[Federal Register Volume 67, Number 161 (Tuesday, August 20, 2002)]
[Notices]
[Pages 53942-53945]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-21118]


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FEDERAL TRADE COMMISSION

[Docket No. 9299]


MSC.Software Corp.; 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 the complaint 
previously issued 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 September 13, 2002.

ADDRESSES: Comments filed in paper form should be directed to: FTC/
Office of the Secretary, Room 159-H, 600 Pennsylvania Avenue, NW., 
Washington, DC 20580. Comments filed in electronic form should be 
directed to: [email protected], as prescribed below.

FOR FURTHER INFORMATION CONTACT: Joe Simons, or Richard Dagen, FTC, 
Bureau of Competition, 600 Pennsylvania Avenue, NW., Washington, DC 
20580, (202) 326-3667 or (202) 326-2628.

SUPPLEMENTARY INFORMATION: Pursuant to section 6(f) of the Federal 
Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46(f), and Sec. 3.25(f) 
of the Commission's rules of practice, 16 CFR 3.25(f), 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 thirty (30) days. The following Analysis to Aid 
Public Comment describes the terms of the consent agreement, and the 
allegations in the complaint. An electronic copy of the full text of 
the consent agreement package can be obtained from the FTC Home Page 
(for August 14, 2002), on the World Wide Web, at http://www.ftc.gov/os/2002/08/index.htm. A paper copy can be obtained from the FTC Public 
Reference Room, Room 130-H, 600 Pennsylvania Avenue, NW., Washington, 
DC 20580, either in person or by calling (202) 326-2222.
    Public comments are invited, and may be filed with the Commission 
in either paper or electronic form. Comments filed in paper form should 
be directed to: FTC/Office of the Secretary, Room 159-H, 600 
Pennsylvania Avenue, NW., Washington, DC 20580. If a comment contains 
nonpublic information, it must be filed in paper form, and the first 
page of the document must be clearly labeled ``confidential.'' Comments 
that do not contain any nonpublic information may instead be filed in 
electronic form (in ASCII format, WordPerfect, or Microsoft Word) as 
part of or as an attachment to email messages directed to the following 
email box: [email protected].

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Such comments will be considered by the Commission and will be 
available for inspection and copying at its principal office in 
accordance with Sec. 4.9(b)(6)(ii) of the Commission's rules of 
practice, 16 CFR 4.9(b)(6)(ii).

Analysis of Proposed Consent Order To Aid Public Comment

    The Federal Trade Commission has accepted for public comment an 
Agreement Containing Consent Order with MSC.Software Corporation 
(``MSC'') to resolve matters charged in an Administrative Complaint 
issued by the Commission on October 9, 2001. The Agreement has been 
placed on the public record for thirty (30) days for receipt of 
comments from interested members of the public. The Agreement is for 
settlement purposes only and does not constitute an admission by MSC 
that the law has been violated as alleged in the Complaint or that the 
facts alleged in the Complaint, other than jurisdictional facts, are 
true.

