[Federal Register Volume 62, Number 94 (Thursday, May 15, 1997)]
[Notices]
[Pages 26790-26797]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-12753]


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FEDERAL TRADE COMMISSION

[File No. 971-0033]


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

AGENCY: Federal Trade Commission.

ACTION: Proposed consent agreement.

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SUMMARY: The consent agreement in this matter settles alleged 
violations of federal law prohibiting unfair or deceptive acts or 
practices or unfair methods of competition. The attached Analysis to 
Aid Public Comment describes both the allegations in the draft 
complaint that accompanies the consent agreement and the terms of the 
consent order--embodied in the consent agreement--that would settle 
these allegations.

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

ADDRESSES: Comments should be directed to: FTC/Office of the Secretary, 
Room 159, 6th St. and Pennsylvania Ave. NW., Washington, DC 20580.

FOR FURTHER INFORMATION CONTACT:
William J. Baer, Federal Trade Commission, H-374, 6th St. and 
Pennsylvania Ave. NW., Washington, DC 20580, (202) 326-2932. Howard 
Morse, Federal Trade Commission, S-3627, 6th St. and Pennsylvania Ave. 
NW., Washington, DC 20580, (202) 326-2949.

SUPPLEMENTARY INFORMATION: Pursuant to Section 6(f) of the Federal 
Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46, and Section 2.34 of 
the Commission's Rules of Practice (16 CFR 2.34), notice is hereby 
given that the above-captioned consent agreement containing a consent 
order to cease and desist, having been filed with and accepted, subject 
to final approval, by the Commission, has been placed on the public 
record for a period of sixty (60) days. The following Analysis to Aid 
Public Comment describes the terms of the consent agreement, and the 
allegations in the accompanying complaint. An electronic copy of the 
full text of the consent agreement package can be obtained from the 
Commission Actions section of the FTC Home Page (for May 8, 1997), on 
the World Wide Web, at ``http://www.ftc.gov/os/actions/htm.'' A paper 
copy can be obtained from the FTC Public Reference Room, Room H-130, 
Sixth Street and Pennsylvania Avenue NW., Washington, DC 20580, either 
in person or by calling (202) 326-3627. Public comment is invited. Such 
comments or views will be considered by the Commission and will be 
available for inspection and copying at its

[[Page 26791]]

principal office in accordance with Section 4.9(b)(6)(ii) of the 
Commission's Rules of Practice (16 CFR 4.9(b)(6)(ii)).

Analysis of Proposed Consent Order to Aid Public Comment

    The Federal Trade Commission (``Commission'') has accepted, subject 
to final approval, an Agreement Containing Consent Order 
(``Agreement'') from Cadence Design Systems, Inc. (``Proposed 
Respondent''). The proposed Order is designed to remedy anticompetitive 
effects stemming from Cadence's proposed acquisition of Cooper & Chyan 
Technology (``CCT''). On October 28, 1996, Cadence and CCT entered into 
an Agreement and Plan of Merger and Reorganization whereby Cadence will 
acquire 100 percent of the issued and outstanding shares of CCT voting 
securities in exchange for shares of Cadence voting securities valued 
at more than $400 million (the ``Proposed Merger'').
    The Commission has reason to believe that the Proposed Merger may 
substantially lessen competition in violation of Section 7 of the 
Clayton Act, as amended, 15 U.S.C. Sec. 18, and Section 5 of the 
Federal Trade Commission Act, as amended, 15 U.S.C. Sec. 45, unless an 
effective remedy eliminates likely anticompetitive effects. The 
Agreement Containing Consent Order would, if finally accepted by the 
Commission, settle charges that Cadence's acquisition of CCT may 
substantially lessen competition or tend to create a monopoly in the 
research, development, and sale of constraint-driven, shape-based 
integrated circuit routing tools.
    The proposed Order has been placed on the public record for sixty 
(60) days. The Commission invites the submission of comments by 
interested persons, and comments received during this period will 
become part of the public record. After sixth (60) days, the Commission 
will again review the Agreement, as well as any comments received, and 
will decide whether it should withdraw from the Agreement or make final 
the Agreement's proposed Order.

