Flow International Corporation

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IN THE MATTER OF FLOW INTERNATIONAL CORPORATION CONSENT ORDER, ETC., IN REGARD TO ALLEGED VIOLATIONS OF SEC. 7 OF THE CLAYTON ACT AND SEC. 5 OF THE FEDERAL TRADE COMMISSION ACT Docket C-4231; File No. 081 0079 Complaint, August 15, 2008 – Decision, August 15, 2008 This consent order addresses the acquisition of OMAX Corporation by Flow International Corporation. The companies are the leading manufacturers of waterjet cutting systems in the United States, and the transaction may substantially lessen competition in the market for the development, manufacture, marketing, and sale of such systems. Both companies offer an efficient PC-based controller that compensates for the unique characteristics of how a waterjet cuts. Under the terms of the order, Flow must grant a royaltyfree license to each competitor who seeks to license the two broad OMAX patents relating to controllers that Flow will acquire with its acquisition of OMAX. This will eliminate the entry barrier faced by current waterjet cutting system competitors and future entrants and ensure that other firms are able to replace the competition that would otherwise be eliminated by the acquisition. In addition, Flow may not provide, disclose, or otherwise make available any confidential business information to any person except as set forth in the order. If Flow fails to grant a license within the time periods specified, the Commission may appoint a Licensing Trustee to grant the license to any competitors to satisfy the requirements of the order. Additional provisions include the requirements that Flow notify the Commission of any changes in corporate structure and file written reports on its compliance with the order. Participants For the Commission: Stuart Hirschfeld, Joe Lipinsky, Alan Loughnan, Susan Raitt, Robert J. Schroeder, Art Strong, and Lore Unt.

For the Respondent: Ramona Emerson and Jim Weiss, K&L Gates.

VOLUME 146 Complaint COMPLAINT Pursuant to the provisions of the Federal Trade Commission Act and of the Clayton Act, and by virtue of the authority vested by said Acts, the Federal Trade Commission (the “Commission”), having reason to believe that respondent Flow International Corporation (“Flow”), a corporation, and OMAX Corporation (“OMAX”), a corporation, both subject to the jurisdiction of the Commission, have agreed to an acquisition by Flow of OMAX in violation of Section 7 of the Clayton Act, as amended, 15 U.S.C. § 18, and Section 5 of the Federal Trade Commission Act, as amended, 15 U.S.C. § 45, and it appearing to the Commission that a proceeding in respect thereof would be in the public interest, hereby issues its Complaint, stating its charges as follows: I. RESPONDENT 1. Respondent Flow is a corporation organized and existing under the laws of the State of Washington, with its principal place of business at 23500 - 64th Avenue South, Kent, Washington 98032. Flow is a global company engaged in the development, manufacture, marketing, and sale of waterjet cutting systems. II. JURISDICTION 2. Flow is, and at all times relevant herein has been, engaged in commerce as “commerce” is defined in Section 1 of the Clayton Act, as amended, 15 U.S.C. § 12, and is a corporation whose business is in or affects commerce as “commerce” is defined in Section 4 of the Federal Trade Commission Act, as amended, 15 U.S.C. § 44.

III. THE PROPOSED TRANSACTION 3. OMAX is a Washington company with its head office in Kent, Washington. OMAX is a global company engaged in the FLOW INTERNATIONAL CORPORATION 147 Complaint development, manufacture, marketing, and sale of waterjet cutting systems.

4. In December 2007, the parties signed an exclusive option agreement for the acquisition of OMAX. Under the agreement, Flow and OMAX will work to negotiate a definitive agreement for Flow to acquire OMAX. Upon closing, Flow will pay approximately $109 million in cash and stock with the potential for a contingent earn-out in two years of up to $26 million. IV. WATERJET CUTTING SYSTEMS 5. The demand for waterjet cutting systems is growing very rapidly due to the versatility and ease of operation of these systems. Waterjet cutting systems can be used to cut and machine a much wider range of materials than other cutting systems. For most users of waterjet cutting systems, alternative cutting systems would not provide comparable features and therefore would not serve as adequate substitutes. Customers now using or seriously considering adopting waterjet cutting systems would be unlikely to switch to an alternative cutting technology if the prices of all waterjet cutting systems were to be raised by a small but significant non-transitory amount.

