Article

Export Trading Company Act: Guidelines

The Export Trade Certificate of Review Program - The Competitive Edge for U.S. Exporters

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Table of Contents

I.   Introduction

II.  Factors to Consider in Deciding Whether to Seek a Certificate of Review under Title III

III. Eligibility Criteria

A. Eligible Applicants

B. Conduct Eligible for Certification

1. Export Trade

2. Export Trade Activities and Methods of Operation

IV. Certification Standards

A. The First Standard – Substantial Lessening of Competition or Restraint of Trade

B. The Second Standard – Unreasonable Price Effects

C. The Third Standard – Unfair Methods of Competition

D. The Fourth Standard – Resales in the United States

V. Application of Certification Standards to Specific Conduct in Export Trade

A. Vertical Restraints

B. Horizontal Restraints

C. Technology Licensing

   Example: Exclusive Foreign Licensee

D. Sales to or Financed by the U.S. Government

I. Introduction

These guidelines set forth the factors a firm should consider in deciding whether to apply for a Certificate of Review, the purpose of the certification procedure, the protection conferred by the Certificate of Review, and the persons and conduct eligible to receive certification.  The guidelines include a discussion of the four certification standards in Title III, the application of those standards to specific kinds of export conduct and advice about the application process.

The Export Trading Company Act of 1982 [1] (the ETC Act or the Act) is intended to increase U.S. exports of goods and services primarily by removing two impediments: (1) Restrictions on bank investment and certain export financing, and (2) the uncertainty regarding the application of U.S. antitrust laws to export activity.  To remove these impediments to exporting, the ETC Act makes several changes to applicable banking and antitrust laws.   These changes are reflected in four titles that are largely independent of each other.

Title I establishes an office in the Department of Commerce to promote the formation of export trade associations and export trading companies (ETCs) [2].  No particular structure is required of an ETC. An ETC is an entity that links U.S. producers of goods and services with foreign markets.  Under Title I, the Office of Competition and Economic Analysis - Export Trading Company Act Team provides counseling about Title III and the Act.

Title II permits eligible banking entities to acquire, subject to certain limitations, up to 100 percent of the stock of an ETC.[3]  It also improves exporters access to working capital financing by establishing a loan guarantee program at Eximbank.

To reduce antitrust uncertainty, Congress enacted a regulatory certification procedure under Title III and a statutory clarification under Title IV.  Without amending the antitrust laws, Title III creates a certification process which enables an exporter to receive an advance determination about its specified export conduct.  The Certificate confers significant protection for the specified export conduct from federal and state government antitrust suits.[4]   A Title III Certificate of Review also reduces an exporter’s private action liability from treble to single damages for the certified conduct.

Title IV directly amends the Sherman and Federal Trade Commission Acts to clarify how they apply to export commerce.[5]

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II. Factors to Consider in Deciding Whether To Seek a Certificate of Review Under Title III

Persons involved in export trade who are deciding whether to apply for a Certificate of Review under Title III should first identify and assess the antitrust risks associated with their proposed export conduct. To focus this assessment, it is helpful to consider, for example, whether a competitor, a customer, or a state government might bring a lawsuit asserting that the proposed export conduct violates U.S. antitrust law.

Next, a potential applicant should review the costs and benefits of applying for Title III certification. The two most significant benefits of a Certificate of Review are virtual immunity from government antitrust suits and procedural advantages in private suits. The Certificate holder and the members identified in the certificate, have virtual immunity from federal and state government civil and criminal antitrust or unfair competition suits.[6]   This virtual immunity extends to the export conduct specified in the Certificate and carried out during the effective period of the Certificate in compliance with its terms and conditions. The only exception to this immunity is that the Justice Department may bring an action against the certificate holder to enjoin conduct threatening clear and irreparable harm to the national interest. [7]

The procedural advantages that a Certificate of Review provides to the certificate holder and its members in private actions by persons who claim to have been injured by the certified conduct are: (1) A reduction in liability from treble to single damages, (2) a shorter statute of limitations for bringing an action, (3) a rebuttable presumption that the certified conduct is permissible. and (4) the recovery by a prevailing certificate holder of the costs of defending the suit, including a reasonable attorney’s fee.

A. Benefits of Virtual Immunity

The virtual immunity and the procedural advantages provided by Title III can reduce antitrust risks and uncertainty by deterring lawsuits of dubious merit.  Moreover, a Certificate of Review can remove the uncertainty and risks associated with gray-area conduct by giving an exporter an opportunity to confirm the often qualified conclusions of counsel that particular export conduct is not likely to violate the antitrust laws.

