THE NEW SCHOOL OF ANTITRUST LAW
Robert A. SkitolDrinker Biddle & Reath LLPWashington, DC
BeforeSan Francisco Economic Roundtable
May 29, 2002
I had the privilege of sharing thoughts with you five years ago on the broad topic of "Antitrust Law Today and Tomorrow." What I actually covered in 35 minutes on that occasion was 107 years of antitrust history -- all the way from the early industrial age Robber Barons of the latter part of the 19th Century to the post-industrial age "new economy" Robber Barons of the latter part of the 20th Century. We focused in particular on shifting sands among successive "schools" of antitrust theology -- from the ultra-intrusive "Populist School" of the 1960s and 1970s to the ultra-minimalist "Chicago School" of the 1980s to the newly-invigorated and fresh-thinking "Post-Chicago School" of the 1990s. I am delighted to be back with you for an update on the antitrust story at this stage of a new Administration two years into our new century. After reviewing the new landscape, I will tell you my name for a newly emerging antitrust school and its implications for the years ahead.
When President Bush announced his appointments of Timothy Muris as the new Chair of the Federal Trade Commission and Charles James as the new Assistant Attorney General for the Antitrust Division in the Department of Justice almost exactly one year ago, antitrust wags were quick to predict that we would be going "Back to the Future" or at least driving in reverse gear. Muris was Director of the Bureau of Competition at the FTC of the 1980s and a principal architect of that agency's antitrust agenda in those years; James grew up in the Antitrust Division of those same years and rose to the position of Acting Assistant Attorney General in the last year of the first Bush Administration. Fans of the more activist Clinton enforcement regime openly fretted about a dark future under these appointees. Anxious to disarm their critics, however, both Muris and James in their early speeches last summer heaped praise on their immediate predecessors and promised "continuity" as their central theme.
Now, one year after they took charge, what are the main headlines from their tenure to date? The answer is that in these 12 months they have managed to start three wars: one between the United States and the European Commission over GE/Honeywell and "who calls the shots" on transnational mergers generally; one between the Department of Justice and nine states over remedies in the Microsoft monopolization case; and one between the enforcement agencies and their Congressional overseers regarding a "Clearance Agreement" that divides the economy between the two agencies. Allow me to comment on each of these matters.
Historically, both agencies have been strong supporters of the E.C.'s development of its own antitrust enforcement regime. Indeed, during the first Bush Administration, the FTC Chair and Assistant Attorney General hailed the E.C.'s adoption in 1990 of a new Merger Control Regulation subjecting large mergers of transnational scope to an E.C. review process roughly comparable to the U.S. review process under the Hart-Scott-Rodino Act; and both agencies throughout the Clinton years cooperated closely with their E.C. counterparts on merger enforcement matters. There was one blip of disagreement on Boeing/McDonnell-Douglas in 1997, but it was resolved in an amicable manner and without damage to mutual respect for differing perspectives, policies and traditions of longstanding. Mr. James, however, chose to escalate his disagreement with Mario Monte on GE/Honeywell into a virtual holy crusade. He and his lieutenants sharply and repeatedly attacked the Europeans for their application of "conglomerate" merger theories that the U.S. agencies created in the days of Populist hegemony but then abandoned when the Chicago School came into vogue. While there have been over the past decade many mergers between European firms that the E.C. cleared but the U.S. challenged without protest from the E.C. side, Mr. James led an avalanche of fury over GE/Honeywell, the first and still only instance of a merger between U.S. firms that the U.S. cleared but the E.C. nixed. Perhaps this is just the antitrust part of the Bush Administration's muscular unilaterism in foreign affairs generally: it is okay for the E.C. authorities to dabble in merger review and enforcement as long as they strictly follow our lead.
The war between DOJ and the states in the current stage of the Microsoft proceeding breaks a longstanding cooperative relationship that began during the Ford Administration in the mid-1970s. The relationship was strained throughout the Reagan years but revitalized during the first Bush Administration and it then flowered throughout the Clinton era. The cause of the breakdown, according to critics, was the excessive eagerness of the new DOJ to wash its hands of the whole Microsoft affair, a case it regretted inheriting from the Clinton regime even after a distinctly conservative court of appeals unanimously upheld (in June of last year) the core findings of unlawful monopolization that the district court entered after three years of intense litigation. The states plainly believe that DOJ settled all too quickly on Microsoft's terms, settled on the cheap with a slap on the wrist and without any consideration of the states' perspectives even though they had been co-plaintiffs at DOJ's side from the outset of the suit. The states are now fighting on before the district court and we'll need to wait at least several months before knowing the outcome of this saga. Regardless of how it ends, however, the era of good feelings between federal and state antitrust authorities would now appear to be at an end. All Indications are that the current leadership at both agencies share the dislike of the old Reagan crowd for the whole idea of a state AG antitrust presence. And, as happened during the Reagan period, the result is likely to be escalation of counterproductive conflict between federal and state antitrust authorities in the years ahead.