6. A waterjet cutting system contains four main parts: (1) pump, (2) cutting head, (3) cutting table, and (4) controller.  The “pump” rated in pressure at or above 50,000 pounds per square inch creates ultra-high pressure water;  The cutting head is a two-stage nozzle where the ultrahigh pressure water passes through a small-diameter jewel orifice to form a narrow waterjet. In abrasive waterjet cutting systems, the resulting waterjet then passes through a small chamber where a slight vacuum pulls abrasive material into this area through a feed tube. The abrasive particles are accelerated by the narrow waterjet and VOLUME 146 Complaint together they pass into a long, hollow cylindrical ceramic mixing tube. The resulting mix of abrasive and narrow waterjet exits the mixing tube as a coherent stream and cuts the material;

 The cutting table holds the material to be cut and can utilize either a gantry or cantilever system to move the cutting head; and  The controller is hardware and software that directs the cutting head. Controllers can be adapted from other cutting tools, such as lasers, that also use cutting tables, or they may be specifically designed to compensate for the unique characteristics of how the waterjet cuts, including taper (the waterjet expands after leaving the nozzle, forming a cone shape) and lag (the faster the cutting head moves, the more the waterjet will trail behind the cut). 7. Waterjet cutting systems are used by a wide variety of industrial machine tool customers. These customers include:  job shops that produce a wide variety of short-run parts use waterjet cutting systems to complement their traditional Computer Numerical Control milling machines and flame cutters;

 wire Electrical Discharge Machining (“EDM”) shops because waterjet cutting systems are up to ten times faster than wire EDM and can cut both conductive and nonconductive material without creating a heat-affected zone;  laser shops, which can capitalize on the ability of waterjet cutting systems to cut thicker materials than lasers can, and, unlike lasers, can cut reflective materials; FLOW INTERNATIONAL CORPORATION 149 Complaint  aerospace shops because waterjet cutting systems can cut without damaging materials that are affected by heat, such as titanium and aluminum;

 tooling shops because waterjet cutting systems can work with hardened tool steel;

 architectural fabricators, which use waterjet cutting systems to create large signs, decorative tiles, or intricate design work in a wide variety of materials; and  metal fabricators, which value the enhanced ability of waterjet cutting systems to cut clean edges for plate work. 8. Most waterjet customers derive a gain in productivity, which is a function of cutting speed and set-up time, by using a waterjet cutting system instead of an alternative cutting technology. Cutting speed is affected by pump strength, the number of cutting heads used on the system, and the sophistication of the controller. Controllers are often the least expensive means of improving cutting speed and have the further virtue of reducing set-up time if they are easily programmable. Controllers can also improve the quality of the cut by, among other things, automatically adjusting the speed of the cut. V. COMPETITION BETWEEN FLOW AND OMAX 9. Flow is the largest manufacturer of waterjet cutting systems in the United States. OMAX is the second largest. 10. OMAX has received U.S. Patent Nos. 5,508,596 and 5,892,345 relating, among other things, to controllers that may include a personal computer for determining appropriate machining commands to control velocity, acceleration and/or jerk for a cutting head. These commands help compensate for the VOLUME 146 Complaint unique characteristics of how the waterjet cuts, including taper and lag.

11. Both Flow and OMAX produce waterjet cutting systems that feature relatively inexpensive yet sophisticated PC-based controllers. Flow and OMAX are each other’s closest competitors because they are the only two competitors that manufacture comparably priced waterjet cutting systems with the most advanced and efficient controllers.

VI. RELEVANT MARKET 12. For the purposes of this Complaint, the relevant line of commerce in which to analyze the effects of the Acquisition is the development, manufacture, marketing, and sale of waterjet cutting systems.

13. For the purposes of this Complaint, the relevant geographic market within which to analyze the effects of the Acquisition is the United States.

VII. CONCENTRATION IN THE RELEVANT MARKET 14. The relevant market would be highly concentrated as a result of the acquisition. Post-acquisition, Respondent would account for more than 55 percent of waterjet cutting system sales in the United States.