The Proposed Complaint

    According to the Commission's proposed complaint, Cadence is a 
company that sells various electronic design automation products and 
services, including integrated circuit layout environments. An 
integrated circuit (more commonly known as a microchip) is a complex 
electronic circuit that consists of as many as five million or more 
miniature electronic components on a piece of semiconductor material 
smaller than a postage stamp. Integrated circuit design consists of two 
distinct phases, logical design and physical design. Integrated circuit 
layout environments, which are used during the physical design phase, 
are software infrastructures within which integrated circuit designers 
access integrated circuit layout tools. Approximately $70 million of 
Cadence's annual worldwide sales of approximately $741 million are 
attributable to sales of integrated circuit layout environments.
    The proposed complaint further alleges that CCT is a company that 
sells integrated circuit routing tools and related services, which 
account for approximately $13 million of CCT's annual worldwide sales 
of approximately $37.6 million. An integrated circuit routing tool, 
which is a type of integrated circuit layout tool, is software used to 
automate the determination of the connections between electronic 
components within an integrated circuit.
    According to the Commission's proposed complaint, a relevant line 
of commerce within which to analyze the competitive effects of the 
Proposed Merger is the market for the research, development, and sale 
of constraint-driven, shape-based integrated circuit routing tools. As 
integrated circuit designs have become smaller, denser, and faster, the 
routing of the interconnections between components has become an 
increasingly important phase of the integrated circuit design process. 
Routing issues are critical at deep submicron scales of integrated 
circuit design, which are scales of design smaller than .35 micron (a 
micron is a millionth of an inch). The current state-of-the-art design 
scale is .35 micron, but in the future, integrated circuit designs will 
shrink to .25 micron and then .18 micron design scales. At deep 
submicron scales of integrated circuit design, routing is complicated 
by ``cross talk'' and other types of electrical interference, timing 
concerns, design density, and other problems. A constraint-driven, 
shape-based integrated circuit routing tool is the only kind of routing 
tool that can correctly accommodate these unique deep submicron 
integrated circuit routing issues.
    The proposed complaint further alleges that there are no acceptable 
substitutes for constraint-driven, shape-based integrated circuit 
routing tools. Routing tools based on other technology cannot 
accommodate the unique deep submicron integrated circuit routing issues 
described above and thus cannot route deep submicron integrated circuit 
designs accurately. Routing inaccuracies create serious performance 
problems, and correcting these problems causes significant design 
delays. Nor is it commercially feasible for integrated circuit design 
engineers to route integrated circuit designs without automation (i.e., 
by ``pointing and clicking'' between each individual component and each 
other component to which it must be connected, then going back and 
correcting any interference or other problems that arise as the routing 
progresses). Given the sheer complexity and density of deep submicron 
integrated circuit designs, as well as the intense time-to-market 
pressures faced by semiconductor companies in today's fast-paced 
electronics industry, hand routing is not an alternative for the timely 
and accurate design of integrated circuits.
    The proposed complaint further alleges that CCT is currently the 
only firm with a commercially viable constraint-driven, shape-based 
integrated circuit routing tool, although at least one other firm is in 
the process of developing a constraint-driven, shape-based integrated 
circuit routing tool that would compete with CCT's product. The 
complaint further alleges that Cadence is the dominant supplier of 
integrated circuit layout environments. The competitive significance of 
Avant! Corporation, Cadence's leading competitor in the supply of 
integrated circuit layout environments, is limited by the fact that 
Avant! has been charged criminally with conspiracy and theft of trade 
secrets from Cadence. Several top Avant! executives have been charged 
criminally as well.
    The Commission's proposed complaint further alleges that there are 
high barriers to entry in the market for constraint-driven, shape-based 
integrated circuit routing tools, which are technologically complex and 
difficult to develop. De novo entry takes approximately two to three 
and a half years for a company that already possesses certain 
underlying core technology that can be used to develop a constraint-
driven, shape-based integrated circuit router (for example, shape-based 
routing technology for printed circuit boards). Entry is likely to take 
even longer for a company that does not already possess such 
technology.
    According to the Commission's proposed complaint, integrated 
circuit designers achieve the necessary compatibility between 
integrated circuit layout tools by selecting tools that have interfaces 
to a common integrated circuit layout environment. As a result,

[[Page 26792]]

a constraint-driven, shape-based routing tool that lacks an interface 
into a Cadence integrated circuit layout environment is less likely to 
be selected by integrated circuit designers than a constraint-driven, 
shape-based routing tool that possesses such an interface. Similarly, 
an integrated circuit layout environment is not likely to be selected 
by integrated circuit designers unless a full set of compatible 
integrated circuit design tools is available.
    The proposed complaint further alleges that it is in Cadence's 
interest to make available to users of Cadence integrated circuit 
layout environments a complete set of integrated circuit design tools, 
because to do so makes a Cadence integrated circuit layout environment 
more valuable to customers. Historically, Cadence has provided access 
to its integrated circuit layout environments to suppliers of 
complementary integrated circuit layout tools that Cadence does not 
supply. Cadence does not, however, have incentives to provide access to 
its integrated circuit layout environments to suppliers of integrated 
circuit layout tools that compete with Cadence products. Cadence 
historically has been reluctant to provide access to its integrated 
circuit layout environments to suppliers of competing integrated 
circuit layout tools.
    According to the Commission's proposed complaint, prior to the 
Proposed Merger, Cadence did not have a commercially viable, 
constraint-driven, shape-based integrated circuit routing tool. As a 
result of the Proposed Merger, Cadence will own the only currently 
available commercially viable constaint-driven, shape-based integrated 
circuit router. Thus, as a result of the Proposed Merger, Cadence will 
become less likely to permit potential suppliers of competing 
constraint-driven, shape-based integrated circuit routing tools to 
obtain access to Cadence integrated circuit layout environments.
    The Commission's proposed complaint alleges that, absent access to 
Cadence integrated circuit layout environments, developers will be less 
likely to gain successful entry into the market for constraint-driven, 
shape-based routing tools. The proposed complaint further alleges that 
the Proposed Merger will make it more likely that successful entry into 
the constraint-driven, shape-based integrated circuit routing tool 
market would require simultaneous entry into the market for integrated 
circuit layout environments. The need for dual-level entry will further 
decrease the likelihood of entry into the market for constraint-driven, 
shape-based integrated circuit routing tools.
    The Commission's proposed complaint alleges that the Proposed 
Merger may substantially lessen competition or tend to create a 
monopoly in the market for constraint-driven, shape-based routing 
tools, which, among other things, may lead to high prices, reduced 
services, and less innovation.