A governmental determination not to grant a Certificate is subject to judicial review and the agencies must give reasons for the denial; therefore, a firm can obtain a definite answer about gray-area conduct.  If a certificate is not granted. neither the denial nor the reasons for it are admissible in any administrative or judicial proceeding in support of any claim under the antitrust laws.  Finally, Title III protections can apply not only to the actual operation of an export entity but also to its planning activities.

B. Costs of Applying for a Certificate of Review

The costs of applying for a Certificate of Review are time, money and disclosure of confidential information.   An applicant will spend time and money in: (1) Preparing the application and responses to supplemental questions, if any, (2) discussing the proposed conduct and the form of the Certificate with the government after the application has been filed, and (3) carrying out post-certification requirements, such as submission of annual reports.   Certain of these costs can be significantly reduced by taking advantage of the pre-counseling provided by the Office of Competition and Economic Analysis - Export Trading Company Act Team, as described in Part VI.

The possible disclosure of confidential business information to the federal government is another potential cost of Title III certification.   The application form for a Certificate of Review requires some disclosure to the federal government of information about the applicant’s business plans, sales, and markets. In addition, the government may ask supplemental questions about other confidential information, such as an applicant’s contracts, suppliers, customers, or joint venture arrangements.

Title III and its implementing regulations, however, place significant restrictions on the disclosure of confidential information provided in an Application for a Certificate of Review.   Any information submitted in connection with an application is exempt from disclosure under the Freedom of Information Act. Also, the government is prohibited, except in rare instances, from disclosing confidential commercial or financial information that would cause harm to the person that submitted it.   Even though summaries of the application and certificate are published in the Federal Register and although the entire Certificate is available to the public, government officials and Certificate applicants have been able to draft these publicly available materials so that no confidential or proprietary information need be disclosed.

C. Limitations of Certificate Protection

While a Title III Certificate of Review provides significant protections, potential applicants should be aware of its limitations.   The Certificate provides no protection for persons not identified as an applicant or members in the certificate.   Moreover, conduct that falls outside the scope of the Certificate or violates its terms remains fully subject to criminal sanctions, as well as both private and governmental civil enforcement suits under U.S. antitrust laws.   Furthermore, a Certificate obtained by fraud is void from the beginning and, thus, provides no protection.   Finally, applicants should be aware that other nations have antitrust or competition laws with which they must comply.   The Certificate does not confer immunity from these foreign laws.

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 III. Eligibility Criteria

A. Eligible Applicants

Anyone who is a person within the meaning of that term in Title III is eligible to apply for a certificate.

The term “person” means an individual who is a resident of the United States: a partnership that is created under and exists pursuant to the laws of any state or of the United States: a state or local government entity; a corporation, whether organized as a profit or nonprofit corporation, that is created under and exists pursuant to the laws of any state or of the United States; or any association or combination, by contract or other arrangement, between or among such persons.[8]

Under this definition, any individual or legal entity that is either a resident or citizen of the United States can apply for a Certificate under Title III.

Unlike Title II, the Bank Export Services Act which applies only to bank affiliated ETCs and unlike the Webb-Pomerene Act, which applies only to associations engaged solely in export trade, Title III permits any U.S. exporter to apply for and be issued a Certificate of Review, regardless of its legal form and range of activities.[9]

An entity calling itself an ETC is not required to obtain a Title III Export Trade Certificate of Review.   Nor is a firm required to be an ETC to obtain a Certificate; under Title III, a single U.S. company can apply for certification even if its export trade is only a small part of its total operations.

A foreign company cannot seek a Certificate because it is not a person.   U.S. subsidiaries of foreign companies, however, are eligible to obtain a Certificate. Moreover, foreign companies can receive the protection of a Certificate by becoming members of an eligible applicants’ Certificate.[10]

B. Conduct Eligible For Certification

Under Title III, Certificates of Review may be issued only with respect to export trade, export trade activities and methods of operation [11] The agencies will determine whether the conduct proposed for certification falls within these definitions before considering whether the conduct meets the four certification standards of Section 303(a) of Title III.   Conduct that constitutes export trade, export trade activities or methods of operation is eligible for certification. Conduct that does not constitute export trade, export trade activities or methods of operation is not eligible for certification.

1. Export Trade.

Title III defines export trade to be trade or commerce in goods, wares, merchandise, or services exported, or in the course of being exported, from the United States or any territory thereof to any foreign nation. [12] Title III does not require that the goods or services for export must be produced in the United States.

Even though the goods or services have not yet been exported by the applicant or its members, they may fall within the definition of export trade and, therefore, be eligible for certification, if they are in the course of being exported.   For example, the sale of a product within the United States, if the product is to be exported, may in some circumstances constitute export trade.   However, the production in the United States of goods will not ordinarily be considered as export trade even if the goods produced are destined for export.   Nothing in Title III prevents an export venture from engaging in manufacturing activities or any other activities, such as import or domestic trade.   Such activities would not, however, be eligible for certification, and would remain subject to the normal application of the antitrust laws.