VIII. LIKELIHOOD OF ENTRY 15. New entrants and existing competitors are deterred by the risk of violating OMAX patents from developing and producing competitive waterjet cutting systems. Developing an efficient controller that clearly works around the potential reach of OMAX’s patents would likely be an expensive and timeconsuming process, with no guarantees of success. Therefore, entry into the relevant market would not be timely, likely, or FLOW INTERNATIONAL CORPORATION 151 Complaint sufficient in magnitude, character, and scope to deter or counteract the anticompetitive effects of the acquisition. IX. EFFECTS OF THE ACQUISITION 16. The effects of the acquisition, if consummated, may be substantially to lessen competition and to tend to create a monopoly in the relevant market in violation of Section 7 of the Clayton Act, as amended, 15 U.S.C. § 18, and Section 5 of the FTC Act, as amended, 15 U.S.C. § 45. Specifically, the acquisition would:

a. Eliminate actual, direct, and substantial competition between Flow and OMAX in the relevant market by eliminating competition for the development, manufacture, and sale of waterjet cutting systems that utilize PC-based controllers; and b. Increase Respondent’s ability to exercise market power unilaterally in the relevant market. X. VIOLATIONS CHARGED 17. The agreement described in Paragraph 4 constitutes a violation of Section 5 of the FTC Act, as amended, 15 U.S.C. § 45.

18. The transaction described in Paragraph 4, if consummated, would constitute a violation of Section 5 of the FTC Act, as amended, 15 U.S.C. § 45, and Section 7 of the Clayton Act, as amended, 15 U.S.C. § 18.

WHEREFORE, THE PREMISES CONSIDERED, the Federal Trade Commission on this fifteenth day of August, 2008, issues its Complaint against said Respondent. By the Commission.

VOLUME 146 Decision and Order DECISION AND ORDER The Federal Trade Commission (“Commission”) having initiated an investigation of the proposed acquisition by Respondent Flow International Corporation (hereinafter “Flow International”, “Respondent”, or “Respondent Flow International”) of OMAX Corporation, and Respondent having been furnished thereafter with a copy of a draft of Complaint that the Bureau of Competition proposed to present to the Commission for its consideration and which, if issued by the Commission, would charge Respondent with violations of Section 7 of the Clayton Act, as amended, 15 U.S.C. § 18, and Section 5 of the Federal Trade Commission Act, as amended, 15 U.S.C. § 45; and Respondent, its attorneys, and counsel for the Commission having thereafter executed an Agreement Containing Consent Order (“Consent Agreement”), containing an admission by Respondent of all the jurisdictional facts set forth in the aforesaid draft of Complaint, a statement that the signing of said Consent Agreement is for settlement purposes only and does not constitute an admission by Respondent that the law has been violated as alleged in such Complaint, or that the facts as alleged in such Complaint, other than jurisdictional facts, are true, and waivers and other provisions as required by the Commission’s Rules; and The Commission having thereafter considered the matter and having determined that it had reason to believe that Respondent has violated the said Acts, and that a Complaint should issue stating its charges in that respect, and having accepted the executed Consent Agreement and placed such Consent Agreement on the public record for a period of thirty (30) days for the receipt and consideration of public comments, now in further conformity with the procedure described in Commission Rule 2.34, 16 C.F.R. § 2.34, the Commission hereby makes the following jurisdictional findings and issues the following Decision and Order (“Order”): FLOW INTERNATIONAL CORPORATION 153 Decision and Order 1. Respondent Flow International is a corporation organized, existing and doing business under and by virtue of the laws of the State of Washington, with its offices and principal place of business located at 23500 64th Avenue South, Kent, Washington 98032.

2. The Federal Trade Commission has jurisdiction over the subject matter of this proceeding and of Respondent, and the proceeding is in the public interest.

ORDER I.