I. The Commission's Complaint

    The Complaint alleged that Respondent MSC.Software Corporation 
(``MSC'') unlawfully acquired Universal Analytics, Inc. (``UAI'') and 
Computerized Structural Analysis and Research Corporation (``CSAR'') in 
1999 in violation of section 7 of the Clayton Act and section 5 of the 
FTC Act. The Complaint alleged that the acquisitions may substantially 
lessen competition or lead to a monopoly in the market for advanced 
versions of Nastran, a public domain engineering simulation software 
program. Neither acquisition had been reportable under the Hart-Scott-
Rodino reporting thresholds, 15 U.S.C. 18a.
    MSC is the largest supplier of computer-aided engineering 
simulation software in the world. In 2001, its annual worldwide revenue 
was $236 million. MSC has an estimated 1350 employees located around 
the world. MSC has grown substantially through acquisitions, having 
acquired six other engineering software vendors or resellers since 
1998. MSC is a publicly-traded company.
    The Complaint alleged that MSC, UAI, and CSAR had long been 
vigorous competitors, each offering an advanced version of Nastran to 
customers in the aerospace, automotive and other industries. These 
competing versions of advanced Nastran all derived from a program 
originally developed by NASA and placed into the public domain. The 
common origin of these three advanced Nastran versions made switching 
between them relatively easy. For these reasons, UAI Nastran and CSAR 
Nastran were close substitutes for MSC.Nastran. Non-Nastran solvers, 
however, were more distant substitutes. The Complaint alleged that 
competition among the three advanced Nastran suppliers helped to hold 
down prices and to promote product innovation.
    The Complaint further alleged that MSC was the dominant supplier of 
advanced versions of Nastran, with an estimated 90 percent of worldwide 
Nastran revenue. Prior to MSC's acquisitions, UAI and CSAR were the 
only other firms offering advanced versions of Nastran. They held 
substantially smaller market shares. Each had about five percent of 
worldwide advanced Nastran revenues.
    The Complaint alleged that the acquisitions were anticompetitive 
because they increased the level of concentration in already highly 
concentrated markets. The Complaint further charged that the 
acquisitions eliminated competition on price and product development 
and enhancements, created or enhanced MSC's power to raise prices above 
a competitive level or to withhold or delay product development and 
enhancements, and prevented the increased competition that MSC expected 
if other suppliers of engineering software were to acquire UAI and 
CSAR. Even if other solvers offering advanced analysis capabilities 
were included in the market, the markets remain highly concentrated and 
the acquisitions anticompetitive. The Complaint also alleged that MSC's 
acquisitions were unlawful in separate markets that exist for specific 
industries or customer categories. According to the Complaint, the 
appropriate geographic market in which to analyze MSC's acquisitions is 
the world, although a U.S. market may also exist.
    The Complaint also alleged that MSC's acquisitions constitute 
unlawful monopolization and an attempt to monopolize in violation of 
section 5 of the FTC Act. It further alleged that MSC's dominant market 
share prior to and after the acquisitions satisfied the showing 
required for monopoly power and dangerous probability of success. 
Moreover, the Complaint alleged that MSC acted willfully and with the 
specific intent to obtain and maintain a monopoly in the market for 
advanced versions of advanced Nastran when it made the acquisitions.
    The Complaint further charged that entry is not likely, nor, if it 
did occur, would it likely be timely or sufficient to prevent the 
anticompetitive effects of the acquisitions.

II. Terms of the Proposed Consent Order

    The proposed Order would provide relief for the alleged 
anticompetitive effects of the acquisitions principally by means of a 
divestiture intended to restore competition. In addition, the proposed 
Order contains further provisions intended to facilitate the 
restoration of competition.
    Divestiture. The principal relief under the proposed Order is to 
require the Respondent to divest, within 150 days after entry of the 
Order and up to two acquirers to be approved by the Commission, 
perpetual, worldwide, royalty-free, and non-exclusive licenses to the 
key intellectual property needed by a new competitor to compete in the 
sale and licensing of advanced Nastran software. ] II.A. The licensed 
intellectual property rights would consist of the version of 
MSC.Nastran that is most current as of the date that the Consent 
Agreement is accepted for public comment by the Commission, as well as 
all the intellectual property rights acquired by MSC in the two 
challenged acquisitions. ] I.L.1
    The licenses would permit the acquirer (or acquirers) to use the 
licensed rights to sell advanced Nastran software, sublicense others 
without restriction, and prepare derivative works so as to further 
develop and enhance the software without further remuneration to MSC 
once the divestiture is completed. the licenses granted would be non-
exclusive, meaning that MSC would continue to retain full rights itself 
to the licensed intellectual property. ] II.A. The basic approach 
reflected in the settlement, therefore, is to replicate in the hands of 
the acquirer(s) the crucial intellectual property held by MSC in the 
aftermath of the challenged acquisitions.
    The Order language providing for divestiture ``up to two'' 
acquirers tracks the language of the Notice of Contemplated Relief 
accompanying the Complaint. It reflects MSC's removal of two 
independent competitors from the marketplace through the challenged 
acquisitions. The language is intended to leave open to the Commission 
the option of requiring that two competitors be re-established.
    Purpose. Paragraph II.C. of the proposed Order contains a 
recitation of the Commission's purpose in ordering the divestiture. 
That provision recites that the purpose of the divestiture is to remedy 
the lessening of competition alleged in the complaint by establishing 
one or more viable and effective competitors to MSC engaged in the 
sale, distribution and licensing of advanced Nastran software for use 
by customers,