In order to qualify as export trade, goods or services must ultimately be exported from the United States or any territory thereof to any foreign nation. [13]   Although it will not often be an issue, questions could be raised as to when goods and services are exported from the United States or any territory thereof.   For example, fish that are caught by U.S. flag vessels within U.S. waters and sold at sea would be considered to be exported from the United States. [14]

The definition of export trade does not require that the goods or services to be exported be produced in the United States.   For example, sales abroad of foreign-made products that were imported into the United States and then exported to a foreign country qualify as export trade as do the sales abroad of goods assembled in a United States foreign trade zone from imported parts.

In addition to goods and services that are to be exported, the definition of export trade includes export trade services.   Export trade services are services that are provided exclusively to facilitate the export of goods or services.   Examples of export trade services include the sale and shipment of goods or services abroad, advertising in the export market, international market research, product research and design exclusively for export, joint trade promotion, financing, communication and processing of foreign orders, and negotiating export contracts with foreign buyers.[15]

2. Export Trade Activities and Methods of Operation.

As a matter of practice, the agencies distinguish between export trade and export trade activities and methods of operation. Export Trade refers to what the applicant exports, and export trade activities and methods of operation refers to how the applicant exports.  Title III defines export trade activities as activities or agreements in the course of export trade and defines methods of operation as any method by which a person conducts or proposes to conduct export trade. [16]  Proposed activities, agreements or methods of conducting business will be eligible for certification if they fall within these definitions.   It is not important whether proposed conduct is best characterized as an export trade activity or a method of operation, so long as the proposed conduct constitutes one or the other.

It is especially important that applicants specify their export trade activities and methods of operation since the Certificate’s protection is limited to the specific conduct that is described in the certificate.

Agreements in the course of export trade (export trade activities) might include agreements among the members of a joint export entity on the allocation of export shipment, agreements setting prices or other terms and conditions of purchase or sale for or in foreign markets, and distribution agreements for export.

The applicant’s methods of operation might include such mechanisms as using exclusive or non-exclusive export distributors, selling on consignment, and using a resale price maintenance program for its foreign sales.   Methods of operation eligible for certification might also include the organizational and managerial aspects of the export venture, such as the manner in which the overseas prices will be established, the role members will play in the management decisions of the venture, the manner in which business information will be disclosed to or exchanged between members and/or non-members, and restrictions on the activities of members in export markets or on their withdrawal from the export venture.

While, as a general matter, certification is not available for overseas investment activities, investments that are integral to the export of goods or services may in some circumstances be eligible for certification.   For example, investment in warehouse facilities overseas to store exported products until transferred to the foreign purchaser would ordinarily be eligible for certification.   Similarly, although the production or manufacture of products ordinarily would not be eligible for certification, minor product or packaging modification activities necessary to insure compatibility of the product with the requirements of the foreign market could be considered an export trade activity eligible for certification.

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IV. Certification Standards

Proposed export trade, export trade activities and methods of operation may be certified if such conduct will

(1) Result in neither a substantial lessening of competition or restraint of trade within the United States nor a substantial restraint of the export trade of any competitor of the applicant,

(2) Not unreasonably enhance, stabilize, or depress prices within the United States of the goods, wares, merchandise, or services of the class exported by the applicant.

(3) Not constitute unfair methods of competition against competitors engaged in the export of goods, wares, merchandise, or services of the class exported by the applicant, and

(4) Not include any act that may reasonably be expected to result in the sale for consumption or resale within the United States of the goods, wares, merchandise, or services exported by the applicant.

Title III is intended to eliminate uncertainty concerning the applicability of the antitrust laws to conduct in export trade and thereby to promote exports.   Congress did, however, provide for a single-damage remedy against certified conduct by a Certificate holder that is subsequently determined by a court he inconsistent with Title III standards.

A. The First Standard: Substantial Lessening of Competition or Restraint of Trade

Under this standard, conduct will be certified unless it results in a substantial lessening of competition or restraint of trade in the domestic market or a substantial restraint on the export trade of U.S. export competitors.   To determine whether the proposed conduct will result in a substantial lessening of competition or restraint of trade within the United States, the analysis will look to the overall purpose and effect of the activities on competition in the domestic market.   If the conduct will not substantially lessen competition in a domestic market, it will be certified.

A determination as to whether proposed conduct will substantially lessen competition in domestic markets will often require an analysis of the market structure in the United States for the goods and services to which the proposed conduct will apply.