The war over the agencies' clearance agreement emanates from a notable lack of diplomacy in pursuing what observers of all persuasions appear to regard as a good idea: a reasonable division of responsibility on an industry by industry basis between the two agencies to end longstanding conflicts over which agency should investigate which deals in which industries. The problem arose because Messrs. Muris and James hatched their agreement behind closed doors, with input from selected outsiders but no consultation either with Muris's fellow Commissioners or with Senator Hollings, Chairman of the Senate Commerce Committee that oversees FTC activities and also Chairman of the appropriations panel that oversees both agencies' budgets. Senator Hollings literally went on the warpath and demanded the undoing of the agreement. In fact under his unrelenting attack the agreement was officially abandoned last week. The legacy nonetheless is a large degree of distrust and hostility between the agencies and their overseers in Congress that will surely breed more mischief in the months ahead.
Now what about actual enforcement activity over these 12 months? The James DOJ has continued to pursue criminal cartel investigations and cases inherited from the Clinton years while also pursuing civil investigations of major joint ventures in the online music and currency-trading industries. The Muris FTC has continued to pursue several initiatives from the Clinton years, particularly an aggressive enforcement program against practices of the major pharmaceutical manufacturers aimed at suppressing generic drug competition. Chairman Muris's particular interest in the area of horizontal restraints in the health care industry is evident in three recent FTC actions against collaborations among competing physicians to resist cost-containment efforts of managed care groups and insurers. Both agencies have continued to investigate, challenge and negotiate settlements of concerns with merger transactions even as the volume of overall merger activity has dropped off precipitously over the past year. The James DOJ prosecuted but lost an injunction proceeding against what it saw as a merger to duopoly in the computer services disaster recovery market; the Muris FTC prosecuted and won an injunction proceeding against a merger to duopoly in the institutional glassware market. Generally speaking from outside appearances the story has been a reasonable degree of continuity on mainstream conventional enforcement directions passed on from the prior regime.
That is, however, not the whole picture. The Muris and James agencies have innovated in noteworthy new directions of their own. In August of last year Chairman Muris called attention to the fact that recent amendments to the Hart-Scott-Rodino Act raising reporting thresholds may have resulted in significantly anticompetitive mergers being consummated without any prior agency scrutiny. His solution was to mount a campaign to look for done deals that have been anticompetitive and seek to undo them through FTC administrative proceedings. Indeed, in October, the agency found two such deals -- one involving a new-economy software combination and the other involving an old-economy industrial equipment combination -- and initiated cases to break them up. Particularly in light of the dearth of new merger transactions available to occupy the agency staff's time, we can expect to see more of the old ones unearthed and challenged in the months ahead. Again reflecting Chairman Muris's particular interest in the healthcare sector, hospital mergers consummated several years ago are among the transactions now being scrutinized for possible attack. We will see how successful the Muris Commission is at recreating separate entities from integrated structures, the rough equivalent of unscrambling eggs.
This past November, the agencies announced a joint undertaking to conduct a series of wide-ranging hearings into the interaction between antitrust and intellectual property law and policy. These hearings then began in February, consumed a great deal of time and attention throughout the Spring, and will continue into next month. Speakers have included a diverse range of both antitrust and intellectual property law practitioners, distinguished scholars and business executives. The hearings are probing a host of complex and critically important issues presented by the role of both patents and copyrights in shaping the future of high-technology markets throughout our economy. Among the issues are whether patent and copyright holders are misusing licensing arrangements with their competitors to suppress innovation rivalry; whether, conversely, some longstanding antitrust constraints on licensing practices inhibit desirable technology development and exploitation; whether some of the newer core technologies critical to the growth of new markets and of the economy generally are generating impenetrable "patent thickets" ensuring market dominance by first movers while sharply restricting opportunities for new entrants; whether and under what conditions should intellectual property owners be subjected to an antitrust duty to share their intellectual property with rivals; and whether the entire patent generation system should be reinvented to address what critics see as an increasing proliferation of invalid patents that get issued and thereafter enforced despite invalidity.