IT IS ORDERED that, as used in the Order, the following definitions shall apply:

D. “Flow International” or “Respondent” means Flow International Corporation, its directors, officers, employees, agents, attorneys, representatives, predecessors, successors, and assigns; and its joint ventures, subsidiaries, divisions, groups and affiliates controlled by Flow International Corporation, and the respective directors, officers, employees, agents, representatives, predecessors, successors, and assigns of each.

E. “OMAX” means, OMAX Corporation, a corporation organized, existing and doing business under and by virtue of the laws of the State of Washington, with its offices and principal place of business located at 21409 72nd Avenue, Kent, Washington 98032; and its joint ventures, subsidiaries, divisions, groups, and affiliates controlled by OMAX Corporation.

F. “Commission” means the Federal Trade Commission. VOLUME 146 Decision and Order G. “Acquisition” means the proposed acquisition of OMAX by Flow International pursuant to an exclusive option agreement to negotiate the acquisition of Omax signed on December 5, 2007.

H. “Acquisition Date” means the date the Acquisition is consummated.

I. “Competitor” means any person that, during the five (5) years after this Order becomes final, is or seeks to become engaged in the research, development, manufacturing, marketing, or sale of Waterjet Cutting Systems or Waterjet Cutting System Controllers in the United States. J. “Confidential Business Information” means any information relating to the research, development, manufacture, distribution, marketing, or sale of Waterjet Cutting Systems or Waterjet System Cutting System Controllers by any Licensee or Authorized Sublicensee that comes into the possession or control of the Respondent as the result of the License, including, but not limited to, any information that any Licensee is required to provide to the Respondent under the terms of the License. “Confidential Business Information” includes, but is not limited to, any information provided to Respondent in any License Report.

K. “Controller” means computer software and hardware that direct the cutting head.

L. “License” means:

1. the license with a Licensee for the Licensed Patents attached as Exhibit A to this Decision and Order; or, FLOW INTERNATIONAL CORPORATION 155 Decision and Order 2. a license that substantially complies with Exhibit A, that achieves the purposes of this Order, and that receives the prior approval of the Commission. M. “Licensed Patents” mean the OMAX ‘596 Patent and the OMAX ‘345 Patent.

N. “Licensee” means any signatory (other than Respondent) to any License.

O. “License Reports” means any report or information provided by any Licensee to Respondent under the terms of any License.

P. “OMAX ‘345 Patent” means United States Patent No. 5,892,345, including all related patent applications, extensions, current or future United States patents that share a common parent application with or that claim a priority from an application for U.S. Patent No. 5,892,345, and all other rights included in the term Patent as it is defined in this Order.

Q. “OMAX ‘596 Patent” means United States Patent No. 5,508,596, including all related patent applications, extensions, current or future United States patents that share a common parent application with or that claim a priority from an application for U.S. Patent No. 5,508,596, and all other rights included in the term Patent as it is defined in this Order.

R. “Patent” means the United States patent and all related patent applications and includes all reissues, divisions, continuations, continuations-in-part, substitutions, reexaminations, restorations, and/or patent term extensions thereof, all inventions disclosed therein, all rights therein provided by international treaties and conventions, and all VOLUME 146 Decision and Order rights to obtain and file for patents and registrations thereto in the United States.

S. “Person” means any individual, partnership, joint venture, firm, corporation, association, trust, unincorporated organization, joint venture, or other business or governmental entity, and any subsidiaries, divisions, groups or affiliates thereof.

T. “Waterjet Cutting System” means a system that uses a high pressure stream of water to cut plastic, metal, composite, and other materials. A Waterjet Cutting System contains one or more of each of four main parts: (1) pump, (2) cutting head, (3) cutting table, and (4) controller. II.

IT IS FURTHER ORDERED that:

A. Respondent Flow International shall grant a License to any and all Competitors that, during the five (5) years after this Order becomes final, request a License. Respondent shall execute the License not more than thirty (30) days after Respondent receives a written request from a Competitor. B. At the request of a Licensee, and subject to the prior approval of the Commission, the Respondent shall enter into an agreement to modify the License if the modification reasonably is related to achieving the purpose of this Order.

C. Respondent Flow International shall not threaten to file, file suit, or make any claim for damages against any Licensee relating to any actual or claimed infringement of any of the intellectual property that is the subject of and within the scope of the License.