An evaluation of whether proposed export conduct will be likely to substantially restrain the export trade of a competitor of the applicant will focus on the purpose and effect of the conduct.   For example, conduct that is predatory, or that denies an export competitor access to an essential facility and thus prevents it from competing for exports would not be certified.[17]   However, instances of conduct that would be violative of this standard are likely to be rare.[18]   In particular, this standard is not applied to vigorous competition. Such competition would be consistent with this standard even if it improves the competitive position of the applicant as compared to other U.S. export competitors.   Certification in such circumstances may be possible even if the applicant accounts for a substantial share of the U.S. supply of a product or service.[19]

B. The Second Standard: Unreasonable Price Effects

The second standard requires the analysis of the purpose and likely effect upon domestic prices of the proposed export conduct. In practice, export activities creating unreasonable domestic price effects are likely to be rare. Under this standard, an effect on domestic prices resulting from export sales that are a legitimate business response to demand in foreign markets, will in itself not constitute an unreasonable effect on domestic prices.   However, an increase in domestic prices that results from anti-competitive behavior directed at the domestic market will be unreasonable.   For example, if the purpose of proposed conduct is to manipulate domestic prices, directly or indirectly through the manipulation of domestic supplies, certification will be denied.

C. The Third Standard: Unfair Methods of Competition

Under this standard, proposed conduct that is anti-competitive and likely to substantially restrict the exports of U.S. export competitors will not be certified.

Conduct that would violate the last part of the first standard-that would substantially restrain the export trade of a competitor-would also be likely to violate this standard.  The mere fact that conduct would lead to export sales by the applicant or its members that would displace sales of other U.S. exporters would not be grounds in itself for denying certification.

D. The Fourth Standard: Resales in the United States

The fourth standard seeks to ensure that anti-competitive effects, if any, of proposed export conduct are not felt in the United States through subsequent re-importation of the exported goods or services into the United States. It is intended to ensure that the antitrust protection afforded by Title III will not be given for conduct which, while ostensibly involving exports, has a significant impact in the domestic market.

Under the standard, the agencies look at whether the applicant reasonably expects the exported goods or services to reenter the United States for sale or consumption within the United States, and if so, whether such sale or consumption within the U.S. may have a substantial domestic impact in the relevant product markets. The fact that exported products or services are incorporated into finished products overseas or are significantly transformed in their character and then exported back into the United States would not be a basis for denial under this standard.

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V. Application of Certification Standards to Specific Conduct in Export Trade

A. Vertical Restraints

Vertical restraints are arrangements between firms operating at different levels of the distribution chain (for example, between a manufacturer and a wholesaler or a wholesaler and a retailer) that restrict the conditions under which firms may sell or customers may purchase products. Although vertical restraints can take a variety of forms, most restraints can be placed in one of three categories:

(1) Territorial and Customer Restraints -Restrictions on the territories in which, or customers to which, a buyer is permitted to resell goods purchased from including location clauses, areas of primary responsibility, and profit pass over arrangements.

(2) Exclusive Dealing Arrangements - Requirements that a buyer deal only with a particular seller or that a seller deal only with a particular buyer or group of buyers, including exclusive distributorship and requirements contracts.

(3) Tying Arrangements - requirements that a buyer desiring to purchase one product (“the tying good”) from a seller also purchase a second product (“the tied good”) offered by the seller.

Vertical restraints in the course of export trade can take various forms and arise in various contexts. A U.S. producer might grant exclusive distribution rights to an export intermediary and might impose territorial, customer, price, and other restrictions on such intermediary. The inability of a producer to deal with certain export intermediaries in light of, or because of, supply agreements between itself and other export intermediaries is another kind of vertical restraint. A vertical restraint could also take the form of a requirement by a U.S. exporter that its export intermediaries deal only in the exporter’s products for export or a requirement that such intermediaries purchase certain products from it as a condition of access to other products.

Each of these vertical restraints might have some restrictive effect on the ability of particular exporters to export. In most cases, however, these restrictions are legitimately imposed by a supplier of products in order to increase the competitiveness of its products in export markets.

Vertical restraints in export trade ordinarily do not have a substantial anti-competitive effect in violation of the Title III standards.   Therefore, unless such restraints will be likely to lead to the achievement or maintenance of market power or to the coordination of price or output levels within the United States, they generally will be consistent with the Title III standards.

For further details, read more about examples of vertical restraints.

