court said:

Whether the form of association they created be called acartel, an international cartel, a patent pool, or a technicaland commercial cooperation, is of little significance. It is acombination and conspiracy in restraint of trade; and the re-straint is unreasonable. . . . No citation of authority is anylonger necessary to support the proposition that a com binationof competitors, which by agreement divides the world intoexclusive trade areas and suppresses all competition amongthe mem bers of the com bination, offends the Sherm an A ct."Shortly after rendering its decision in National Lead, the samedistrict court decided United States v. G eneral Electric C o. 6 2 The lattercase involved an international arrangement in tungsten carbide be-tween General Electric (GE) and a German industrial corporation,Fried, Krupp Aktiengesellschaft. Krupp, as owner of the principalpatents for the production and processing of tungsten carbide, ex-ported this material to the United States, and licensed its productionto a number of American firms. GE, which held some U.S. patents onprocesses for m anufacturing a similar hard metal com position, enteredinto an agreement with Krupp whereby Krupp licensed to GE all ofits present and future U.S. patent rights in the hard metal field. GEwas obligated to fix the price at which tungsten carbide w as to be sold,to grant a reasonable number of licenses to U.S. firms, and to payKrupp royalties on all such metal sold. Krupp, in return, agreed torefrain from manufacture in the United States and GE agreed not toexport out of the United States or Canada.The defendants argued that the agreement was nothing m ore thana cross-licensing of basic patents with an ancillary, territorial restric-

tion. The court, assuming that such restrictions might be permissiblein some cases," concluded that the contract "was not really a cross-license at all, but more a nake d division of m arkets amon g two form ercompetitors,"" and thus in blatant violation of the Sherman Act.United States v. General Electric Co., 5 5 likewise involved, interalia, the question of territorial limitations in foreign licensing of pat-

5 Id. at 524.51 Id. at 523.52 80 F. Supp. 989 (S.D.N.Y. 1948).5 8 Id. at 1009. (The court was referring to the situation where there is only oneoriginal patent and all the others are improvements thereon.)84 Id. at 1009.55 82 F. Supp. 753 (D.N.J. 1949).

46 1


11/26

B O S T O N C O L L E G E IND US T R IA L A N D C O M M E R C IA L L A W R E V I EWeats and technical information. The government charged that GEwas r estraining trade thro ugh a series of license agreements which

. . . pro vide almo st unifor mly for (a) an exchange of patentrights relating to the manufactur e of lamps; (b) an exchangeo f infor mation r elating to the manufacture o f lamps; (c) anallocation o f territor y by w hich (1) the manufacture, sale,and sale for use in the United States of lamps . . . ar e exclu-sively reserved to International General Electric, (2) thehom e mar ket of the o ther party is exclusively r eserved to it,and (3) certain other terr itor y is made no n-exclusive and inwhich both par ties may manufactur e and sell."In addition, a further agreement, called the "P ho ebus" agreem ent,pro vided that various subsidiaries of GE and o ther for eign manu-facturers agreed to exchange technical infor mation in return for p ro m-ises to limit their participation in foreign lamp markets to a fixedpercentage of each other's sales." Th is agreem ent was reinfor ced bylicense contracts of technical inform atio n to for eign licensees whichrestr icted the licenses to defined territo ries."The co urt summar ized GE's defense as fo llow s:Gener al Electric ar gued that territor ial restraints in itslicenses were r easonab le and therefor e valid as ancillary toan exchange of manufacturing infor mation. In suppor t of itsargum ent it contended that the exchange o f technical and .manufacturing infor mation and "know -how" was a primarypurpo se of the license agreements and w as clearly evidencedby its substance and impor tance. It referred to the mass ofaccumulated industrial infor mation which it had co mpiledand argued that the "pro tection o f one's labor is affor ded eventhough the subject matter may no t be strictly a 'trade secret'.It may stand 'like a trade secret' ". It claimed that the par tiesto the license agreem ents sought technical and manufacturinginfor mation and "kno w-ho w" and sought access to each othersresearch labor atories and that the material involved was o fthe utmost importance. It insisted that the "ancillary re-straints were no t to el iminate or even reduce po tential oractual com petitio n, but w ere simply to pr otect the partiesagainst com petition which wo uld only have been of their ow ncreating." In co ncluding it insisted that the pr o o fs establishedthat patented inventio ns and a v ast bo dy o f "everchangingmanufacturing infor matio n and 'kno w -how ' has been ex-

8 ( 1 Id. at 827..37 Id. at 835.58 Id. at 837.

46 2


12/26

A N T I T R U S T A N D I NT E R N A T I O N A L C O R P O R A T E A C T I V I T Ychanged between International Gener al Electric and its for -eign licensees.""