The Proposed Order

    The proposed Order would remedy the alleged violations by 
eliminating a significant impedment to entry in the market for 
integrated circuit routing tools. The proposed Order would require that 
Cadence permit developers of commercial integrated circuit routing 
tools to participate in the Cadence Connections ProgramTM, 
any successor program thereto, or other licensing programs, promotional 
programs or other arrangements (collectively, ``Independent Software 
Interface Programs'') which enable independent software developers to 
develop and sell interfaces to Cadence integrated circuit layout tools 
and Cadence integrated circuit layout environments.
    The proposed Order would require that Cadence allow independent 
developers of commercial integrated circuit routing tools to 
participate in Cadence's Independent Software Interface Programs on 
terms no less favorable than the terms applicable to other 
participants. Cadence currently has over 100 partners in its 
Independent Software Interface Programs.
    The purpose of these requirements is to ensure that Cadence's 
acquisition of CCT's constraint-driven, shape-based integrated circuit 
routing tools does not create incentives for Cadence to prevent 
competing suppliers of constraint-driven, shape-based integrated 
circuit routing tools from participating in Cadence's Independent 
Software Interface Programs; to prevent a need for dual-level entry in 
the markets for constraint-driven, shape-based integrated circuit 
routing tools and integrated circuit layout environments; to ensure 
that independent software developers will continue to invest the 
resources necessary to develop and sell constraint-driven, shape-based 
integrated circuit routing tools that would compete with CCT's 
constraint-driven, shape-based integrated circuit routing tool; and to 
remedy the lessening of competition as alleged in the Commission's 
complaint.
    In addition, the proposed Order would prohibit Cadence from 
acquiring certain interests in any other concern which, within the year 
preceding such acquisition, engaged in the development or sale of 
integrated circuit routing tools in the United States, and also would 
prohibit Cadence from acquiring any assets used or previously used (and 
still suitable for use) in the development or sale of integrated 
circuit routing tools in the United States, without prior notice to the 
Commission, for a period of ten (10) years. Absent this prior notice 
requirement, Cadence might be able to undermine the purposes of the 
proposed Order by acquiring a developer of integrated circuit routing 
tools without the Commission's knowledge, where such acquisition would 
not be subject to the reporting requirements of the Hart-Scott-Rodino 
Antitrust Improvements Act of 1976.
    Cadence and the Commission also have entered into an Interim 
Agreement whereby Cadence has agreed to be bound by the terms of the 
proposed Order, pending and until the Commission's issuance of the 
proposed Order.
    The purpose of this analysis is to facilitate public comment on the 
proposed Order. This analysis is not intended to constitute an official 
interpretation of the Agreement or the proposed Order or in any way to 
modify the terms of the Agreement or the proposed Order.
Donald S. Clark,
Secretary.

Statement of Chairman Robert Pitofsky and Commissioners Janet D. 
Steiger and Christine A. Varney in the Matter of Cadence Design 
Systems, Inc./Cooper & Chyan Technology, Inc.; File No. 971-0033

    The consent agreement negotiated in this matter, which the 
Commission has today accepted and placed on the public record for 
comment, eases competitive concerns raised by Cadence Design Systems, 
Inc.'s (``Cadence'') acquisition of Cooper & Chyan Technology, Inc. 
(``CCT'').
    The Commission's complaint alleges that Cadence is the dominant 
supplier of complete software ``layout environments'' for the physical 
design of integrated circuits, or ``chips,'' the postage-stamp sized 
electronic components used in devices as diverse as personal computers 
and kitchen appliances. CCT sells a software tool, called a ``router,'' 
that works within a layout environment and allows users to plot the 
connections among the millions of components within an integrated 
circuit. The proposed complaint alleges that CCT is the only firm to 
have developed a ``constraint-driven, shape-based'' router, state-of-
the-art technology that is expected to solve the

[[Page 26793]]