FLOW INTERNATIONAL CORPORATION 157 Decision and Order D. Respondent shall comply with all terms of each License, and any breach by Respondent of any term of a License shall constitute a violation of this Order. If any term of the License varies from the terms of this Order (“Order Term”), then to the extent that Respondent cannot fully comply with both terms, the Order Term shall determine Respondent’s obligations under this Order. Notwithstanding any paragraph, section, or other provision of the License, any modification of the License, without the prior approval of the Commission, shall constitute a failure to comply with this Order.

E. The purpose of the License required by Paragraph II.A. of this Order is to create viable, independent Competitors to develop, manufacture, and sell Waterjet Cutting Systems or Waterjet Cutting System controllers, using the Licensed Patents, and to remedy the lessening of competition resulting from the Acquisition as alleged in the Commission’s Complaint.

III.

IT IS FURTHER ORDERED that:

A. Respondent shall:

1. not provide, disclose or otherwise make available any Confidential Business Information to any Person except as set forth in Paragraph III.B. of this Order; 2. not use any Confidential Business Information for any reason or purpose other than as otherwise required or permitted by the License and this Order; and, 3. require all License Reports to be sent to the attention of Flow’s general counsel, who shall not provide, disclose, or otherwise make available any information VOLUME 146 Decision and Order contained in any License Report except to persons whose duties relate solely to providing legal services and representation to Respondent.

B. Respondent may use Confidential Business Information only (i) for the purpose of performing Respondent’s obligations under this Order; and, (ii) for the purpose of exercising Respondent’s rights explicitly granted to Respondent by the License.

IV.

IT IS FURTHER ORDERED that:

A. If the Commission finds that Respondent has failed to grant a License as required by Paragraph II. of this Order within the time periods specified therein, then the Commission may appoint a Licensing Trustee to grant the License to any Competitors to satisfy the requirements of Paragraph II of this Order.

B. Neither the decision of the Commission to appoint a Licensing Trustee, nor the decision of the Commission not to appoint a Licensing Trustee, to grant the License under this Paragraph IV shall preclude the Commission or the Attorney General from seeking civil penalties or any other relief available to it, including a court-appointed trustee, pursuant to § 5(l) of the Federal Trade Commission Act, 15 U.S.C. § 45(l), or any other statute enforced by the Commission, for any failure by the Respondent to comply with this Order.

C. If a Licensing Trustee is appointed by the Commission or a court, Respondent shall consent to the following terms and conditions regarding the Licensing Trustee’s powers, duties, authority, and responsibilities: FLOW INTERNATIONAL CORPORATION 159 Decision and Order 1. The Commission shall select the Licensing Trustee, subject to the consent of Respondent, which consent shall not be unreasonably withheld. If Respondent has not opposed, in writing, including the reasons for opposing, the selection of any proposed Licensing Trustee within ten (10) days after notice by the staff of the Commission to Respondent of the identity of any proposed Licensing Trustee, Respondent shall be deemed to have consented to the selection of the proposed Licensing Trustee.

2. Subject to the prior approval of the Commission, the Licensing Trustee shall have the exclusive power and authority to grant the License to a Competitor pursuant to the terms of this Order.

3. Within ten (10) days after appointment of the Licensing Trustee, Respondent shall execute a (or amend the existing) trust agreement (“Licensing Trustee Agreement”) that, subject to the prior approval of the Commission and, in the case of a courtappointed trustee, of the court, transfers to the Licensing Trustee all rights and powers necessary to permit the Licensing Trustee to grant the License to a Competitor pursuant to the terms of this Order. 4. The Licensing Trustee may grant the License to any Competitor pursuant to the terms of this Order at any time after the Licensing Trustee Agreement is effective.