The co urt did no t agree with GE's contentio ns concerning the relativeimpor tance of the "kno w-ho w" to the territo rial restrictio n. Rather, itfound that the primary pur pose o f the for eign licenses was to r estrictcom petition in the United States" thus resulting in a violation o f theSherman Act.In a similar case, United Stat es v . T imk en R oller B earing Co.,"the defendant, Timken, a manufacturer o f ro ller bearings, entered intocontracts with several foreign subsidiaries first under patents and, whenthese patents expired, under kno w-ho w grants. The co ntracts dividedthe wo rld into sales territor ies and set prices on the licensed pr o ducts.The defendant asserted that "any r estraints imposed by the contr actswer e ancillary to its agreements to furnish kno w-ho w . . . [and] thatthe law per mits the restrictio n no t to co mpete in each other's territor yas a reco mpense for its co ntribution to the fo reign companies of adviceand instruction. . . ." 6 2 In striking dow n the agreements, the cour t saidof know-how:

One w ho po ssesses greater kno wledge or superior skill in theman ufacture o f a pro duct is entitled to be fairly and ade-quately com pensated if he furnishes his kno wledge or skill too thers. He is no t entitled, ho wever , to exact as a price for suchcontr ibution, com plete freedom fro m com petitio n. The quidpro quo fo r furnishing of kno w-how cannot be an absolutelicense to avo id the pro visions of the Sherman Act. The harmcaused thereby w ould be to o great a tribute to kno wledge andskill when view ed in the light o f public policy."Finally, United States v . Im perial Chem ical Industries L td." alsoconcerned a vast netwo rk o f cross-licensing o f patents and know -how .The defendants argued that they had entered into these arr angements

w ith the pur po se of securing for themselves "the 'benefits of an ex-change of technology."" The court stated that the real issue was"w hether the agreements wer e entered into w ith a view to dividingterritor ies, or to securing the benefit of technolo gy; or , if bo th mo tiveswer e present, wh ether the unlawful mo tive w as a material considera-tion."" The defendants justified the agreements o n the gro unds that59 Id. at 845.69 Id. at 847.6 1 83 F. Supp. 284 (ND. Ohio 1949), aff'd, 341 U.S. 593 (1951).62 Id. at 312.ea Id. at 313.6 4 100 F. Supp. 504 (S.D.N.Y. 1951).e 5 Id. at 527.06 Id. at 527, 528.

46 3


13/26

B O S T O N C O L L E G E IND US T R IA L A N D C O M M E R C IA L L A W R E V I EWexclusive license territories were necessary so that they would not befaced w ith com petition utilizing their ow n inventions."The court noted that although this aspect of the agreement mightbe supportable, the portion of the agreement prohibiting the licensorfrom competing in the territory of the licensee indicated that theparties sought to protect themselves not against adverse use of tech-nology, but against competition." Further contributing to the court'sdecision was its finding that many of the inventions licensed did nothave any appreciable royalty value, but that they nevertheless weremade the basis of a territorial allocation. "The inference necessarilyfollows that the territorial division was the rea l purpose of the arrange-ment." The court went so far as to place territorial divisions on apar with price fixing, saying: "There is no intimation in any decisionthat elimination of competition is to be given a more favorable judicialconsideration when achieved by the route of territorial division ratherthan by way of price fixing. . . .'"One common theme appears in all the cases involving territorialrestrictions; the court acknowledges or assumes without inquiry theexistence of the ancillary doctrine. Despite this fact, however, thecourt invariably deems the doctrine inapplicable. The commentatorsreferred to above noted the reasons why the courts failed to upholdthe doctrine and concluded that in the absence of these reasons thedoctrine would have prevailed. For example, language to the effectthat the know-how was not v aluable or secret is interpreted as mea ningthat if it had been such, the territorial restrictions would have beenupheld.However, another explanation may be that the courts no longerrecognize the ancillary doctrine, but rather feel com pelled to explain itaway because the doctrine seem s firmly entrenched in earlier decisions.This theory is bolstered by analyzing the origins of the doctrine. Nodoubt, the common law doctrine that a covenant not to compete inthe sale of a business strongly influenced the formation of the ancillarydoctrine in the licensing field." As one writer has put it: "The analyt-ical keystone is: 'To what extent may the transfer of unpatented in-formation be analogized to the sale of a business or the assignment orlicense of a patent?' " 7 2The two cases which appear to have adopted the common lawdoctrine can be explained on grounds which throw into doubt theirauthority. In United States v. A ddyston Pipe and Steel Co.," a numberof companies manufacturing iron pipe in different states formed a

67 Id. at 528.68 Id.a d.70 Id. at 593.71 See supra note 36.72 K. Br ewster, Antitrust and American Business Abr oad at 161 (195 8).7 8 85 F. 271. (6th Cir. 1898).

46 4


14/26

A N T I T R U S T A N D IN T E R N A T I O NA L C O R P O R A T E A C T IV I T Ycombination wher eby the terr itor y in which they o perated w as dividedinto "r eserved" cities and '"pay" terr ito ry. The r eserved cities wer eallotted to particular m ember s of the comb ination fr ee of com petitionfro m the o thers, though pro vision w as made for pretended bids bythe latter at pr ices previo usly arr anged. In the pay terr itory, all offersto pur chase pipe w ere subm itted to a co mm ittee which determ inedthe price and then awarded the contract to that member o f the co m-binatio n w hich agreed to pay the largest bon us. The cour t held thatthis was an unlaw ful com bination bo th at com mo n law and underthe Sherm an Act. It was o nly in dictum that it appro ved of terr itorialrestrictions, remar king:

[W ]hen one in business sold pro perty with which the buyermight set up a rival business, it was certainly reaso nable thatthe seller should be able to r estrain the buyer fr om do ing himan injury w hich, but for the sale, the buyer w o uld be unableto inflict. This was not r educing com petitio n, but w as onlysecuring the seller against an increase of co mpetitio n o f hisow n creating."In T horns v. Sutherland," two concerns, one do mestic and theo ther for eign, divided between themselves trade territor y in Nor thAmer ica and Euro pe for the exclusive sale of certain pro ducts, and by

the same contr act pro vided for the sale of the business of one co ncernto the other in certain countr ies. The cour t upheld the territo rial re-strictio n o n the gro unds that it was " ancillary . . . and necessary fo rthe pro tection o f pro perty rights which pass fro m o ne to another. . .""It is subm itted that since the prim ary tr ansaction w as the sale o fa business, the court's approval of territorial restraints cannot beextended to transactio ns involving o nly the transfer of techno logy.The status of the par ties in the suit also gives rise to do ubts as to howfar the ho lding should be extended. It is quite po ssible that the co urtfelt that the restraints o n com petitio n w ere far o ut-weighed by theundesirability of one party's effort to break a basic agreement byasser ting the illegality of a r estraint designed, in par t at least, for itsow n benefit."Tw o post-1950 cases upheld terr itorial restriction s, and are citedby so me as author ity that the ancillary do ctrine lives on." In FoundryServ ices, Inc. v. Beneflux C orp .," a New Y or k corpo ration was givenan exclusive license by an English co rpo ration to m anufacture pro d-ucts in accordance with secret processes and sell them only in the

74 Id. at 280, 281.75 52 F.2d 592 (3rd Cir. 1931).76 Id, at 593.7 7 Brewster, supra note 72, at 162.78 Barton, supra note 43.79 110 F. Supp. 857 (S.D.N.Y. 1953), rev'd on other grounds, 206 F.2d 214 (2d

Cir. 1953).46 5


15/26

B O S T O N C O L L E G E IN DU ST R I A L A N D C O M M E R C IA L L A W R E V I EWUnited States and C anada. For its part, Beneflux, the English corpora-tion, agreed not to sell the same products in the United States for thelife of the agreement. On the ground that Foundry, the domesticcorporation, had violated the agreem ent by selling a sample wo rth fivedollars to a Mexican firm, Beneflux organized a subsidiary in theUnited States. Foundry Services promptly sued to enjoin Benefluxfrom operating in the United States. Beneflux argued that the decisionsin National Lead, the General Electric cases, Timken, and Imperialhad brushed aside "argument based upon old decisions involvingsecret processes, patents and trade marks and repeatedly condemned. . . all divisions of ma rkets betwee n com petitors."The court did not dispute defendant's interpretation of thosecases, but distinguished them on the ground that in each it was foundthat the defendants were true competitors. With respect to the casebefore it, the court found that "we have no comparable situationhere." 8 ' The court said that it was inaccurate to say that the Englishcorporation was a "competitor" of the plaintiff, "which it merelyengaged and authorized to exploit its secret process in North Amer-ica."b 2 The court went on to describe the contract between the partiesin agency terms:

Actually the plaintiff was no m ore than the En glish corpora-tion's agent or representative here. And common sense andjustice, as well as the "normal" and "usual" business customof rational men, dictate that a principal refrain from under-taking to perform at the same time an d in the same place theprecise functions it has engaged a representative to per-form...."It would appear that the importance of the decision in FoundryServices lies not in its acknowledgment of the ancillary doctrine, butin its limitation of the doctrine to the case of a covenant by an owner-licensor of a secret process not to compete with its licensee, who, priorto the grant, was not a competitor. With respect to the former cases

where the parties were competitors, the court said, "it was necessarilyheld that those conspiracies were unlawful; and that they were nonethe less so merely because of the circumstance that they we re effectedthrough license agreem ents.""A similar result was reached in United States v. E. I. DuPont deNemours & Co." In that case, La C ellophane , a French company, andDuPont, an American company, entered into an agreement wherebyDuPont was given the exclusive right to manufacture cellophane in80 Id. at 861.81 Id.82 Id.88 Id.84 Id .88 118 F. Supp. 41 (D. Del . 1953), ard on other gr ounds, 351 U.S. 377 (1956) .

46 6


16/26

A N T I T R U S T A N D I NT E R N A T I O N A L C O R P O R A T E A C T I V I T YNorth and Central America by processes acquired from La Cello-phane. The latter agreed not to market or sell cellophane in DuPont'sterritory except through DuPont. The district court upheld thevalidity of this agreement saying: "Plaintiff's argument [that] aterritorially limited license under a secret process is per se illegal isnot accepted.""The rea soning behind the d ecision is very illum inating. The c ourtnoted that when La Cellophane developed a successful process forthe commercial manufacture of cellophane, no one else was makingcellophane. When DuPont learned of cellophane, it was not thenengaged in any business which would cause it to fear the competitionof cellophane. La Cellophane, in turn, had no reason to fear DuPont'scompetition, for DuPont had neither the necessary knowledge northe technical experience to compete in cellophane.' In short, theywere not competitors. The court characterized the agreement as theorganization of a new enterprise, with La Cellophane contributingtechnical assistance and DuPont providing trained management andcapital. "DuPont and the French thus each had a legitimate stake inthe venture . . . and neither party was motivated by anti-competitiveconsiderations." 8 8Taking into consideration all of the cases dealing with the ancil-lary doctrine, a plausible inference is that the real question is not howvaluable is the know-how, or whether there is an ancillary doctrine;rather, the question is simply, is competition being unreasonablyrestrained. Where the parties to the agreement or combination werenot in com petition, territorial restrictions were upheld," not because ofthe ancillary doctrine, but because there was no restraint of competi-tion." Where the parties to the agreement or combination were incompetition, the territorial restrictions were struck down, not becausethe know-how was not valuable, but because competition was beingrestrained.