next generation of problems that will face integrated circuit producers 
designing ever more powerful chips.
    The Commission's proposed complaint alleges a well-established 
vertical theory of competitive harm, laid out in the 1984 Merger 
Guidelines.\1\ The Guidelines explain that a vertical merger can 
produce horizontal anticompetitive effects by making competitive entry 
less likely if (1) as a result of the merger, there is a need for 
simultaneous entry into two or more markets and (2) such simultaneous 
entry would make entry into the single market less likely to occur.\2\ 
While the dissenting Commissioners may take issue with the ``dual-level 
entry'' theory of vertical mergers that the 1984 Guidelines articulate, 
the available evidence suggests that the Cadence/CCT merger, which 
combines Cadence's dominant position in integrated circuit layout 
environments with CCT's current monopolistic position in constraint-
driven, shape-based integrated circuit routers, presents a 
straightforward case of anticompetitive effects caused by vertical 
integration. We believe that this type of competitive harm merits our 
attention.\3\
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    \1\ See U.S. Department of Justice Merger Guidelines, 4 Trade 
Reg. Rep. (CCH para. 13,103 (June 14, 1984) (hereinafter ``1984 
Merger Guidelines''). When the agencies issued the 1992 Horizontal 
Merger Guidelines, U.S. Department of Justice and Federal Trade 
Commission Horizontal Merger Guidelines, 4 Trade Reg. Rep. (CCH) 
para. 13,104 (April 7, 1992), they explained that ``[s]pecific 
guidance on non-horizontal mergers is provided in . . . [the] 1984 
Merger Guidelines.'' U.S. Department of Justice and Federal Trade 
Commission Statement Accompanying Release of Revised Merger 
Guidelines, 4 Trade Reg. Rep. (CCH) para. 13,104 (April 2, 1992). 
See generally Herbert Hovenkamp, Federal Antitrust Policy Secs. 9.4, 
9.5 (1994) (suggesting that vertical mergers may create barriers to 
entry when one of the parties is a monopolist or near-monopolist).
    \2\ See 1984 Merger Guidelines Sec. 4.21.
    \3\ Contrary to Commissioner Starek's assertions that 
enforcement action here, in the context of a merger, leads logically 
to enforcement action against internal vertical expansion, see 
Dissenting Statement of Commissioner Roscoe B. Starek III at n.8 & 
accompanying text, such unilateral action has been known to present 
a completely different set of questions under the antitrust laws for 
more than one hundred years.
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    When considering the effects of mergers in dynamic, innovative 
high-tech markets, such as those present here, it is particularly 
important to investigate whether such mergers will create barriers to 
entry. New entrants often bring innovation to the market, and the 
threat of entry leads incumbents to innovate. Therefore, we must be 
vigilant to preserve opportunities for entry.
    As the Analysis to Aid Public Comment explains, unless a would-be 
supplier of routing tools had the ability to develop an interface to 
the Cadence integrated circuit layout environment, it would not be able 
to market its routing product effectively to the vast majority of 
potential customers which use the Cadence layout environment.\4\ 
Without an expectation that it could design software compatible with 
Cadence's installed base, a would-be entrant might well decide not to 
compete.\5\
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    \4\ Not only is Cadence the dominant layout environment, but its 
competitors are in a state disarray. For example, Cadence's most 
significant competitor, Avant! Corporation, and several of its top 
executives have recently been charged with the theft of trade 
secrets from Cadence.
    \5\ CCT decided that it was so important to gain access to 
Cadence's layout environment that when Cadence refused to allow the 
IC Craftsman product (CCT's constraint-driven, shape-based router 
technology) to interface with the Cadence layout program through the 
``Connections'' Program, CCT induced a third party that was a 
Connections partner to write an interface to the Connections Program 
for IC Craftsman without Cadence knowledge. Cadence thereafter 
sought to impede CCT's attempts to gain access to the Cadence 
integrated circuit layout environment by suing CCT.
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    After the proposed Cadence/CCT merger, Cadence would have an 
incentive to impede attempts by companies developing routing technology 
competitive with CCT's constraint-driven, shape-based router 
technology, IC Craftsman, to gain access to the Cadence integrated 
circuit layout environment. Following the proposed merger, successful 
entry into the routing tool market is more likely to require 
simultaneous entry into the market for integrated circuit layout 
environments. Without a consent that mandates access to Cadence's 
layout environment, and thus lowers the barriers to entry in the 
market, a combined Cadence/CCT will face less competitive pressure to 
innovate or to price aggressively. Thus, competition would likely be 
reduced as a result of the proposed acquisition.
    The proposed remedy in this matter preserves opportunities for new 
entrants with integrated circuit routers competitive with IC Craftsman 
by allowing them to interface with Cadence's layout environments on the 
same terms as developers of complementary design tools.\6\ 
Specifically, the proposed order would require Cadence to allow 
independent commercial router developers to build interfaces between 
their design tools and the Cadence layout environment through Cadence's 
``Connections Program.'' The Connections Program is in place now and 
has more than one hundred participants who have all entered a standard 
from contract with Cadence.
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    \6\ At the same time, the proposed order preserves any 
efficiencies of vertical integration resulting from the proposed 
merger, which may benefit customers.
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    The separate statements by Commissions Azcuenaga and Starek 
question this enforcement action. We respectfully disagree.
    First, Commissioner Azcuenaga argues that the Commission should 
have brought an action based upon a horizontal theory of competitive 
harm. We certainly agree that horizontal competitive concerns deserve 
our close attention and recognize that horizontal remedies often cure 
vertical problems. If we had credible support for the theory that the 
proposed merger would combine actual or potential horizontal 
competitors and would substantially lessen competition in an integrated 
circuit routing market or an innovation market for integrated circuit 
routers, we would not hesitate to advance that case. But after a 
thorough investigation by Commission staff, we have not found 
sufficient evidence to conclude that, absent the acquisition, Cadence 
would have been able to enter the market for constraint-driven, shape-
based integrated circuit routers successfully in the foreseeable 
future.
    The dissenting statements fail to give full weight to all the 
incentives at work in the vertical case. It is true that Cadence would 
be motivated by the entry of new, promising routing technology to allow 
an interface to its layout environment to seek more of its 
complementary products. And absent the merger, that would be its only 
incentive. But with the merger, Cadence clearly also has an incentive 
to prevent loss of sales in its competing products. And while these two 
incentives may compete as a theoretical matter, the evidence in this 
case indicates that Cadence has acted historically according to the 
latter incentive. There is some reason to believe that Cadence in the 
past has thwarted attempts by firms offering potentially competitive 
technology to develop interfaces to its layout environment (including 
at one point, CCT). Now that it has a satisfactory router to offer its 
customers, there is no reason to think that absent the consent, Cadence 
would treat developers of routers that would compete with IC Craftsman 
any differently than it once treated CCT.
    Commissioner Azcuenaga also suggests that the consent order is 
unnecessary because a company developing a router to compete with IC 
Craftsman could proceed, as CCT did, without an interface to Cadence's 
design layout environment. The evidence shows, however, that CCT's 
management thought that ensuring compatibility with Cadence's layout