B. Horizontal Restraints

The analysis under Title III’s certification standards of joint export activity among competitors will focus or whether the conduct is likely to have a substantial anti-competitive effect in a U.S. market. This is essentially a two-part test. First, the agencies will analyze whether the joint activity is likely to have any anti-competitive effect on U.S. commerce.  If it is incapable of having any anti-competitive impact in the United States, the collective export activity will be certified.  Examples of such conduct include the joint setting of prices and quantities at which products are sold in export markets if the products by law cannot be sold in the United States and the exchange among competing U.S. sellers of information relating exclusively to exporting or export markets (e.g. identification of customers in any export market). Second, if there is potential for anti-competitive spillover affecting U.S. markets, then the agencies will analyze whether the formation or contemplated operation of the joint entity is likely to substantially restrain or lessen competition within U.S. commerce.  Generally, anti-competitive spillover may occur if competitors, in the process of engaging in export trade, share price or other sensitive business information relating to their respective U.S. sales or if competitors manipulate domestic prices through the manipulation of domestic supply.

The framework for analyzing whether there is likely to be a substantial anti-competitive effect in the United States is similar to that for analyzing joint ventures or mergers.[21] In analyzing the export conduct sought to be certified, the agencies will evaluate the economic characteristics of the domestic market in order to assess whether a market is likely to be conducive to domestic price or output coordination.

In evaluating the domestic market structure, the agencies will first undertake to define the relevant product and geographic markets in which to assess the anti-competitive effects of the joint export activity.

After determining the relevant market, the agencies will examine the market’s structure in order to assess whether its economic characteristics are conducive to developing and maintaining a consensus on domestic price levels and output rates.  As a first step, the agencies will assume that the competitors merged and focus on the post-merger market concentration, a function of the number of firms in a market and their respective market shares. Treating the participants in a joint export venture as a merged entity is a useful threshold test, because for joint ventures with small market shares in markets with a low degree of market concentration (e.g. 20 approximately equal-sized firms in the market and the four joint venture participants have a total market share of 20%), the agencies will be able to determine without a detailed examination of other economic characteristics that the joint venture poses no substantial threat to competition in the United States.  In other cases, however, the agencies will proceed to examine a variety of other economic characteristics relevant to determining whether the market is predisposed to effect coordination of domestic price levels and output rates and, therefore, whether the joint export entity is likely to be a substantial restraint on domestic competition.  Such characteristics include; (1) The ease of entry into the market by other firms, (2) the ease with which firms in an industry can expand supply; (3) the homogeneity of a product across producers: (4) the existence of large buyers; (5) whether the participants have in the past effectively coordinated domestic price levels or output rates: and (8) whether domestic demand is stable or variable.

If an assessment of domestic market concentration in light of these other structural characteristics leads the agencies to conclude that the joint export entity is likely to have substantial restraining effects in domestic competition, the agencies may find it necessary either to limit significantly the activities that may be certified or to impose safeguards on certified activities, such as an information exchange limitation.  However, even in a concentrated market, the absence of certain other characteristics listed above may lead to the conclusion that successful price and output coordination would be unlikely and that, therefore, certification would be possible for joint export activities with few or no limitations.  Particularly where competitors intend to cooperate only on a single contractor where contacts among them are to be infrequent, the likelihood of a substantial anti-competitive impact is reduced because there would be no continuing opportunity for coordinating domestic price levels or output rates.

An issue of particular concern for applications involving domestic competitors is the possibility of sharing price and other sensitive business information in connection with export conduct. In some situations, such exchanges are likely to have anti-competitive effects because the information can be used for coordinating domestic price levels or output rates, In other situations, however, sharing such information is not conducive to coordination of domestic prices or output and, thus, is likely not to have an anti-competitive effect.

In determining whether to certify exchanges of such information among domestic competitors, the agencies wilt carefully scrutinize the application in a manner similar to other joint activities. The agencies will ordinarily place a condition in the Certificate stating that the certified parties will not intentionally make exchanges of competitively sensitive information except as explicitly certified.  The agencies would certify such exchanges if it can be shown that the sharing of information is in the course of export trade and is unlikely to have a substantial anti-competitive effect in U.S. markets either because the nature of the information is incapable of affecting US. competition or because the economic characteristics of the relevant markets indicate that the exchange is likely to have a pro-competitive or competitively neutral effect.  If they have insufficient information about the proposed conduct or about the specific product markets or domestic competitors to make a determination about whether the exchange is likely to have a pro-competitive, competitively neutral or anti-competitive effect, the agencies wilt not certify the exchange. If they determine that such an exchange is likely to substantially restrain or lessen domestic competition. The agencies will not certify the exchange.  In some instances, however, safeguards on the nature of information shared and the manner in which it is exchanged may eliminate the likely effect on domestic competition, thus permitting the agencies to certify it.  Such safeguards would be placed in the Certificate as a condition.