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including customer sin the aerospace and automotive industries, and 
with the ability to engage in further development and enhancement of 
advanced Nastran software. It states that, in determining whether the 
licensing of more than one acquirer may be required, or whether to 
approve the grant of a license to a particular prospective acquirer, 
the Commission will consider, among other things, the likely future 
capability of the prospective acquirer or acquirers to provide 
effective price and innovation competition to MSC. It also recites that 
the Commission will consider as well, among other things, any 
provisions for the hiring by the acquirer(s) of personnel knowledgeable 
concerning the design, development, maintenance, customer support, 
sales and marketing of the licensed rights.
    The Software To Be Licensed. The intellectual property to be 
licensed includes all rights relating to the version of MSC.Nastran 
that is most current as of the date the consent agreement is accepted 
by the Commission for public comment. ] I.L.1.a. Diverstiture of rights 
to MSC's current version of MSC Nastran is a necessary remedial measure 
to facilitate the re-establishment of the competition that MSC 
allegedly eliminated with its two acquisitions. Such divestiture 
addresses the switching of former UAI and CSAR customers to MSC's own 
version of advanced Nastran, including former UAI and CSAR customers 
who may have adapted their prior procedures and customer-written 
software routines to the MSC version. In addition, such divestiture 
addresses the fact that MSC has incorporated new features in its 
releases of MSC.Nastran, including features taken from the CSAR and UAI 
versions acquired in 1999, and has not carried on any further 
development of the UAI and CSAR versions of Nastran following the 
acquisitions. Divestiture of the acquired assets alone would not 
restore the competitive conditions that existed before the acquisitions 
(the status quo ante), because the 3-year old UAI and CSAR codes are no 
longer as commercially viable as they were when MSC acquired them. 
Licensing of the current version of MSC.Nastran is required to give the 
acquirer or acquirers what UAI and CSAR formerly had: An up-to-date 
product upon which to base sales and future development efforts.
    In addition to the current version of MSC.Nastran, MSC is also 
required to license to the acquirer(s) all of the intellectual property 
acquired in the UAI and CSAR acquisitions. ] I.L.1.b. and -.c. This 
relief is integral to the fundamental approach reflected in the 
settlement, which is to replicate in the hands of the acquirer(s) the 
intellectual property held by MSC in the aftermath of the challenged 
acquisitions. Licensing all the UAI and CSAR computer codes (in 
addition to MSC.Nastran) is justified to permit an acquirer(s) to offer 
all the computer codes formerly available from UAI and CSAR, including 
the ability to select aspects of the UAI Nastran and CSAR Nastran codes 
for possible inclusion in its future advanced Nastran product that have 
not been incorporated in MSC.Nastran since the acquisitions.
    The Order details a broad range of intellectual property rights to 
be licensed to the acquirer(s). See ] I.L.2. In addition to the 
licensed intellectual property and physical or electronic copies 
embodying the intellectual property, MSC is also required to divest 
copies of other materials useful to an acquirer in establishing itself 
as a competitor to MSC. These include all of the customer files 
acquired by MSC as a result of the challenged acquisitions, as well as 
all marking information, sales training materials, and current (as of 
the divestiture date) customer lists, customer contact information, and 
customer support log database contents relating to customers who use 
MSC.Nastran in the United States. ] I.E.2. The latter information 
should be of particular use by an acquirer that may wish to 
differentiate itself from MSC by its responsiveness to customer needs. 
In the past, both UAI and CSAR used such tactics to compete against 
MSC.
    Post-Divestiture Rights. In addition to the licensed rights 
describe above, the Order provides for further rights by the 
acquirer(s) in the post-divestiture period:
    For twelve months after the divestiture date, the acquirer has the 
right to obtain from MSC ongoing support with respect to MSC.Nastran, 
in the form of personnel, information, technical assistance, advice and 
training. This includes reasonable consultation with knowledgeable 
employees of MSC to ensure that the acquirer's personnel can maintain, 
develop and support the Licensed Rights in a manner comparable to MSC. 
This continuing support does not extend to the licensed UAI and CSAR 
intellectual property, and will be provided at MSC's direct cost. ] 
I.K.4. This continuing support obligation complements the hiring 
opportunities afforded to the acquirer under other provisions of the 
Order discussed below.
    For not less than three years after the divestiture date, the 
acquirer has the right to use the trademarks or trade names of the 
licensed software for the purpose of identifying the acquirer as a 
licensee from MSC. The acquirer does not otherwise obtain any rights of 
any kind to the name ``MSC'' or ``MSC.Nastran'' or related logos and 
trademarks of MSC. ] I.K.4.
    Hiring of MSC Personnel. In order to ensure the ability of the 
acquirer to provide effective competition, the Order contains 
procedures to facilitate the acquirer's hiring of valuable MSC 
personnel. ] V. In the aftermath of the acquisitions, MSC was 
essentially the only employer of computer programmers with thorough 
knowledge of the proprietary versions of advanced Nastran. The future 
success of the acquirer in providing ongoing innovation competition in 
developing advanced Nastran may depend to a significant degree on its 
hiring of personnel (particularly programmers and customer support 
engineers) with knowledge of this large and complex body of computer 
code.
    Customer Contracts. Prior to the acquisitions, most of MSC's 
advanced Nastran customer purchased the software on an annual lease 
basis--that is, for one-year terms with annual payments and in 
quantities determined according to annual needs. In the aftermath of 
the acquisitions, and especially in the 2001-2002 period, many 
customers converted annual leases for advanced Nastran to ``paid-up'' 
licenses--that is, licenses to use the software for an extended term, 
generally 25 years, for a larger advance payment and continuing 
maintenance fees during the contract term. This conversion may 
disadvantage future advanced Nastran competitors who may no longer have 
access to these customers at competitive prices.
    To address the effect of these conversions on the acquirer's 
ability to attract a customer base, the proposed Order provides that, 
for a period of one year after the divestiture date, any customer who 
was converted from an annual lease to a paid-up license for MSC.Nastran 
in the period since the acquisitions has the right to terminate or 
rescind its license in whole or in part in order to deal with the 
acquirer. If a customer chooses to do so, MSC is required to refund or 
return a pro rata portion of the consideration paid in advance for its 
paid-up MSC.Nastran license. ] VII.A. The Order also provides that MSC 
is to provide affected customers with written notice of such rights 
within fourteen days following the divestiture date. ] VII.B.
    The formula for such refunds bases the pro-rata allocation on the 
lesser of four years or the contract term. ] VII.A.