[[Page 26794]]

environment was critical and that marketing without that compatibility, 
which it had done, was not sufficient.\7\ It took the extreme measure 
of inducing a third party to write software for CCT to interface IC 
Craftsman with the Cadence layout environment without Cadence's 
knowledge. Moreover, despite CCT's success in developing a routine 
program, its sales were modest before the merger announcement.\8\
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    \7\ Interfacing with another firm's design layout environment is 
also not a feasible alternative because of Cadence's dominant 
position in the market. Without hope of marketing to the vast 
majority of customers, developers of an alternative router have 
minimal incentives to compete. In addition, the competitive's 
significance of Cadence's few competitors is questionable.
    \8\ Products offering incremental innovation rather than the 
revolutionary breakthrough of IC Craftsman would have an even more 
difficult time entering.
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    Commissioner Azcuenaga is further concerned that mandating access 
to the Connections Program for developers of routing software on terms 
as favorable as for other Connections participants might have 
unintended consequences. In particular, she is concerned that the order 
may prompt Cadence to charge higher prices to all Connections partners. 
But the Connections Program is an existing program with over one 
hundred members, and Cadence would have significant logistical 
difficulties, and would risk injuring its reputation, if it suddenly 
altered the terms of the program. Also, Cadence has good reasons for 
having so many Connections partners--they offer Cadence customers 
valuable tools, most of which do not compete with Cadence products. It 
seems unlikely that Cadence would be motivated to make the Connections 
Program less appealing to those partners.
    Both Commissioners Azcuenaga and Starek suggest that the proposed 
remedy may be difficult to enforce. Any time this Commission enters an 
order, it takes upon itself the burden of enforcing the order, which 
requires use of our scarce resources. However, we think the proposed 
order, which simply requires Cadence to allow competitors and potential 
competitors developing routing technology to participate in independent 
software interface programs on terms no less favorable than the terms 
applicable to any other participants in such programs, is a workable 
approach.\9\ Connections partners all sign the same standard-form 
contract and there has been a consistent pattern of conduct with 
respect to the program to use as a baseline for future comparisons. 
Moreover, the Commission has had experience with such non-
discrimination provisions, and can rely on respondent's compliance 
reports required under the order as well as complaints from independent 
software developers to ensure compliance with the consent. We think the 
dissenting Commissioners' scenarios about intractable compliance issues 
are unfounded.
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    \9\ The language of the consent is clear in requiring that terms 
for routing companies be no less favorable than for any other 
participant in the Connections Program. Thus, we do not understand 
Commissioner Starek's conclusion that the consent could be 
interpreted to require routing companies to pay a ``fee no higher 
than the highest fee.'' And as his own dissent acknowledges, if the 
order could be interpreted to allow Cadence to terminate router 
developers from the Connections Program after thirty days, the 
proposed order would be meaningless.
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    In sum, we believe that the consent order will preserve competition 
in the market for cutting-edge router technology by reducing barriers 
to entry.

Statement of Commissioner Mary L. Azcuenaga Concurring in Part and 
Dissenting in Part in Cadence Design Systems, Inc., File No. 971-0033

    The acquisition of Cooper & Chyan Technology, Inc. (Cooper & 
Chyan), by Cadence Design Systems, Inc. (Cadence), combines the only 
firm currently marketing a constraint-driven, shape-based integrated 
circuit routing tool with a firm that was, at least until the 
acquisition, on the verge of entry into this market. I find reason to 
believe that the proposed merger would violate Section 7 of the Clayton 
Act under a horizontal, potential competition theory of law. I dissent 
from the complaint because it fails to allege a horizontal violation of 
law and because I do not find reason to believe that the transaction 
would violate the law under the vertical theory that is alleged in the 
complaint. I support the part of the order that addresses the 
horizontal problem, although I question whether it is sufficient. The 
classic horizontal remedy would be divestiture of either the Cooper & 
Chyan routing tool or the Cadence routing tool that has not yet reached 
the market. I do not support the rest of the order.
    Despite the absence of a horizontal allegation in the complaint, 
the majority nevertheless has addressed the horizontal competition 
issue in paragraph III of the proposed consent order, which imposes a 
ten-year prior notice provision. Under the Commission's policy, prior 
notification provisions are imposed to prevent a recurrence of an 
anticompetitive merger.\1\ This prior notice provision seems to address 
the prospect of another anticompetitive, horizontal merger in the 
market for ``Integrated Circuit Routing Tools.'' Any further 
acquisition by Cadence of a firm marketing such a tool would present 
obvious horizontal issues, but should not require any additional 
vertical cure. To the extent that this proposed order provides a 
vertical remedy for any possible market foreclosure or increased 
barriers to entry, a duplicate vertical order against Cadence would be 
unnecessary.
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    \1\ According to the ``Statement of Federal Trade Commission 
Policy Concerning Prior Approval and Prior Notice Provisions'' (June 
21, 1995), the Commission imposes such prior notice requirements 
only on a finding of ``credible risk that a company that engaged or 
attempted to engage in an anticompetitive merger would, but for an 
order, engage in an otherwise unreportable anticompetitive merger.''
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    Paragraph II of the proposed order requires Cadence to allow 
developers of ``Commercial Integrated Circuit Routing Tools'' to 
participate in its connections program on ``terms no less favorable 
than'' the terms offered to any other participant. According to the 
Analysis to Aid Public Comment at page 7, this provision is intended to 
eliminate the need for dual level entry so that a future developer of 
``Commercial Integrated Circuit Routing Tools'' will not also need to 
develop an environment comparable to Cadence's environment.
    I question this aspect of the case for several reasons.\2\ First, 
Cooper & Chyan was successful in developing and marketing its routing 
program before it obtained access to Cadence's environment program. 
This success suggests that access to Cadence's environment is not 
necessary to the success of an entrant in the routing tool market. 
Second, although Cadence initially denied Cooper & Chyan access to its 
connections program, it reversed course and granted the access. To the 
extent that Cadence may have capitulated to pressure from customers to 
grant access, that capitulation would suggest that Cadence has little 
or no power to deny access to its connections program to a product that 
its customers want. Third, this remedy is premised on the allegation in 
paragraph 16 of the Complaint that ``Cadence does not, however, have 
incentives to provide access to a Cadence integrated circuit layout 
environment to suppliers of integrated circuit layout tools that 
compete with Cadence products.'' To the extent that a Section 7 order 
may be based on incentives, the incentives appear to be at least as 
likely to go the