88 Id. at 219.87 M. at 218.88 Id. at 219.89 See supra notes 79, 85.90 For a recent development in this area see the treatment of territorial restrictions

as they appear in the context of manufacturing licences. In United States v. Sealy, Inc.,388 U.S. 3W (1967), Sealy licensed certain firms to manufacture Sealy products andrestr icted these firms to selling in specified terr itories. Th e licensees wer e free to m ake andsell non-Sealy prod ucts without restriction. The go vernm ent argued that Sealy's licensingarrangement was a facade for a conspiracy among competitors to divide up the market,as in Timken. The lower court upheld the territorial restriction but found Sealy guiltyof a price-fixing charge. The government appealed on the territorial question and theSupreme Co urt reversed. How ever , the reason for the reversal w as that the Court foundthat the territor ial restraints were par t of the pr ice-fixing conspiracy. In 37 ABA AntitrustL.J. 137, 142 (1967), Richard McLaren, Assistant Attorney General in charge of theAntitrust Division, suggests that the main significance of Sealy is that the Court refusedto throw out the ancillary restraints doctrine in a capital assets case. He concludes that,absent price fixing, selling restrictions in manufacturing-type licenses are still "arguablydefensible."

46 7


17/26

BOSTON COLLEGE INDUSTRIAL AND COMMERCIAL LAW REVIEW

The underlying problem in all these cases is that the courtreco gnizes that kno w-ho w is valuable, and that if one par ty confersit upon ano ther, the granting party should be adequately compensated.In each case w here the pr ice exacted has been a terr ito rial restrictionin markets, the court has gone to great lengths to explain why theexchange of know -how does not w arr ant a territorial restriction andthe ensuing loss of competition. It is submitted that the better ap-pro ach wo uld be to acknow ledge that in many cases the exchange ofkno w-ho w is sufficiently valuable to w arr ant a territor ial restriction,but that the Sher man Act pro hibits this particular fo rm of co mpensa-tion. The pr o blem is put into perspective by asking, who should payfor a grant or exchange of know-how. The obvious answer is therecipient. However, if an exclusive license to market in a certainterr itor y is part o f the exchange, then it is the public who is ultimatelypaying for the transactio n, by way o f higher pr ices resulting fro m alessening in com petitio n. Judge F o rm an, in United States v . G eneralElectric C o.," touched upo n this point when he said:

Reflecting these expressio ns upo n the circumstances ofthis case witho ut conceding that the exchange of "kn ow -how "could be the basis for territor ial restrictio ns, the parties tothe contracts herein are fo und to have r eceived their quid proquo in the mutual exchange of valuable infor mation each tothe other . The interest of the public in the w o rld w ide divi-sions of terr itor y set up and the far flung effects upo n com -petition and trade enco mpassed in them is very gr eat. Nom atter how reasonable the restraints have been consider edas betw een the contract ing p art ies they w ere ent irely unrea-sonable in so far as t he interest of t he p ublic is concerned.(Emphasis added.) 9 2

Thus, in setting up co ntracts or com binatio ns involving the transfero r exchange of kno w -how , the parties should ensure that the publicdo es not ultimately pay for any advantages that might be received bythe companies.There are several alternative methods o f compensation no t involv-ing the public. Wh ere the holder o f valuable know -how feels that itsmark et position is stro ng enough to w ithstand increased com petition,it can either sell its kno w -how o n a cash basis o r tr ansfer it with anagreement to receive ro yalties on all resulting pr odu cts. Th is latteraltern ative is especially advantageous to the co mpany w hich for lacko f capital canno t or do es not desire to finance any expansio n in itsmar ket territor ies. In such a case, the grantee wo uld have to decidewhether it wo uld be more econo mical to develop the know -how on itsow n, or buy it fro m the ho lder. In the case wher e the grantee is not

al 82upp. 753 (D.N.J. 1949).92 Id. at 847. 46 8


18/26

A N T I T R U S T A N D IN T E R N A T I O NA L C O R P O R A T E A C T IV I T Yin a position to buy the know-how with cash or royalties, it can offerthe grantor certain know-how that it alone had developed. Such arrange-ments can produce considerable savings for both grantor and granteewithout expense to the public through loss of competition.III. THE IMPACT OF THE CLAYTON ACT ON FOREIGN ACQUISITIONS

Section 1 of the Clayton Act defines "commerce" as includingtrade or comm erce amo ng the several states and with foreign nations."Section 7 of the Clayton Act provides that no corporation engaged incomm erce shall acquire another corporation also engaged in comm erce,"where in any line of commerce in any section of the country, theeffect of such acquisition may be substantially to lessen com petition, ortend to create a monopoly. )'Section 7 was adopted in 1914 to apply specifically to mergersthat the Sherman Act could not reach because a "restraint of trade"or "monopoly" had not actually occurred. In its original form it appliedonly to acquisitions of stock or share capital and was concerned onlywith the elimination of competition between the acquiring and theacquired firm.