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This refund formula should provide substantial incentive for affected 
customers to consider switching to the acquirer in whole or in part. 
Under this formula, customers who converted to a paid-up license since 
mid-year 2001 and who determine to switch to the acquirer at mid-year 
2003 will be entitled to a refund of one-half or more of their advance 
payment for the paid-up MSC.Nastran license.
    Although these provisions authorize refund payments by MSC to some 
customers, they are neither a penalty nor disgorgement. Their purpose 
is not to punish MSC or deprive it of ill-gotten gains. Rather, the 
provisions are in furtherance of the principal divestiture relief 
provided under the Order. They are intended to remove any penalty or 
disincentive on customers who had no alternative to MSC's terms after 
1999, but who might now consider doing business with the acquirer of 
the divested assets. Indeed, no payment will be due from MSC to a 
customer unless and until the customer chooses to do business with the 
acquirer.
    Post Divestiture Conduct. The Order includes provisions intended to 
prevent MSC from disadvantaging the acquirer in its post-divestiture 
dealings with customers or suppliers.
    Advanced Nastran software is used in conjunction with other 
complementary software. Complementary software includes programs known 
as ``pre- and post-processors'' or ``meshers'' that are used to process 
input to or output from advanced Nastran and make it useful with other 
computer data, such as designs produced by CAD software. Complementary 
software of this sort is produced by various suppliers and by MSC 
itself. The Order requires MSC, for three years after the divestiture 
date, to maintain the interoperability of the current and any future 
versions of MSC's complementary software (including but not limited to 
its product MSC.Patran) with the licensed software (] VIII.A); and 
prohibits MSC from influencing a supplier of complementary software or 
services to refuse to deal with the acquirer or stop supporting 
interoperability with any of the licensed software (] VIII.B.).
    During the same three-year period, MSC is required to maintain all 
current input and output file formats for MSC.Nastran. This is to 
ensure that users of MSC.Nastran would not be impeded or penalized in 
their use of models, files, or complementary software if they switched 
to the version of advanced Nastran offered by the acquirer. ] VII.C. 
The Order also requires that MSC not refuse to deal with any customer 
or prospective customer for the reason, in whole or in part, that such 
customer or prospective customer deals with the acquirer. ] VIII.D. The 
latter provision is intended to prevent MSC from inhibiting the pre-
acquisition practice of many customers to maintain simultaneous 
licenses for more than one source of advanced Nastran software.
    Prior Notice of Future Acquisitions. For a period of ten years, the 
Order requires MSC to provide prior notice of future acquisitions of 
any entity engaged in the development or sales of any version of 
Nastran. ]IX. This provision is warranted under existing Commission 
policy because of the risk that MSC may in the future carry out 
anticompetitive acquisitions that otherwise would not come to the 
attention of the Commission because the transactions are likely to fall 
below the Hart-Scott-Rodino reporting thresholds. See Statement of FTC 
Policy Concerning Prior Approval and Prior Notice Provisions (June 21, 
1995.
    Monitor, Trustee and Reporting. The proposed Order contains 
standard monitor and trustee provisions. The Monitor provisions, set 
out in Paragraph III, authorize appointment of a person to oversee 
MSC's compliance with the terms of the Order. Such a monitor is 
warranted in light of the technical nature of the products at issue and 
the potential complexity of some compliance issues, including employee 
hiring and customer refunds. The trustee provisions, set out in 
Paragraph IV, contemplate appointment of a trustee to complete the 
required divestiture if MSC does not do so within the 150 days 
specified in the Order. Under these provisions, the Commission will 
appoint a trustee who will undertake to accomplish the required 
divestiture at no minimum price. The trustee will have one year to 
complete the divestiture. Finally, the proposed Order contains 
provisions for MSC to file regular reports concerning its compliance 
with the Order terms. ]X.