5. The Licensing Trustee shall have full and complete access to the personnel, books, records and facilities of Respondent related to each License, as the Licensing Trustee may request. Respondent shall develop such financial or other information as the Licensing Trustee may request and shall cooperate with the Licensing VOLUME 146 Decision and Order Trustee. Respondent shall take no action to interfere with or impede the Licensing Trustee’s accomplishment of his or her responsibilities. 6. The Licensing Trustee shall serve, without bond or other security, at the expense of Respondent, on such reasonable and customary terms and conditions as the Commission or a court may set. The Licensing Trustee shall have the authority to employ, at the expense of Respondent, such consultants, accountants, attorneys, investment bankers, business brokers, appraisers, and other representatives and assistants as are necessary to carry out the Licensing Trustee’s duties and responsibilities. The Licensing Trustee shall account for all monies derived from the divestiture and all expenses incurred. Respondent shall pay the Licensing Trustee’s fees and expenses in accordance with the Licensing Trustee Agreement.

7. Respondent shall indemnify the Licensing Trustee and hold the Licensing Trustee harmless against any losses, claims, damages, liabilities, or expenses arising out of, or in connection with, the performance of the Licensing Trustee’s duties, including all reasonable fees of counsel and other expenses incurred in connection with the preparation for, or defense of, any claim, whether or not resulting in any liability, except to the extent that such losses, claims, damages, liabilities, or expenses result from gross negligence, willful or wanton acts, or bad faith by the Licensing Trustee.

8. If the Commission determines that the Licensing Trustee has ceased to act or failed to act diligently, the Commission may appoint a substitute trustee in the same manner as provided in this Paragraph IV of this Order.

FLOW INTERNATIONAL CORPORATION 161 Decision and Order 9. The Commission or, in the case of a court-appointed trustee, the court, may on its own initiative or at the request of the Licensing Trustee issue such additional orders or directions as may be necessary or appropriate to comply with the terms of this Order. 10. The Licensing Trustee shall report in writing to Respondent and to the Commission every two (2) months concerning his or her efforts to grant Licenses under this Order, and Respondent’s compliance with the terms of this Order.

D. Respondent shall comply with all terms of the Licensing Trustee Agreement, and any breach by Respondent of any term of the Licensing Trustee Agreement shall constitute a violation of this Order. Notwithstanding any paragraph, section, or other provision of the Licensing Trustee Agreement, any modification of the Licensing Trustee Agreement, without the prior approval of the Commission, shall constitute a failure to comply with this Order. V.

IT IS FURTHER ORDERED that Respondent shall notify the Commission at least thirty (30) days prior to: A. any proposed dissolution of Respondent; B. any proposed acquisition, merger or consolidation of Respondent; or C. any other change in the Respondent, including, but not limited to, assignment and the creation or dissolution of subsidiaries, if such change might affect compliance obligations arising out of the Order.

VOLUME 146 Decision and Order VI.

IT IS FURTHER ORDERED that:

A. Within thirty (30) days after the date this Order becomes final and every thirty (30) days thereafter for one hundred and eighty (180) days, Respondent shall submit to the Commission (with simultaneous copies to the Licensing Trustee(s), as appropriate) verified written reports setting forth in detail the manner and form in which they intend to comply, are complying, and have complied with Paragraph II of this Order. Respondent shall include in the reports, among other things that are required from time to time, the name, address, and phone number of each person who has inquired about receiving a License (whether or not Respondent granted a License to such person), the name, address, and phone number of each Person to whom Respondent granted a License, and a full description of any dispute between Respondent and any person to whom Respondent granted a License concerning any claimed actual or alleged breach (whether or not Respondent believes there has been a breach) of any License. Respondent shall include in the reports: 1. Copies of all Licenses executed in each reporting period, together with copies of all written communications to and from each Licensee; and, 2. The name, address, and phone number of each person who requested a License, but to whom Respondent did not grant a License, together with a description in reasonable detail of the reasons why Respondent did not grant the person a license.