In 1950, the Clayton Act was amended to (1) extend the scopeof the law to acquisitions of assets as well as stock, (2) extend thecoverage to include com petition in any line of com merce in any sectionof the country, and (3) eliminate the test concerning restraint ofcommerce in any section or community." The legislative history ofSection 7 reveals nothing as to the intent of Congress regarding theapplication of the Clayton Act to foreign acquisitions. However, areasonable and common sense interpretation of the statute yields noreason why it should not be so applied, providing of course thatjurisdictional requirements are met.Section 7 applies only to "acquisitions by one corporation engagedin commerce [of] another corporation engaged also in commerce.""The significant word here is "comm erce." Section 1 defines com merceas including "trade or commerce . . . with foreign nations."" Thus,an acqu isition of a foreign firm w ould fall within the Act if the foreigncompany were engaged in the foreign com merce of the United States,and if its acquisition might lessen competition "in any line of com-merce in any section of the country!'"98 15 U.S.C. 12 (1964).9 15 U.S.C. g 18 (1964).00 1518 (1964). See also S. Rep. No . 17 7 5, 81st Cong., 2d Sess., reprintedin 2 U.S. Co de, Cong. & A dm. News 4293 (1950), which states:The committee wish to make it clear that the [amendment] Is not Intendedto revert to the Sherman Act test. The intent here, as In other parts of theClayton Act, is to cope with monopolistic tendencies in their incipiency andwell before they have attained such effects as would Justify a Sherman Actproceeding. Id. at 4296.90 15 U.S.C. 18 (1964).or 15 U.S.C. 12 (1964).98 For an excellent discussion of the Clayton Act and its application to foreign

46 9


19/26

B O S T O N C O L L E G E IN DU ST R I A L A N D C O M M E R C IA L L A W R E V I EW

There appear to be no decisions to date which have squarelyapplied Section 7 to a foreign corporation doing business in its ownright in the commerce of the United States." In 1968, however, theFederal Trade Com mission proceeded under Section 7 against DresserIndustries,'" and its subsidiary, Magnet Cove Barium Corporation,which had ac quired Canad ian Industrial Minerals, Ltd. This Cana diancompany had substantial barite resources, and two years prior to theacquisition, Magnet purchased about 80% of the out-put of the Ca-nadian firm. Dresser contended that the Canadian company was notengaged in "commerce" as defined by the Clayton Act. The FTChearing examiner dismissed the complaint, holding that the acquisitiondid not tend to lessen competition. The Commissioner did not adoptthe opinion of the examiner, but dismissed the complaint with a warn-ing as to future acquisitions in the industry. The significance of thecase lies in the fact that neither the hearing examiner nor the Com-missioner dismissed the complaint because the Canadian companywas not engaged in commerce under Section 7, or because Section 7did not apply to foreign acquisitions.'"The second instance where the government attempted to applySection 7 to the acquisition of a foreign com pany w as United States v .Jos. Schlitz Brewing Co. 1 0 2 Schlitz, a major brewer, bad acquiredLabatt, a Canadian brew er, which in turn controlled General Brewing,a domestic competitor of Schlitz. The district court found that al-though Labatt was not then a substantial competitor in the UnitedStates, it had the "desire, the intention and the resourcefulness to enterthe United States markets and to make General Brewing a strongercompetitor in those markets."'" Thus, it can be seen that the realfocus of Schlitz's interest in acquiring Labatt was the acquisition ofcontrol of a domestic competitor.'" This being the true significance ofthe case, the question of whether the acquisition of a purely foreignconcern having no substantial connection with a domestic firm wouldviolate the C layton Act, was not settled.Two distinct questions are raised in the latter case. The first iswhether the elimination of a potential competitor results in a lesseningof com petition. The second is whe ther the fact that the potential com -petitor is a foreign corporation raises any jurisdictional problems notsettled under the Sherman Act cases. The first of these questions is aacquisitions, see Do novan, T he Legality of Acquisitions and M ergers Invo lving Americanand Foreign Corporations Under the United States Antitrust LawsPart II, 40 S. Cal.L. Rev. 38 (1966).

99 For a possible exception, see United States v. Jos. Schlitz Brewing Co., 253 F.Supp. 129 (ND. Calif. 1966).100 Dresser Industries, Inc., 63 F.T.C. 250 (1963).101 Bridges, Foreign Mergers Under Section 7 of the Clayton Act, 52 A.B.A.J. 360,363 (1966).102 253 F. Supp. 129 (N.D. Calif. 1966), add per.suriam, 385 U.S. 37 (1966).199 Id. at 147.194 Id. at 138, 145.

47 0


20/26

A N T I T R U S T A N D IN T E R N A T I O NA L C O R P O R A T E A C T IV I T Ygeneral question and can be answered without regard to whetherforeign compan ies are involved or not.

In FTC v. Procter & Gamble Co.,'" the Supreme C ourt held thatProcter's acquisition of the assets of Clorox Chemical violated Section7 of the Clayton Act. In its evaluation of the anticompetitive effects ofthis merger, the Court held that (1) the substitution of the powerfulacquiring firm for the smaller, but already dominant, acquired firmmight substantially impair the competitive structure of the industryby raising entry barriers and by dissuading the smaller firms fromaggressively competing, and (2) that the acquisition eliminated thepotential competition of the acquiring firm. The court condemned theloss of Procter's potential competition because the market was highlyconcentrated, because Procter had been found to be the "most likelyprospective entrant," and because "the number of potential entrantswas not so large that the elimination of one of them would be insignifi-cant."'"Similar language is found in United States v . Penn-Olin C hem icalCo.,1 0 7 where the government attacked the acquisition of a newlyincorporated joint venture by the joint venturers. In finding a violationof the Clayton Act, the Court said, "The existence of an aggressive,well-equipped and well-financed corporation engaged in the same orrelated lines of commerce waiting anxiously to enter an oligopolisticmarket would be a substantial incentive to competition which cannotbe underestimated."'"There appear, therefore, to be at least two factors that a courtmust consider in determ ining whether the acquisition of a potential com-petitor will lessen competition: (1) the subjective eagerness of thepotential competitor to enter the market, and (2) the objectivecharacteristics of the market itself. In United S tates v. W ilson S port-ing Goods Co.,'" the government sought and received a preliminaryinjunction against the merger of a sporting goods manufacturer and agymnastic equipment manufacturer. The court made a thoroughanalysis of the market conditions and noted the relevancy of theProcter & Gamble and Penn-Olin tests. It felt that the morger wouldin effect lessen competition because of the "adverse psychologicaleffects" it would have on the acquired company's smaller rivals andupon potential new entrants into the market."Thus, there is no direct or easy answ er to the question of wh etherthe acquisition of a "potential competitor" necessarily violates theClayton Act. The answer to this question is dependent upon the factsof each case. As the government itself recognized in its brief in Procter& G am ble:

no 386 U.S. 568 (1967).106 Id. at 581.10 7 378 U.S. 158 (1964).108 Id. at 174.no 288 F. Supp. 543 (1968).110 Id. at 556.