[[Page 26795]]

other way. If another company develops an innovative, advanced router, 
one would assume that Cadence would have incentives to welcome the 
innovative product to its suite of connected design tools, thereby 
enhancing the suite's utility to customers.
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    \2\ The majority is mistaken to the extent they believe I take 
issue with Section 4 of the U.S. Department of Justice Merger 
Guidelines (June 14, 1984). See Statement of Chairman Robert 
Pitofsky and Commissioners Janet D. Steiger and Christine A. Varney 
written in response to this statement and the dissenting statement 
of Commissioner Starek.
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    Paragraph II of the proposed order may be counterproductive and may 
result in substantial enforcement costs for the Commission. Because 
Paragraph II bars Cadence from charging developers of ``Commercial 
Integrated Circuit Routing Tools'' a higher access fee than developers 
of other design tools, one possible, unintended consequence of the 
order is that Cadence may reduce or eliminate discounting of access 
fees. In addition, enforcement of the provision of the order requiring 
Cadence to provide access to the connections program to developers of 
``Commercial Integrated Circuit Routing Tools'' on terms ``no less 
favorable than the terms applicable to any other participants'' may 
well embroil the Commission in complex commercial disputes.
    I concur in the acceptance of Paragraph III of the proposed order 
and dissent from the acceptance of Paragraph II of the proposed order.

Dissenting Statement of Commissioner Roscoe B. Starek, III in the 
Matter of Cadence Design Systems, Inc. and Cooper & Chyan Technology, 
Inc., File No. 971 0033

    I respectfully dissent from the Commission's decision to accept a 
consent agreement with Cadence Design Systems, Inc. (``Cadence''), a 
supplier of software for the design of integrated circuits (``ICs''). 
The proposed complaint alleges that the merger of Cadence and Cooper & 
Chyan Technology, Inc. (``CCT'')--a producer of software complementary 
to Cadence's--is likely substantially to lessen competition in 
violation of Section 7 of the Clayton Act, 15 U.S.C. Sec. 18, and 
Section 5 of the Federal Trade Commission Act, 15 U.S.C. Sec. 45. To 
justify the proposed complaint and order, the Commission once again 
invokes the specter of anticompetitive ``foreclosure'' as a direct 
consequence of the transaction. As I have made clear on previous 
occasions,\1\ foreclosure theories are generally unconvincing as a 
rationale for antitrust enforcement. The current case provides scant 
basis for revising this conclusion.
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    \1\ See Dissenting Statement of Commissioner Roscoe B. Starek, 
III, in Time Warner Inc., et al., Docket No. C-3709 (consent order, 
Feb. 3, 1997); Dissenting Statement of Commissioner Roscoe B. 
Starek, III, in Waterous Company, Inc. and Hale Products, Inc., 
Docket No. C-3693 & C-3694 (consent orders, Nov. 22, 1996); 
Dissenting Statement of Commissioner Roscoe B. Starek, III, in 
Silicon Graphics, Inc. (Alias Research, Inc., and Wavefront 
Technologies, Inc.), Docket No. C-3626 (consent order, Nov. 14, 
1995); Remarks of Commissioner Roscoe B. Starek, III, ``Reinventing 
Antitrust Enforcement? Antitrust at the FTC in 1995 and Beyond,'' 
remarks before a conference on ``A New Age of Antitrust Enforcement: 
Antitrust in 1995'' (Marina del Rey, California, Feb. 24, 1995).
---------------------------------------------------------------------------

    The theory of harm presented here is the same as--and thus shares 
all of the defects of--that offered in Silicon Graphics, Inc. 
(``SGI'').\2\ In SGI, the Commission alleged that the merger of a 
computer hardware manufacturer (SGI) and two software vendors (Alias 
and Wavefront) would result in the post-acquisition ``foreclosure'' of 
other independent software suppliers, leading to monopoly prices for 
graphics software. The Commission claimed that because the acquisition 
would give SGI its own in-house software producers, SGI no longer would 
allow unaffiliated software vendors access to its hardware platform.
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    \2\ Supra note 1.
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    In the current incarnation of this theory, Cadence is cast in the 
role of SGI and CCT in the role of the software vendors. The Commission 
alleges that Cadence no longer will allow independent suppliers of 
``routing'' software--the type of software sold by CCT--to wire 
programs that can interface with other IC layout programs in the 
Cadence suite. To mitigate these supposed anticompetitive incentives, 
the proposed order would require Cadence to provide independent vendors 
of routing software access to its ``Independent Software Interface 
Programs'' (e.g., to its ``Connections Program'') on terms ``no less 
favorable'' than the terms offered to other independent software 
vendors.\3\
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    \3\ Proposed order, para. II.A.
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    The logic of the proposed complaint is fundamentally flawed. Even 
if we assume arguendo--as the proposed complaint in this case does--
that Cadence is ``dominant'' in the supply of software components 
complementary to the router,\4\ the fact remains that it has no 
incentive to restrict the supply of routers. I noted in SGI that ``SGI 
ha[d] strong incentives to induce expanded supply of SGI-compatible 
software: increasing the supply of compatible software (or of any 
complementary product) increases the demand for SGI's 
workstations.''\5\ The same is true here: the introduction of lower-
priced or higher-quality routing program increases the value of 
Cadence's ``dominant'' position in the sale of software complementary 
to the router, because it increases the demand for Cadence design 
software, thereby allowing Cadence to increase the price and/or the 
output of these programs. Despite the majority's assertions to the 
contrary,\6\ this is true whether or not Cadence has vertically 
integrated into the sale of routing software, for efficient entry into 
the production of routing software increases the joint profits of the 
entrant and Cadence. If the Commission is correct that Cadence is 
``dominant'' in the supply of software components