For further details, read more about examples of horizontal restraints

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C. Technology Licensing

Even licenses that include restriction on the foreign licensee’s foreign patents or know-how often will be consistent with Title III’s standards, because this would not have substantial anti competitive effects in any U.S. market.  For example, a territorial restriction in a foreign patent limiting the licensee to selling the patented product in a particular foreign country would have the effect of prohibiting sale of that product in the United States. Without a license under the foreign patent, however, the licensee could not have manufactured the product in that foreign country.  Moreover, if the licensor owned a U.S. patent covering the same invention as the foreign patent, the licensor lawfully could have stopped the importation of such products into the United States even without the restriction in the foreign license.  It may be that in certain cases the grant of a license by a U.S. manufacturer of a product to a foreign licensee could have the practical effect of eliminating the licensee as a competitor in the U.S. market. For example, this would be the case if, as a result of the license, the licensee were to abandon its former technology and use the licensed technology for all production. Even in such a case, however, the restraint would not necessarily run a foul of Title III’s standards. A factual inquiry would he required to determine whether the foreign firm otherwise was an actual or potential competitor in the appropriately defined relevant market and, if so, whether the structure or performance in that market suggested that the elimination of that additional competitor might substantially restrain domestic competition.

Similarly, it is unlikely that a licensing restriction will be found to constitute a substantial restraint on the export trade of a competitor of the applicant or an unfair method of competition against such competitor.  The mere fact that a licensing arrangement with a foreign licensee may result in the sale of the licensee’s products displacing U.S. exports of competing products likely would not be contrary to Title III’s standards.  Even the use of tying obligations requiring the licensee to purchase products from the licensor in connection with the licensing of technology often will not restrict the exports of competing exporters of the products in such a way as to substantially restrain domestic U.S. domestic competition in the tied product.

Finally, the use by a licensor of a restriction preventing a licensee from using technology competitive with the licensed technology or from selling goods that compete with the licensed technology might limit the export opportunities of competing licensors or sellers of competing goods.  Again. however, such a restriction might be justified in view of the licensor’s interest in ensuring that a licensee devote its efforts to the development and use of the licensed technology. In any event, the restriction of competitors from the export sales or licensing opportunities represented by a licensee or group of licensees would not in most cases have a substantial anti-competitive effect in U.S. domestic markets.

Example of Technology Licensing

The following example is intended to give guidance in determining when proposed export conduct involving technology licensing satisfies the four certification standards.  It is illustrative and not comprehensive.

Example: Exclusive Foreign Patent License

Short Wave, a manufacturer of radios accounting for 5 percent of U.S. sales, holds patents in the United States and in a number of other countries for a new type of transistor that can be used in various electronic products. Short Wave, which has made an independent decision to concentrate on the U.S. market and not to export its radio, wishes to license Langwelle, a German manufacturer of radios with 10 percent of the German market and no substantial sales in the United States.  The license gives Langwelle the exclusive right under Short Wave’s German patent to manufacture, use and sell the patented transistor in Germany for the radio field. T he patented transistor provides improved performance in radios but is not a revolutionary development, and many other types of transistors can be used for the same purpose in radios. In order to induce Langwelle to use its patent, Short Wave is charging Langwelle a relatively low royalty.  However, Short Wave also wishes to require Langwelle to purchase certain radio components for use in all radios manufactured by Langwelle that incorporate the licensed transistor.  Finally, Short Wave wishes to impose a restriction on Langwelle preventing it from directly or indirectly exporting radios incorporating Short Wave’s transistor to the United States. The U.S. market for radios is composed of 20 companies none of which has a market share in excess of 10 percent.

Discussion

It seems likely that the contemplated licensing arrangement would he consistent with Title III’s standards.  Short Wave’s unilateral decision to export its technology by licensing other radio manufacturers in export markets seems to be an appropriate way to exploit its foreign patents. It seems unlikely that a substantial risk of a significant anti-competitive effect would result from Short Wave licensing a potential exporter of radios to the U.S. market and restricting the licensee’s exports to the United States of radios incorporating the licensed technology.  First, the license restriction prohibiting Langwelle from exporting from Germany radios containing the patented transistor would not be expected to have any effect on competition in the U.S. in the sale of radios containing that transistor.  The U.S. patent covering the transistor gives Short Wave the power, through patent infringement or unfair trade practice proceedings, to exclude the importation into the U.S. of any radios using the patented transistor.  Therefore, assuming the U.S. patent is valid, even absent the license restriction Langwelle could not have sold radios embodying the transistor in the U.S. Second, the license restriction does not affect Langwelle’s ability to use transistors not embodying Short Wave’s patent in radios for export to the United States, To the extent Langwelle found it economically beneficial to use the licensed transistors in all of its radios, it would be, as a practical matter, excluded from the U.S. market.  However, even assuming that absent the license Langwelle would have imported radios employing other transistors into the U.S., in light of the unconcentrated nature of the U.S. market for radios, it seems unlikely that the exclusion of such a potential competitor would constitute a substantial restraint of trade within the United States.