47 1


21/26

B O S T O N C O L L E G E IN DU S T R IA L A N D C O M M E R C IA L L A W R E V I EWTo find that a merger has one o r even bo th of these ef-fects [i.e., raising entry b arr iers and eliminating a potentialcom petitor ] is not necessarily co nclusive o n the questio n ofits illegality. Eliminating o ne o f many equally ab le and willingpotential entrants wo uld no t substantially impair the efficacyo f potential co mpetition; nor wo uld raising bar riers to entryimper ceptibly. And so me co mpetitive advantages that raiseentry b arr iers seem a dubio us predicate of antitrust illegality,since they reflect the kind of efficiencies in pro duction, dis-tribution, and the likethat a pro-competitive policy isintended to pr om o te. In addition, impairm ent of po tentialcom petition is likely to b e harm less w herever the mark et issufficiently unco ncentrated that existing co mpetition can be

relied upon as a mark et regulato r.These qualificatio ns require that the Co mm issio n andthe cour ts pro ceed with care in judging a mer ger w hich affectso nly potential com petition."Assuming that the acquisition o f a particular po tential com petito rdoes r esult in a vio lation of the Clayton A ct, the question still remainswhether the same result ob tains if the acquired firm is a for eign co rpo -ration . If the pr esence o f substantial effects in the U nited States issufficient to give jurisdiction to U.S cou rts in Sher man A ct cases, the

same test sho uld apply in C layton Act cases. The question to be askedthen is whether the acquisition o f a for eign potential competitor, sup-po sedly legal in the coun try o f the com petitor , causes sufficient sub-stantial effects in the U nited States to justify the acquiring o f jurisdic-tion by the cour ts. Fu rther redu ced, the inquiry b ecom es, can effectswhich are mer ely "potential" ever b e "substantial" in term s of juris-dictional requirements.P erhaps the inquiry need not pro ceed so far when at least one o fthe cor po rations is a U.S . citizen. Up to this point the analysis of juris-dictional co nsiderations has focused on the "place of effects" r ule. Thistest is set for th in Sectio n 18 o f the Restatement (Seco nd) o f the Lawof Fo reign Relations:

18. Jurisdiction to Prescribe with Respect to EffectWithin Terr itor yA state has jurisdictio n to prescr ibe a rule o f law attachinglegal consequences to conduct that occurs o utside its terr itor yand causes an effect within its terr itor y, if eithera) the con duct and its effect are gen erally reco gnized asconstituent elements of a crime or tor t under the law o fstates that have reason ably developed legal systems, orb) (i) the co nduct and its effect are co nstituent elements of

11 1 Brief for the Petitioner at 34, FTC v. Procter and Gamble, 386 U.S. 568 (1967),reprinted in Antitrust Developments 1958-1968: Supplement to Report of the AttorneyGeneral's National Committee to Study the Antitrust Laws at 87 (1955).

47 2


22/26

ANTITRUST AND INTERNATIONAL C ORPOR ATE ACTIVITYactivity to w hich the r ule applies; (ii) the effect withinthe terr itor y is substantial; (iii) it occur s as a dir ect andfor eseeable result of the co nduct outside the territor y;and (iv) the rule is no t inconsistent w ith the pr incipleso f justice generally reco gnized by states that have rea-sonably developed legal systems.

However, wher e the conduct, although in a foreign state, is causedby a citizen of the state in w hich the effects occur, Section 30 o f theRestatement takes precedence: 30. Jurisdictio n to P rescribe with Respect to Nationals1) A state has jurisdiction to prescribe a rule of law (a)attaching legal consequences to co nduct of a nation al ofthe state wherever the condu ct occur s. . . . (Em phasisadded.)

Thus, the cour t has two gro unds upon w hich to b ase jurisdiction. It candecide that "po tential" effects are "sub stantial" effects, o r it can relyo n the state's inherent pow er to review the acts of its citizens wher everthe co nduct takes place.IV. THE PROBLEM OF AP PROP RIATE RELIEF

After determ ining that a certain agreement o r acquisition vio latesthe antitrust laws, there ar ises the impor tant question o f sanctions andrem edies. Of the vario us types of relief available,'" the gov ernm entmo st frequently requests som e for m o f equitable relief.'" This selec-tion of equitable relief in turn raises the problem of fashioning anappro priate equitable r emedy.'" In the case of an executed technicalassistance agreement invo lving the transfers o f kno w -how , a decreethat the accom panying territor ial restrictions ar e invalid and that theparties are free to m ark et in their co mpetitor's terr itor ies does no tsolve the prob lem o f what to do about the technical infor mation thathas already been transferr ed. The cour t cannot enfor ce an or der thatthe grantee "for get" what it has learned. Y et, to allow the grantee touse the inform ation in co mpetition w ith the grantor , who paid for theresearch and development o f that know ledge, wo uld unjustly penalizethe grantor. The W estinghousel" co mplaint is an excellent example ofa case where there is potential harm in merely striking down the