[[Page 26796]]

complementary to routers, then of course Cadence may be in a position 
to expropriate--e.g., via royalties paid to Cadence by the entrant for 
the right to ``connect'' to Cadence's software--some or all of the 
``efficiency rents'' that otherwise would accrue to an efficient 
entrant. This, however, would constitute harm to a competitor, not to 
competition, and Cadence would have no incentive to set such rates so 
high as to preclude entry.
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    \4\ The anticompetitive theory requires Cadence to have 
substantial monopoly power: if there were numerous good alternatives 
to Cadence's suite, other independent vendors of routing software 
could affiliate with them and there would be no ``foreclosure.''
    \5\ Dissenting Statement in SGI, supra note 1, at 2. Moreover, 
as was also true in SGI, the description of the premerger state of 
competition set forth in the complaint itself tends to exclude the 
possibility of substantial postmerger foreclosure. In SGI, the 
complaint alleged that software producers other than Alias and 
Wavefront were competitively insignificant prior to the merger, and 
that premerger entry barriers were high. Similarly, the current 
complaint (para.11) alleges that there are substantial premerger 
barriers to entry into the market for the kind of ``router'' 
software that CCT produces. But one cannot find both that the 
premerger supply elasticity of substitutable software is virtually 
zero and that the merger would result in the substantial postmerger 
foreclosure of independent software producers. If entry into 
constraint-driven, shape-based IC router software is effectively 
blocked premerger, as the complaint contends, if cannot also be the 
case that the merger would cause a substantial incremental reduction 
in entry opportunities.
    \6\ The majority asserts that ``Cadence clearly also has an 
incentive to prevent loss of sales in its competing products.'' 
(Majority Statement at 4; emphasis in original.) Similarly, the 
Analysis of Proposed Consent Order to Aid Public Comment simply 
asserts (at 5) that ``Cadence does not . . . have incentives to 
provide access to its integrated circuit layout environments to 
suppliers of integrated circuit layout tools that compete with 
Cadence products.'' Because neither the majority statement nor the 
Analysis to Aid Public Comment describes how this conclusion was 
reached, it is difficult to identify precisely the source of the 
erroneous reasoning. Chiefly, however, it seems to reflect a 
manifestation of the ``sunk cost fallacy,'' whereby it is argued 
that because Cadence has now sunk a large sum of money into 
acquiring CCT, this in and of itself would provide Cadence with an 
incentive not to deal with independent vendors of complements. This 
reasoning, of course, is fallacious: the cost incurred by Cadence in 
acquiring CCT--whether a large or a small sum--is irrelevant to 
profit-maximizing behavior once incurred, for bygones are forever 
bygones. The introduction of a superior new router, even if by an 
independent vendor, will increase the joint profits of Cadence and 
this vendor (irrespective of the amount spent in acquiring CCT), and 
both parties will have a profit incentive to facilitate its 
introduction.
    Moreover, the majority also imputes a sinister motive to 
Cadence's reluctance to deal with certain competitors, while failing 
to acknowledge that this reluctance almost surely represents a 
legitimate and well-founded interest in protecting its intellectual 
property. As the Analysis to Aid Public Comment notes (at 4): 
``Cadence's leading competitor in the supply of integrated circuit 
layout environments, Avant! Corporation, has been charged criminally 
with conspiracy and theft of trade secrets from Cadence, and several 
top Avant! executives have been charged criminally as well.''
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    The theory of harm and the remedy proposed here also share many of 
the flaws that I pointed out in Time Warner.\1\ In that case the 
Commission's action was based to a significant degree on the argument 
that increased vertical integration into cable programming on the part 
of Time Warner and Tele-Communications, Inc. would increase those 
firms' incentives to reduce the supply of independently produced 
television programming. Carried to its logical conclusion, this theory 
of harm constitutes a basis for challenging any vertical integration by 
large cable operators or large programmers--even vertical integration 
occurring via de novo entry by a cable operator into the programming 
market or de novo entry by a programmer into distribution.
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    \7\ See my Dissenting Statement in Time Warner Inc., et al., 
supra note 1.
---------------------------------------------------------------------------