The tying arrangement in the license seems to be consistent with the standards pertaining to restraints on the export trade of a competitor of the applicant or unfair methods of competition against such a competitor. The tie could have the effect of inducing Langwelle’s use of the licensed technology by more closely tailoring Jacngwelles cost of such use to its level of use. The tie should not raise significant competitive concerns because Short Wave does not appear to have market power in the tying product since there appears to be many available alternatives to the patented technology.

D. Sales to or Financed by the Federal Government

Conduct that is otherwise covered by a certificate will be covered in the case of the U.S. Government financed transactions when either of two conditions are met. First, such conduct will be covered by the certificate where the net effect of any U.S. Government payment or financing involved in an export transaction is that not more than half the cost is borne by the U.S. Government. Second, even where more than half the cost is borne by the U.S. Government, the conduct will still be covered by the certificate where, because of the nature of the conduct or the existence of substantial competition from unaffiliated persons, the arrangement does not eliminate or substantially reduce competition in the transaction.

1.More than Half the Cost Borne by the U.S. Government. For these purposes, more than half the cost of an export transaction will be considered to have been borne by the U.S. Government when:

a. The U.S. Government buys the goods for shipment abroad (e.g., ‘Food for Peace” transactions);

b. The United States is paying for a sale of goods to a foreign government through a grant that is specifically earmarked for the purchase of the goods in question; or

c. The transaction is financed by a loan to a foreign government that has such terms that the loan constitutes a grant because the United States effectively bears most of the cost. Most Agency for International Development and many U.S. Department of Agriculture foreign aid loans fall into this category.[22]

When U.S. Government financing for a U.S. export transaction is not a grant or a heavily subsidized loan, but rather a loan at approximately market rates, then even conduct that would raise the price of goods exported would not have the effect of primarily harming U.S. taxpayers. Therefore, the special risk of harm to the U.S. Government that is the subject of this section of the Guidelines would not be present. Transactions that involve payments or financing by the U.S. Government, but in which the U.S. Government will not be considered to have borne more than half the cost,

Include:

a. Transactions in which any U.S. Government financing is at or near market rates. Examples of government programs that involve financing at or near market rates include most Eximbank, Overseas Private Investment Corporation. and Small Business Administration programs. (Where there is a question as to the share of the cost of a transaction borne by the government in situations where below-market rate financing Is involved, the governments share will ordinarily be calculated in the manner described in note 22.)

b. Transactions funded by international agencies to which the U.S. Government contributes but does not supply a major portion of the funds for those agencies’ financial assistance programs. Programs funded by the Asian Development Bank, for example, would normally fall in this category.

c. Transactions in which the purchaser is a foreign government that receives funds from the United States as part of a general government-to-government aid program, where the aid is unrestricted and not earmarked for particular programs. Transactions of this nature do not raise the special risk discussed in this section of the Guidelines, because it is not possible to determine the extent to which they are financed by the U.S. Government.

2. Conduct that does not Eliminate or Substantially Reduce Competition. If the U.S. Government financing of an export transaction is such that the U.S. Government bears more than half the cost, the transaction will nonetheless be covered by a certificate (assuming it is otherwise within the scope of the certificate) if it is not likely to have anti-competitive effects that will harm U.S. taxpayers. For these purposes, U.S. Government financed export transactions will be considered not to have such anti-competitive effects when either of the following is true:

a. Where the conduct involved is purely vertical and does not involve a horizontal combination among competitors; or

b. Where there is substantial competition from persons who are not participants with the certificate holder in the transaction. This condition will be considered as having been met when there are at least three other suppliers competing for the transaction, and those suppliers are qualified and able to supply the goods being sought on substantially competitive

3. Certification of Specific U.S. Government Financed Export Arrangements. The preceding discussion is intended to provide guidance on the coverage of certificates of review for U.S. Government financed transactions in situation where the applicant has not specifically expressed an intention to participate in such transactions, and where the certificate makes no explicit provision for them. In these situations, certificates of review will include standard language stating that the certificate’s application to conduct in U.S. financed transactions will be subject to the limitations set forth in these Guidelines.

These Guideline are not, however, intended to preclude case-by-case analysis by the agencies of applicants; requests for explicit coverage of particular U.S. Government financed transactions, or particular types of government financed transactions. The agencies will consider, if requested, express certification of participation in programs financed by the U.S. Government and will provide such explicit coverage where the facts demonstrate an absence of likely anti-competitive harm to the U.S. Government, For example. in proposed transactions in which the U.S. Government would bear more than half the cost, the conduct is nut strictly vertical, and there are fewer than three other competing suppliers, the applicant may nonetheless show that the specific arrangements contemplated would not result in anti-competitive harm to the U.S. Government and may obtain explicit coverage for these arrangement in its certificate.