III. Opportunity for Public Comment

    The Proposed Order has been placed on the public record for 30 days 
in order to receive comments from interested persons. Comments received 
during this period will become part of the public record. After 30 
days, the Commission will again review the Agreement and comments 
received, and will decide whether it should withdraw from the Agreement 
or make final the Order contained in the Agreement.
    By accepting the Proposed Order subject to final approval, the 
Commission anticipates that the competitive issues described in the 
Complaint will be resolved. The purpose of this analysis is to invite 
and facilitate public comment concerning the Proposed Order. It is not 
intended to constitute an official interpretation of the Agreement and 
Proposed Order or to modify their terms in any way.

    By direction of the Commission.
Benjamin I. Berman,
Acting Secretary.

Statement of Commissioner Mozelle W. Thompson

    The Commission today accepted a consent agreement to resolve the 
Commission's administrative complaint against MSC.Software. I voted 
to accept the agreement; however, I am concerned that industry and 
the private bar do not mistakenly make too much of the fact that the 
Commission did not require an up-front buyer for this licensing 
divestiture.
    As a general rule, the Commission is more likely to require that 
parties present up-front buyers for assets when divesting less than 
an ongoing business. In this unique case, however, the Commission 
decided to resolve its concerns about MSC.Software's two consummated 
acquisitions by accepting an order requiring a prompt divestiture to 
restore lost competition, instead of potentially delaying relief 
further by first forcing MSC.Software to negotiate an asset sale to 
a potential buyer. The Commission makes such remedial assessments on 
a case-by-case basis, and such assessments would likely vary between 
relief proscribed for consummated mergers and relief for mergers 
prior to their consummation under Hart-Scott-Rodino reviews--the 
vast majority of Commission merger work. I am comfortable with the 
remedial action in this particular instance because the Commission 
has fully vetted the divestiture package's market acceptability with 
industry incumbents. Thus, I am fully confident that the asset 
package will function successfully in the marketplace and facilitate 
viable competition.

[FR Doc. 02-21118 Filed 8-19-02; 8:45 am]
BILLING CODE 6750-01-M