112 Accor ding to Br ewster, supra note 7 2, at 226, there are four categories of formalstatutor y sanctions: private reco very o f treble damages; criminal; for feiture o f pro perty;and equitable r elief.115 Id. at 228.114 Accor ding to Ho llabaugh and Rigler, Scope o f Relief in Government P atent andKno w-ho w A ntitrust Cases, 12 Antitrust Bulletin 327 (1967 ) the various fo rms o f relief

include compulsory licensing with or without royalties, dedication of patents to thepublic, a limited injunction against enfor cement of the terr itorial restriction o n licensingarrangements, and dissolution or divestiture.115 See com plaint, United States v. The G illette Co., Civil No. 6 8-141-W (D. M ass.filed Feb. 1 4, 1968).

473


23/26

B O S T O N C O L L E G E I NDU ST R I A L A N D C O M M E R C IA L L A W 'R E V I EWterritorial restrictions without some further requirements on theparties. If the territorial restrictions are rem oved, M itsubishi wo uld bein a position to man ufacture Westinghouse-designed products in Japanwith low-wage labor, and sell those products in the United States incompetition with products manufactured in the United States byAmerican labor. The Supreme Court recognized this danger in Hart-ford-Empire Co. v. United States,'" and vacated a decree requiringthe grant of a royalty-free license on the ground that the effect of sucha license would be to confiscate considerable portions of the defendant'sproperty.An obvious solution is to require the recipient of the know-howto pay a reasonable royalty. This remedy would, in effect, reform thecontract into one of the alternative proposals discussed above. Thus,in United States v. National Lead Co.,'" the Court upheld the districtcourt's decree that defendants grant a no n-exclusive license under cer-tain patents at a reasonable royalty." 8 The C ourt based its decision onthe theory that since the case was a civil rather than a criminal pro-ceeding, the purpose of the decree was not punishment, but effectiveand fair enforcement."'The National Lead case formed the basis of the decision in UnitedStates v. Imperial Chemical Industries, Ltd.' 2 0 In that opinion, thedistrict court said:

W e hold that in the circumstances before us, compulsoryroyalty free licensing may not be decreed in the absence ofexplicit interpretation of existing statutes by higher courtsaffirmatively permitting such action. 1 2 1The court distinguished the one case that the government offered asprecedent for the granting of royalty-free licenses,' 2 2 and referred toNational Lead as having settled the rule requiring reasonable royalties.Nevertheless, there is language in the National Lead case whichseems to leave open the question of the legality of royalty-free li-censes. The court stated:

W hile it has been contended that, because of the decisionof this Court in Hartford-Empire Co. v. United States, th eDistrict Court was not free in the present case to require theissuance of ro yalty-free licenses, w e feel that, without reach-ing the question whether royalty-free licensing or a perpetualinjunction ag ainst the enforcem ent of a p atent is permissible110 323 U.S. 386 (1945).117 332 U.S. 319 (1947).778 Id. at 328-35.110 Id. at 338, 348.120 105 F. Supp. 215 (S.D.N.Y. 1952).121 Id. at 225.122 Id. at 224, 225.

474


24/26

A N T IT R U S T A N D IN T E R N A T IO N A L C O R P O R A T E A C T I V IT Yas a matter of law in any case, the present decree representsan exercise of sound judicial discretion. (Emphasis added.) 1 "United States v. General Electric Co.' interpreted this languageas casting a shadow on the ruling in Hartford-Empire and inviting theapplication of such a measure when and where the circumstanceswarranted it. 1 2 5 The court then proceeded to decree royalty-free li-censes on the ground that the profit margins of defendant's com-petitors were already so slim that any royalties would inhibit theircom peting with defendant. It attem pted to reconcile this decision w iththe Im perial Chem ical case by pointing out that the latter was basedon a violation of Section 1 of the Sherm an A ct, while the present casewas based on violations of both Section 1 and 2 of the Act. 1 2 The most recent case to consider the question of royalty-freelicenses, United States v, Singer Manufacturing Co., 1 2 7 did little toclarify the co nfusion arising out of National Lead. On remand, after afinding by the Supreme Court that certain licensing agreements con-cerning sewing machines violated the Sherman Act,'" the districtcourt was faced with the choice of royalty-free or reasonable royaltylicenses. The lowe r court acknowledged the persuasiveness of the gov-ernment's argument for royalty-free licenses but denied such reliefstating that "the Supreme Court has to date refused to approve eitherroyalty-free licensing or non-enforcem ent of patents."'" How ever, thecourt concluded its opinion with a statement indicating that royalty-free licensing would be appropriate if it were necessary.

The test . . . which must guide the Court in framing anantitrust decree is what measure must be applied in order todispel the evil effect of the defendant's wrongful conductwhich means what will restore competition.' 3 Carried to its logical conclusion, this language indicates that if thegranting of royalty-free licenses is the only way to restore competition,then such a rem edy w ould be legal. This result can be reconciled withNational Lead by arguing that in such a case, royalty-free licensingwould be, in fact, remedial and not penal.The 1955 Report of the Attorney General's Committee was alsodivided on this particular issue, with the majority following the Hart-ford-Empire prohibition of royalty-free licensing 1 3 t A well-reasonedminority report, however, set out three reasons why royalty-free li-

123 332 U.S. at 338.124 115F. Supp. 835 (DN.J. 1953).125 Id. at 843.120 Id. at 844.127 231 F. Supp. 240 (S.D.N.Y. 1964).128 374 U.S. 174 (1963).120 231 F. Supp. at 243.180 Id. at 244.181 Attorney General's Report (1955) at 256-59.