B. One (1) year from the date this Order becomes final on the anniversary of the date this Order becomes final, annually for the next nine years on the anniversary of the date this FLOW INTERNATIONAL CORPORATION 163 Decision and Order Order becomes final, and at other times as the Commission may require, Respondent shall file verified written reports with the Commission setting forth in detail the manner and form in which it has complied and is complying with this Order. Respondent shall include in the reports, among other things that are required from time to time, the name, address, and phone number of each person who has inquired about receiving a License (whether or not Respondent granted a License to such person), the name, address, and phone number of each Person to whom Respondent granted a License, and a full description of any dispute between Respondent and any person to whom Respondent granted a License concerning any claimed actual or alleged breach (whether or not Respondent believes there has been a breach) of any License. Respondent shall include in the reports: 1. Copies of all Licenses executed in each reporting period, together with copies of all written communications to and from each Licensee; and, 2. The name, address, and phone number of each person who requested a License, but to whom Respondent did not grant a License, together with a description in reasonable detail of the reasons why Respondent did not grant the person a license.

VII.

IT IS FURTHER ORDERED that for the purpose of determining or securing compliance with this Order, upon written request, Respondent shall permit any duly authorized representative of the Commission:

A. Access, during office hours and in the presence of counsel, to all facilities and access to inspect and copy all books, ledgers, accounts, correspondence, memoranda and other VOLUME 146 Decision and Order records and documents in the possession or under the control of Respondent relating to any matters contained in this Order; and, B. Upon five (5) days’ notice to Respondent and without restraint or interference from it, to interview officers, directors, employees, agents or independent contractors of Respondent relating to any matter contained in this Order. VIII.

IT IS FURTHER ORDERED that this Order shall terminate on August 15, 2018.

By the Commission.

VOLUME 146 Decision and Order

VOLUME 146 Decision and Order FLOW INTERNATIONAL CORPORATION 169 Analysis to Aid Public Comment ANALYSIS OF THE CONSENT ORDER TO AID PUBLIC COMMENT I. Introduction The Federal Trade Commission (“Commission”) has accepted, subject to final approval, an Agreement Containing Consent Order (“Consent Agreement”) from Flow International Corporation (“Flow”). The proposed Consent Agreement is designed to remedy the likely anticompetitive effects arising from Flow’s proposed acquisition of OMAX Corporation (“OMAX”). Under the terms of the Consent Agreement, Flow will grant a royaltyfree license to two Omax patents relating to waterjet controllers to any firm that seeks a license.

II. Background Flow and OMAX are the leading manufacturers of waterjet cutting systems in the United States. Waterjet cutting systems use high pressure water and garnet to cut a wide variety of materials from steel to stone. The two companies have developed PC-based controllers that automatically compensate for the unique characteristics of how the waterjet cuts, such as taper (the waterjet expands after leaving the nozzle, forming a cone shape) and lag (the faster the cutting head moves, the more the waterjet will trail behind the cut). The controllers and related technology differentiate these two firms from other competitors in the marketplace. However, the controllers and related technology are also the subject of ongoing litigation between the two companies. In 2004, OMAX filed suit alleging that Flow’s products infringed its patents pertaining to controllers. Flow counterclaimed alleging that OMAX infringed its patents pertaining to controllers. Flow, a publicly traded company headquartered in Kent, Washington, is the leading manufacturer of waterjet cutting systems in the United States market. OMAX is a privately-held company headquartered in Kent, Washington. OMAX owns two VOLUME 146 Analysis to Aid Public Comment very broad U.S. patents covering its controller. OMAX’s controller is a significant factor behind its position as the second leading supplier of waterjet cutting systems in the United States. On December 5, 2007, Flow signed an exclusive option agreement to negotiate the acquisition of OMAX. Under the agreement, Flow and OMAX will work to negotiate a definitive agreement for Flow to acquire OMAX. Upon closing, Flow would pay approximately $109 million in cash and stock with the potential for a contingent earn-out in two years of up to $26 million. The closing will also settle the long-running and expensive patent litigation between Flow and OMAX. III. The Draft Complaint The draft complaint alleges that the transaction may substantially lessen competition in the market for the development, manufacture, marketing, and sale of waterjet cutting systems. A waterjet cutting system contains four main parts: (1) pump, (2) cutting head, (3) cutting table, and (4) controller. Waterjet cutting systems are used by a wide variety of industrial machine tool customers. These customers range from job shops, which produce a wide variety of short-run parts, and use waterjet cutting systems to complement their traditional milling machines, lasers and flame cutters, to aerospace shops that use waterjet cutting systems because they cut without damaging materials that are affected by heat, such as titanium and aluminum. Industrial machine tool customers, as well as others, can increase cutting speed and minimize set-up time by using a waterjet cutting system instead of an alternative cutting technology. Cutting speed is affected by pump pressure, the number of cutting heads used on the system, and the sophistication of the controller. Controllers are often the least expensive means of improving cutting speed and have the further virtue of reducing set-up time if they are easily programmable. To compensate for the unique characteristics of how the waterjet FLOW INTERNATIONAL CORPORATION 171 Analysis to Aid Public Comment cuts, controllers can improve the quality of the cut by, among other things, automatically adjusting the speed of the cut. Both Flow and OMAX produce waterjet cutting systems that feature relatively inexpensive yet sophisticated PC-based controllers that compensate for the unique characteristics of how the waterjet cuts. These controllers make Flow and OMAX each other’s closest competitors because only they manufacture waterjet cutting systems with the most advanced and efficient controllers.