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Notes

1. Pub. L. No.97-290, 96 Stat. 1233-1247.

2.Export Trading Company Act of 1982, Pub. L. 97290, Title 1.98 Stat. 1233 (codified at 15 U.S.C. section 4001-4003).

3. Bank Export Services Act, Pub. L. 97-290. Title II, sections 201-205 (codified at 12 U.S.C. 1843).

4. Pub. L. 97.-290, Title II. section .207 codified at (12 U.S.C. 372 (7)).

5. Pub. L. 97-290, Title III (codified at 15 U.S.C.. 4011-4021).

6. Pub. L. 97-290 section 308 (a) and (b) (codified at 15 U.S.C.4016(a) and (b).)

7. Ibid. section 306(b)(5).

8. 15 U.S.C. 4021(5)

9.Section 203(3)(F) of the Bank Export Services Act defines export trading company as a company which does business under the laws of the United States or any state, which is exclusively engaged in activities related to international trade, and which is organized and operated principally for purposes of exporting goods or services produced in the United States or for purposes of facilitating the exportation of goods or services produced in the United States by unaffiliated persons by providing one or more export trade services. In addition, the definition of export trading company in Title I does not limit who may apply for a Title III certificate of review. See 15 U.S.C. 4002(a)(4); H.R. Rep. No. 924, 97th Cong., 2d Sess. 18 (1982).

10. Member means, with respect to an applicant, a partner, shareholder or participant who is seeking protection under the Certificate. This applies to partners in partnerships or joint ventures; shareholders of corporations: or participants in associations, cooperatives, or other forms of profit or nonprofit organizations or combinations, by contract or other arrangement 15 CFR 325.2(k) (1984).

11. 15 U.S.C. 4013 (a).

12. 15 U.S.C. 4021(1). Export trade activities and Methods of operation are, in turn, defined in terms of Export trade. Section 311(2) of Title III defines services as: intangible economic output, including, but not limited to

(A) Business, repair and amusement services,(B) Management, legal, engineering. architectural, and other professional services, and (C) Financial, insurance, transported. informational and any other data based service, and communication’s services.

Patents, trademarks, know how and technology are intangible economic outputs. Therefore, licenses of patents. trademarks, know how and technology to persons for use in foreign countries are within the definition of export trade and eligible for certification.

13. 15 U.S.C. 4021(1).

14. One situation which presented this issue was specifically addressed by the Conference Report:

Specific consideration was given to the status under this and other definitions in the bill of fish harvested by U.S. flag vessels within the United States fish conservation zone and sold at sea or in a foreign port without having otherwise been landed or processed in the United States. The committee of conference agreed that fish so harvested and sold should he regarded as … constituting exploit trade within the meaning of this title and other titles of the bill: H.R. Rep No 624, 97th Cong., 2d Sess. 18 (1982)

15. See e.g., 15 U.S.C. 4002(a)(3).

16. Ibid. section 4021(3); 15 U.S.C. 4021(4).

17. See. e.g.. Pacific Engineering & Production Co. v. Kerr-McGee Corp., 551 F.2d 790 (10th Cir.), cert. denied, 434 U.S. 879 (1977); Areeda & Turner, Predatory Pricing and Related Practices Under Section 2 of the Sherman Act, 88 Harv. L. Rev. 697 (1975);31. See. e.g.. U.S. v. Terminal RR. Assn., 224 U.S 383 (1912).

18. Because of the relative rarity of such situations and the difficulty of effectively defining them, throughout most of the remainder of these Guidelines we will consider only the effect on the domestic competition standard, which presents the most common issues under the Act. If issues under the injury to competitors standard are presented by a certificate application they will of course be evaluated.

19. See S. Rep. No 27, 97th Cong. 1st Sess. 2021 (1981) quoting U.S. v. Minnesota Mining & Mfg. Co. 92 F. Supp. 947, 965 (D. Mass 1950).

20.The horizontal aspects of the formation and operation of Chem-X by domestic competitors raises other issues concerning potential anticompetitive effects in U.S. markets. These issues are discussed in Section V.B. below.

21. See U.S. Dept. of Justice, Antitrust Division , Merger Guidelines.

22. We distinguish between loans that are so generous that more than half the cost is home by the U.S. Government from other loans by looking at the interest rates and the repayment terms, end comparing them to commercial rates and terms. If the present value of the expected future repayment is less than half the value of the transaction, then more than half the cost of the loan will be borne by the U.S. Government.

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