CHAPTER 5 Federal Trade Commission and Xerox - Competition ...

CHAPTER 5
Federal Trade Commission and Xerox
148. The proceedings taken by the Federal Trade Commission (FTC) in the
United States against the Xerox Corporation are relevant to our inquiry because
some provisions of the Consent Order are world-wide in scope and cover Rank
Xerox and Fuji Xerox as well as Xerox.
149. It has to be borne in mind that US law relating to monopolies is different
from the law operating in this country and that in some respects the trading
practices of Xerox differed from those of Rank Xerox.
Commission's complaint
150. In January 1973 the FTC issued a complaint against Xerox under
section 5 of the Federal Trade Commission Act. This alleged that Xerox had
engaged in a number of unfair 'acts, practices and methods of competition'
and that the purpose and effect of some of them had been to establish and
preserve monopoly power in the market for plain paper copiers and in the
wider office copier market.
151. Among the marketing practices which were alleged by the FTC to
frustrate competition were Xerox's lease only policy, package leasing plans and
quantity discount lease plans, discrimination in price among customers, the
exclusive provision of maintenance and repair services for leased Xerox copiers
and the tying of supplies to the lease of office copiers.
152. With regard to patents, the FTC alleged that various aspects of Xerox's
policy had served to establish and preserve its monopoly position, including
maintaining a patent barrier to competition by attempting to recreate a patent
structure which would be equivalent in scope to expired patents, developing
and maintaining a patent structure of great size, complexity and obscurity of
boundaries, using its patent position to obtain access to technology owned by
actual or potential competitors, entering into cross licensing arrangements
with actual or potential competitors, and by various practices limiting licences
to patents relating to coated paper copiers or slow speed plain paper copiers.
153. The operation of Xerox and a division of the world market for plain
paper copiers among Xerox, Rank Xerox and Fuji Xerox had had the effect
of monopolising the office copier market and plain paper copier sub-market,
preserving a highly concentrated market structure with high barriers to entry,
hindering competition and the entry of new competitors, materially reducing
the independence of Rank Xerox and the influence of Rank Xerox as a potential
competitor and generally depriving consumers of the benefits of competition.
154. The Commission indicated that, if it was satisfied that Xerox was in
37

each of section 5 of the Federal Trade Commission. Act, it might seek relief
in some or all of the following forms:
(i) Mandatory royalty-free unrestricted licence of all existing patents pertaining
to office copiers and a similar provision relating to patents obtained
during the 20 years following the date of the order and disclosure to
licensees of know-how related to the practice of licensed patents;
(ii) the prohibition of refusal to sell copiers;
(iii) divestiture of the stock of Rank Xerox and the prohibition of any restriction
on Rank Xerox from selling or distributing office copiers in the
United States;
(iv) the prohibition of the acquisition of other companies engaged in making
office copiers or supplies;
(v) prohibition of price plans based on the fact that the purchaser or lessee
of an office copier has or will purchase or lease any other office copier
from Xerox;
(vi) prohibition of requirements that Xerox be the exclusive source of maintenance
and repair service for leased Xerox copiers.
Xerox's Answer
155. Xerox Corporation filed an Answer denying all the allegations of
violation of section 5 and asserting that the proceedings were against the public
interest in that they represented a challenge to the 'very foundation' of the US
patent system and to the power of small innovative companies.
Consent Order
156. Although the FTC itself has adjudicative powers under the Federal
Trade Commission Act, the majority of its cases are settled by a negotiated
Consent Order. In such cases neither the original complaints of the FTC nor
any denials of those complaints by the company are adjudicated upon. In
October 1974 the Federal Trade Commission circulated the draft of a Consent
Order, under which Xerox would agree to undertake certain measures and
the Commission would accept the order in settlement of its complaint. After
objections had been voiced by various competing plain paper copier suppliers
this draft Consent Order was rejected by the Commission in February 1975.
After further negotiations with Xerox a revised Consent Order was finally
settled in July 1975.
Provisions of the Consent Order
157. The most important provisions of the Consent Order as far as our
own inquiry was concerned are those relating to patent licensing. Under the
Consent Order Xerox must be prepared to license all patents relating to office
copiers, including non-xerographic copiers, and high speed office copiers such
as the Model 9200. The obligation in respect of colour copiers is more limited.
For the purpose of the Order, Xerox patents include patents owned or controlled
by Rank Xerox and Fuji Xerox. The Consent Order licences are world-wide in
scope: and Rank Xerox and Fuji Xerox, by undertakings to Xerox filed with
the Federal Trade Commission, have confirmed Xerox's power to grant world-
38

wide licences. A licensee may designate up to three patents to be licensed free of
royalty. On the rest Xerox may charge a royalty not to exceed £ per cent of the
licensee's net revenues from each royalty-bearing product, subject to a maximum
accumulated royalty on all licences of 1£ per cent. Xerox (and Rank Xerox and
Fuji Xerox) may require the cross licence of any patents of any licensee for
each Xerox licensed patent in excess of the three licensed royalty free. Such
cross licences are not to become immediately effective, however. Broadly,
the cross licence of an existing patent will only become effective four years
after the date of the Consent Order and of a future patent of a licensee four
years after the issue of that patent. Licensees may charge reasonable royalties
on all cross licences to Xerox. Xerox is debarred from obtaining exclusive
licences under office copier patents and, for a period of ten years, from acquiring
patents from other parties. Disputes between Xerox and applicants for licences
or licensees are to be resolved by arbitration, under the rules of the American
Arbitration Association. The world-wide character of the licensing arrangements
is subject to an important qualification. A licensee in the United States
can require Xerox to provide know-how, but Xerox is not obliged to provide
know-how for manufacture outside the United States.
158. The Consent Order also provided that for five years Xerox must not
operate any price plan for the sale or lease of an office copier which depends
on the customer purchasing or leasing one or more additional office copiers of a
different model. This was aimed at what was known as Xerox's 'Machine
Utilisation Plan'. Customers with a monthly bill of at least the then equivalent
of £13,500 could have all their models on a non-modal pricing scheme which
afforded substantial reductions in charges. There were three bands of charges
at the equivalent at the time of £13,500-£15,500, £15,500-£18,100 and £18,100-
£36,000. This Machine Utilisation Plan differed from Rank Xerox's Group
Pricing Plan in than it applied to fewer and larger customers, and unlike GPP
it did not retain the charges structure for each type of machine but substituted
one structure applicable to all machines. The effect is that Xerox is prohibited
from continuing to lease different Xerox copier models under the Machine
Utilisation Plan.
159. Xerox is required to announce a selling price for any copier at the same
time as it announces that the copier is available on lease.
160. It will be observed that the Consent Order did not require Xerox to
divest itself of its interest in Rank Xerox. However, the Order prohibits Xerox
from acquiring any further interest in any other supplier of copiers (including
Rank Xerox and Fuji Xerox) for a period often years.
161. A number of the other remedies that were contemplated by the FTC
in its initial complaint against Xerox (see para 154) were not included in the
final Consent Order. This is the usual situation when an FTC case is settled
by a negotiated Consent Order rather than by formal adjudication.
39