47 5


25/26

B O S T O N C O L L E G E IN DU ST R I A L A N D C O M M E R C IA L L A W R E V I EWcenses were proper. First, it concluded that neither Hartford-Empirenor National L ead pronounced a blanket statutory or constitutionalban on that remedy. Rather, it was the feeling of the committee thatthese cases hold merely that a court will decree no more in any onecase than is absolutely needed. Second, the minority argued thatro yalty-free licensing is in principle no m o re " confiscatory" than com-pulsory licensing at reasonable rates. Finally, it argued that royalty-free licensing may be the only way, in some cases, to achieve thedesired level of competition, and that, therefore, the courts shouldhave the pow er to decree such relief . 1 8 2 The logic of the above argu-ments is difficult to assail , and no dou bt the m inor ity r epor t w ill playan impor tant role w hen the Supreme Co urt finally decides the question.

V. CONCLUSIONAlthou gh the gover nment's recent challenges to certain interna-tional agr eements and acquisitio ns has caused som e excitement in thebusiness world, there is no reason to believe that the internationalaspects of such activity w ill result in any new legal appro aches to thepro blems raised. The tests fo r per sonal and subject matter jur isdictionover a foreign corporation are relatively well-settled, although onecannot be completely confident of this matter until the Court ruleso n the acquisition o f a purely for eign cor por ation. O n the other hand,

there is still considerable, debate over the weight to be given the an-cillary doctrine in market division cases. Although the courts havecontinued to strike do wn agr eements pro viding for territor ial restric-tions, the defense that the agr eement is ancillary to som e other o bjec-tive continues to b e raised. This com ment has attempted to sho w thatthere is good reason to believe that, given the proper case, the Courtw ill ultimately expose the true natur e of the do ctrine and pro vide that"decent burial" eventually given to all legal fictions. The recentdo mestic cases holding that the eliminatio n o f potential com petitor s isillegal portend a similar result for corresponding cases in the inter-national field. Finally, the legality of com pulsor y ro yalty-free licenses,altho ugh stil l clouded b y the language o f early Suprem e Co urt cases,appear s to b e a distinct po ssibility in futur e cases.These conclusions present problems for bo th the gover nment andprivate interests. On o ne hand, since many firms ar e involved in over -seas acquisitions and licensing agr eements, the reper cussion s o f a go v-ernment victory in the W est inghouse and Gillet te cases would bew idespread. P resent patterns o f international trade wo uld be substan-tially reshaped as companies divested themselves of foreign acquisi-tions and cancelled licensing agreements.On the other hand, a gover nment victor y wo uld have certain un-desirable consequences in the economic sphere of our internationalrelations. If the government obtains the relief it seeks in these cases,

132 Id .476


26/26

ANTITRUST AND INTERNATIONAL CORPORATE ACTIVITYthere will be a substantial increase in competition from abroad, witha probable resulting decrease in domestic profits and jobs. Further-more, it is possible that our country's balance of payments will beadversely affected.The Justice Department, however, sees the cases in a differentlight. In the opinion of Richard McLaren, Assistant Attorney Generalin charge of the Antitrust Division, the objective of the suits is "tohold the line against further economic concentration in this country."He denies that foreign ventures have been singled out for enforce-ment, but adds: "We're trying to keep the door open as widely aspossible to both actual and potential foreign competitors." He saysthat this would benefit American consumers by providing new prod-ucts and lower prices."'Generally, the Court quite properly has avoided any explicitconsideration of national economic policy or the political factors in-volved in antitrust actions.'" The function of the judicial process isnot to make political or economic decisions, but rather to interpretthe scope and purposes of the Sherman and Clayton Acts. The Court 'sbasic views remain the same as in those cases discussed above, andare plainly set forth by the Suprem e C ourt in N orthern Pacific R y . Co.v . United S tates.

The Sherm an Act was designed to be a comprehensive charterof economic liberty aimed at preserving free and unfetteredcompetition as the rule of trade. It rests on the premise thatthe unrestrained interaction of competitive forces will yieldthe best allocation of our economic resources, the lowestprices, the highest qua lity and the greatest material progress,while at the same time providing an environment conduciveto the preservation of our democratic political and social in-stitutions. But even were that premise open to question, thepolicy unequivocally laid down by the Act is competition.And to this end it prohibits "Every contract, combination ..or conspiracy, in restraint of trade or commerce among theseveral States."'

TIMOTHY E. KISH333 Wall Street Journal, July 30, 1970, at 1, col. 6.134 It has been suggested that the antitrust Iaws be amended to direct the enforce-ment of agencies to entertain application for advance antitrust rulings on proposedactivities in international trade. The agencies would, after giving appropriate considera-tion to foreign trade, foreign policy and national security, give a prompt ruling whichwould be the last word on the matter. The status of other foreign-policy considerationswould be secured through the cooperative efforts of the State Department and otherinterested agencies, The Commerce Department would supply the necessary factual

judgment from the standpoint of trade necessity. Scott and Yablonski, TransnationalMergers and Joint Ventures Affecting American Exports, XIV Antitrust Bull. I, 30-31(1969).185 356 U.S. 1, 4-5 (1958).

47 7

Documents

Antitrust Considerations in International Corporate Activity- Tec