The relevant geographic market within which to analyze the likely effects of the proposed transaction is the United States. The draft complaint further alleges that new entry would not prevent or counteract the anticompetitive effects of this acquisition. New entrants and existing competitors are deterred by the risk of violating the OMAX patents from developing and producing competitive waterjet cutting systems. Developing an efficient controller that clearly works-around the potential reach of OMAX’s patents would likely be an expensive and timeconsuming process, with no guarantee of success. The draft complaint also alleges that Flow’s acquisition of OMAX, if consummated, may substantially lessen competition in the market for the development, manufacture, marketing, and sale of waterjet cutting systems in the United States in violation of Section 7 of the Clayton Act, as amended, 15 U.S.C. § 18, and Section 5 of the Federal Trade Commission Act, as amended, 15 U.S.C. § 45, by eliminating direct competition between Flow and OMAX and increasing the likelihood that Flow will unilaterally exercise market power.

IV. The Terms of the Consent Agreement The proposed Consent Agreement will remedy the Commission’s competitive concerns about the proposed acquisition. Under the terms of the proposed consent order, Flow VOLUME 146 Analysis to Aid Public Comment must grant a royalty-free license to each competitor who seeks to license the two broad OMAX patents relating to controllers that Flow will acquire with its acquisition of OMAX. Currently Flow and OMAX are each other’s closest competitor because they each offer an efficient PC-based controller that compensates for the unique characteristics of how a waterjet cuts. OMAX’s two patents make the development of such a controller substantially more expensive and risky. Requiring Flow to grant a royalty-free license to these patents will ensure that other firms are able to replace the competition that would otherwise have been eliminated by the proposed acquisition.

While Flow has two patents relating to controllers, its patents are significantly narrower in scope than the OMAX patents and, as a result, do not prevent current or future competitors from offering a viable waterjet cutting system. Current and future competitors will not need licenses to these narrow patents in order to compete effectively in this market. Other aspects of Flow’s and OMAX’s business, such as customer lists, brand names, key employees, or the other parts of waterjet cutting systems, are easily duplicated by current competitors or future entrants. Consequently, to restore the competition lost by Flow’s acquisition of OMAX, the proposed consent order eliminates the entry barrier faced by current waterjet cutting system competitors and future entrants by giving them a royalty-free license to the OMAX patents.

V. Opportunity for Public Comment The proposed consent order has been placed on the public record for 30 days for receipt of comments by interested persons. Comments received during this period will become part of the public record. After 30 days, the Commission will again review the proposed consent order and the comments received and will FLOW INTERNATIONAL CORPORATION 173 Analysis to Aid Public Comment decide whether it should withdraw from the agreement or make the proposed consent order final.

By accepting the proposed consent order subject to final approval, the Commission anticipates that the competitive problems alleged in the complaint will be resolved. The purpose of this analysis is to invite public comment on the proposed consent order, in order to aid the Commission in its determination of whether to make the proposed consent order final. This analysis is not intended to constitute an official interpretation of the proposed consent order nor is it intended to modify the terms of the proposed consent order in any way.

VOLUME 146 Complaint