    Now apply this train of thought to the current matter. Contrary to 
the analysis presented above, suppose that somehow Cadence could profit 
anticompetively from denying interconnection rights to independent 
router vendors. If that were so, then it would not be sufficient merely 
to prevent Cadence from acquiring producers of complementary software. 
Rather, the Commission would have to take the further step of 
preventing Cadence from developing its own routers, for under the 
anticompetitive theory advanced in the complaint, any vertical 
integration by Cadence into routers, whether accomplished by 
acquisition or through internal expansion, would engender equivalent 
post-integration incentives to ``foreclose'' independent vendors of 
routing software \8\ Of course, as I noted in Time Warner, there is 
likely to be little enthusiasm for such a policy because there is a 
general predisposition to regard internal capacity expansion as 
procompetive.\9\
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    \8\ Thus, it is unclear how the Commission should respond, under 
the logic of its complaint, were Cadence to introduce an internally 
developed software program (now provided by one or more independent 
vendors) that is complementary to its ``dominant'' suite of 
programs. Obviously Cadence would be in a position (similar to that 
alleged in the Commission's complaint) to block access to the 
Cadence design software if it wanted to. Even if Cadence did not 
terminate the independent vendors, consistent application of the 
economic logic of the present complaint seemingly would require the 
Commission to seek a prophylactic ``open access'' order against 
Cadence similar to the order sought here. This enforcement policy 
would of course have a number of adverse competitive consequences, 
including deterrence of Cadence from efficiently entering 
complementary software lines through internal expansion.
    The observation in note 3 of the majority statement that 
antitrust law has treated vertical integration by merger differently 
from internal vertical integration ``for more than one hundred 
years'' suggests that I do not recognize that the law provides for 
differential treatment of mergers and internal expansion. I simply 
intended to point out the illogically of finding vertical 
integration with identical economic consequences to be illegal under 
the Commission's standards of merger review, when that integration 
would be of no concern (and might even be applauded) if it resulted 
from simple internal expansion.
    \9\ In the present case, as in Time Warner, the Commission has 
alleged the existence of substantial pre-acquisition market power in 
both vertically related markets (routing software and the rest of 
the IC layout ``suite'' here, see complaint Paras. 9-11, and cable 
television programming and distribution in Time Warner). Under these 
circumstances, there is a straightforward reason why vertical 
integration is both profitable and procompetitive (i.e., likely to 
result in lower prices to consumers): vertical integration would 
yield only one monopoly markup by the integrated firm, rather than 
separate markups (as in the pre-integration situation) by Cadence 
and CCT.
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    Not only am I unpersuaded that Cadence's acquisition of CCT is 
likely to reduce competition in any relevant market, but--as in SGI and 
Time Warner--I would find the proposed order unacceptable even were I 
convinced as to liability. As in Time Warner, the Commission seeks to 
impose a ``most favored nations''clause that would require Cadence to 
allow all independent router developers to participate in its software 
interface programs on terms that are ``no less favorable than the terms 
applicable to any other participants in'' those interface programs. 
Even apart from the usual problems with ``most favored nations'' 
clauses in consent orders,\10\ this order--as in both SGI and Time 
Warner--will require that the Commission continuously regulate the 
prices and other conditions of access.
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    \10\ As I noted in Time Warner, these clauses have the capacity 
to cause all prices to rise rather than to fall. Dissenting 
Statement, supra note 1, at 20. The majority (at 5) seems 
comfortable with this outcome, provided that all vendors pay the 
same price.
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    Indeed, compared to the proposed order in the present case, the 
order in Time Warner was a model of clarity and enforceability. What 
does it mean to mandate treatment ``no less favorable than'' that 
granted to others, when Cadence's current Connections Program--with 
well over 100 participants--allows access prices to differ 
substantially across participants and imposes substantial restrictions 
on the breadth and scope of the permitted connection rights?\11\ Does 
it mean that router vendors pay a connection fee no higher than the 
highest fee paid by an existing participant? Or would they pay a fee no 
higher than the current lowest fee? Or does it means something else? 
Router vendors surely will argue for the second interpretation--a view 
also apparently shared by the Commission majority\12\--yet there is no 
obvious reason why router vendors should be entitled to such a 
Commission-mandated preferential pricing arrangement, and neither the 
majority nor the Analysis to Aid Public Comment has offered one.
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    \11\ For example, CCT had been permitted to participate in the 
Connection Program with its printed circuit board router but not 
with its IC router.
    \12\ See Majority Statement at note 9.
---------------------------------------------------------------------------

    Similarly, does the ``no less favorable'' requirement mandate that 
the vendors of routing software obtain access rights as broad as the 
broadest rights now granted, or simply no worse than the narrowest now 
granted? And since the current Connections contracts are terminable at 
will by either party with 30 days' notice, does ``no less favorable'' 
mean only that router vendors must be given the same termination terms 
as other software vendors, or does it mean something else (e.g., 
termination only for cause, where the ``reasonableness'' of the 
termination is subject to ex post evaluation by the Commission)? \13\ 
The former interpretation of the order seems the most straightforward; 
however, it is also one that essentially would nullify the protection 
of independent router vendors and thus would render the order 
meaningless.\14\
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    \13\ Moreover, does the terminability of the Connections 
contract on 30 days' notice mean that the ``no less favorable'' 
requirement might need to be reviewed every 30 days?
    \14\ The majority implies (Majority Statement at note 9) that 
the exercise of this right would indeed constitute a violation of 
the order.
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    The preceding suggests strongly that the real (albeit unstated) 
goal of the order is not to nullify any actual anticompetitive effects 
from the proposed transaction, but rather to invalidate the principal 
aspects of Cadence's ``Connections Program'' (i.e., the ability to 
charge different connection fees and to terminate vendors at will) 
without demonstrating that the program's provisions violate the law. 
There is little reason to believe that this program is harmful to 
competition, and there are strong efficiency reasons for allowing 
Cadence to set different fees for different vendors. Moreover, setting 
a uniform fee would result in price increases to at least some vendors.

[[Page 26797]]

    Because I do not accept the majority's theory of liability in this 
case, and because I find the proposed remedy at best unenforceable and 
at worst competitively harmful, I dissent.

[FR Doc. 97-12753 Filed 5-14-97; 8:45 am]
BILLING CODE 6750-01-M