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Antitrust in 60 Seconds: Antitrust and Freedom Of Design

· December 16, 2020

The 60-Second Read:

Over recent years, the role of antitrust with respect to the design of products and services has become increasingly important, especially in the tech sector.  Freedom of design as part of the market economy is quintessential to promote innovation and economic growth.  Firms invest in innovation and improve the design of their products and services so consumers benefit from it.  By the same token, firms increase their profit and the economy grows.  Whereas the federal antitrust laws do not refer to the freedom of design explicitly, the U.S. courts and antitrust agencies have confirmed that antitrust enforcement doesn’t police design and redesign choices.  Restraints on output and price fixing without a doubt are at the core of antitrust enforcement, but it is important to understand why technological choices to redesign products and services are not treated the same way from an antitrust perspective.  In fact, the U.S. courts and antitrust agencies have understood that sanctioning freedom of design in innovation-intensive industries such as the tech sector could negatively impact consumers’ welfare and economic growth.

Introduction 

Firms’ freedom of design as part of their innovation strategies does not generally violate the U.S. antitrust norms.  Despite antitrust norms not explicitly referring to this freedom of design, or freedom to innovate, the boundaries of antitrust enforcement in this specific field have been delineated by the U.S. courts and antitrust agencies.  

Competition in innovation-intensive sectors such as tech depends significantly on the design, redesign, and deployment of new products and services that consumers like.  Oftentimes, these innovations disrupt markets, create winners and losers, and grant short-term monopoly profits to risk-takers. These consequences generally act as incentives to invest in innovation.  Competitors will often recognize these disruptive innovations and try to claim that innovators are engaging in anticompetitive practices.  However, courts and policymakers have generally concluded that innovators and incentives to innovation should not be restrained by antitrust enforcement, as the principal effect would be to protect companies that would prefer to continue to use old technologies.

The development of antitrust principles by courts and antitrust agencies have understood the importance to preserve these incentives to innovate.  As it will be analyzed below, this is the reason why firms’ freedom of design is generally not condemned by antitrust enforcement.

The Federal Antitrust Laws

The “consumer welfare standard applied to U.S. antitrust enforcement favors innovation and decisions to innovate, as it is understood that it enhances consumers’ benefits and the economy overall.  Product design, or redesign, as part of firms’ innovation strategies is considered to be pro-consumer.

U.S. federal antitrust laws, notably the Sherman Act and Clayton Act, focus primarily on monopolization and restraints on trade.  The federal antitrust laws do not mention freedom to design similarly to not mentioning innovation.  But the courts over time have established some boundaries to whether competitors may use the antitrust norms to attack firms’ design choices, clearly prioritizing the benefits of freedom of design over the short-term market implications of deploying into the market new designs.

U.S. Courts’ Position

The U.S. courts have analyzed the role of freedom of design in innovation intensive sectors from an antitrust perspective on several occasions.

Back in 1979, in California Computer Products v. IBM, the 9th Circuit clarified the importance of preserving a firm’s rights to freedom of design in a case pertaining to CPUs and disk products.  California Computer Products (CalComp), the plaintiff, tried to allege that IBM’s introduction of new CPUs and disk products together with IBM’s marketing strategies including price cuts on existing disk products violated Section 1 & 2 of the Sherman Act as it prevented CalComp from effectively competing with IBM for disk product sales.   

The 9th Circuit was made it clear that IBM:

“had the right to redesign its products to make them more attractive to buyers […] It was under no duty to help CalComp or other peripheral equipment manufacturers survive or expand […] The reasonableness of IBM’s conduct in this regard did not present a jury issue.”  

The 1983 Kodak case represents another good example of how U.S. courts view the relationships between freedom of design and antitrust.  Kodak launched a new camera design, the Pocket Instamatic, that only worked with Kodak’s own sealed cartridges.  So, if a consumer wanted to use Kodak’s new cameras it would also have to buy its cartridges for the period of time that these innovations were protected by patents.  Kodak’s competitors felt that the launch of the new camera tied to Kodak’s films was aimed at excluding competitors using old technologies from the market, and deserved antitrust condemnation. However, the 9th Circuit Court explicitly clarified that Kodak: 

“had the right to redesign its products to make them more attractive to buyers — whether by reason of lower manufacturing cost and price or improved performance.” The antitrust laws did not impose a duty on Kodak to “constrict[] its product development so as to facilitate sales of rival products.” 

Finally, the 9th Circuit confirmed that design changes should not be generally sanctioned by the antitrust norms in the Allied Orthopedic case of 2010.  The case pertained to the launching of a new technology where the plaintiff tried to stop this innovation from being deployed relying on section 2 of the Sherman Act, alleging that the new technology harmed those committed to the existing older technology.

The Court was categoric with respect to the deployment of new technologies based on redesign of products:

“As a general rule, courts are properly very skeptical about claims that competition has been harmed by a dominant firm’s product design changes.”

The FTC’s Position

The U.S. Federal Trade Commission (FTC) had an opportunity to voice its views on antitrust and freedom to design already back in 2013.  As part of the FTC’s two-year investigation into Google Search, the FTC analyzed the role of product design from an antitrust perspective and determined that restraining and sanctioning product design decisions risks harming consumers.  In the FTC’s investigation closing statement, the agency stated that:

Product design is an important dimension of competition and condemning legitimate product improvements risks harming consumers. Reasonable minds may differ as to the best way to design a search results page and the best way to allocate space among organic links, paid advertisements, and other features. And reasonable search algorithms may differ as to how best to rank any given website. Challenging Google’s product design decisions in this case would require the Commission – or a court – to second-guess a firm’s product design decisions where plausible procompetitive justifications have been offered, and where those justifications are supported by ample evidence.

Furthermore, the FTC acknowledged that some of the design changes were a quality improvement with no necessary connection to the anticompetitive exclusion of rivals.

Conclusion

The U.S. antitrust framework enforced under the consumer welfare standard promotes innovation to the benefit of consumers and economic growth.  As part of this equation, the courts and the antitrust agencies have understood that freedom of design is of essence to foster innovation.  

Especially in innovation-intensive sectors, failure to respect freedom of design, and the use of antitrust to sanction the deployment of new products and services could have important negative implications for economic growth.  Antitrust is not aimed at protecting competitors over an innovative product or service that disrupts an existing market; antitrust enforcers understand that the promotion of innovation should not be sacrificed at the expense of preserving old technologies used by market players.

 

Innovation

New technologies are constantly emerging that promise to change our lives for the better. These disruptive technologies give us an increase in choice, make technologies more accessible, make things more affordable, and give consumers a voice. And the pace of innovation has only quickened in recent years, as the Internet has enabled a wave of new, inter-connected devices that have benefited consumers around the world, seemingly in all aspects of their lives. Preserving an innovation-friendly market is, therefore, tantamount not only to businesses but society at large.