The hearings have thrown a spotlight on one problem in particular that is likely to be the subject of new enforcement actions in the months ahead: technology interface standard-setting proceedings that provide opportunities for a patent holder to insert its patent into the standard being developed and then only after the standard is adopted and widely employed the patent holder demands exorbitant royalties from all of its rivals. This "patent ambush" strategy enables patent holders to acquire market power and exercise it to suppress competition in emerging markets that these new standards are designed to nurture. This is one area where antitrusters of all stripes should agree that corrective action of some sort is warranted. But what to do is an open question generating a maze of competing suggestions. Indeed a great many standard-setting organizations are struggling over this situation and find themselves to be deeply divided over appropriate solutions.
What more generally the agencies end up doing or proposing to do at the end of the elaborate set of hearings underway remains to be seen. The outcome could trigger serious reform and thereby become an important legacy of the Muris/James antitrust era. It is also possible that the end result is little more than a 500-page report on the record that, while not satisfying advocates of immediate reform, would nonetheless become a valuable resource to future agency officials as well as to courts in their adjudications of future cases.
Another area of major interest to both Mr. Muris and Mr. James is what they describe as unduly broad exemptions and immunities from antitrust coverage, particularly the longstanding "state action" and "Noerr-Pennington" doctrines. The state action doctrine exempts from antitrust challenge anticompetitive activity authorized by a state legislature and subject to some form of state supervision; the Noerr-Pennington doctrine immunizes from antitrust challenge private parties' conduct in petitioning state or federal legislative, executive or judicial bodies for any form of governmental action even when that action is anticompetitive in intent and effect. Chairman Muris has created task forces to generate test cases aimed at narrowing the scope of these doctrines to enable more such anticompetitive activities to be reachable under the antitrust laws. This was in fact a part of the agenda of the antitrust agencies during the Reagan years, and it appears likely to be aggressively pursued in the months ahead. While antitrust thinkers like both Muris and James tend to be skeptical about most kinds of arguments against purely private dominant firm conduct, one area they are quick to embrace is situations that can be characterized as dominant firm predation against smaller rivals through abuse or manipulation of governmental processes. Their theology is that government rather than private market conduct is the greatest source of harm to competition and to consumer welfare.
Now let me turn to what we can expect to see on the evolution of merger policy. This is an especially propitious time for thoughtful reflections on this subject. Next month marks the 40th anniversary of the Supreme Court's Brown Shoe decision, the handiwork of Chief Justice Earl Warren that established an extremely strict standard for the antitrust treatment of all combinations between competitors. The Warren Court interpreted a 1950 amendment to one of our basic antitrust laws, the section of the Clayton Act specifically prohibiting mergers that "may substantially lessen competition," as reflecting a sweeping Congressional intent to halt the "rising tide of economic concentration" throughout the economy. The consequence was a standard that rendered unlawful almost any merger that increased concentration to any material extent in any market or even part of a market of any size. Indeed, in Brown Shoe, the Supreme Court condemned a merger between firms that together represented no more than 5% of the affected footware market. Concentration itself was the evil this law was intended to stop.
But next month is also the 20th anniversary of the Reagan Justice Department's adoption of new Merger Guidelines, the handiwork of the distinguished scholar and Assistant AG William Baxter that established a new standard under which the effect on concentration would be only part of the analysis of whether a merger warrants government challenge. Under these guidelines, concentration itself is not the evil to be addressed. A merger should be found anticompetitive only if it is likely to create or enhance "market power" by enabling either actual or tacit collusion on prices among firms remaining in the post-merger market. Under this thinking, high concentration is a necessary but not sufficient condition to a post-merger danger of collusive pricing: other factors to be considered include whether there is or is not ease of entry or of expansion by smaller firms sufficient to defeat attempted price increases; whether market dynamics and the nature of the products affected by the merger facilitate or impede price coordination; and whether buyers of the affected products are or are not powerful and sophisticated enough to protect themselves against collusive conduct by their suppliers.
Consistent with governing case law, however, the 1982 guidelines established a general (albeit rebuttable) presumption that a merger significantly increasing concentration in an already highly concentrated market warranted challenge. Roughly speaking, the prescribed threshold was that any merger reducing the number of meaningful competitors in the affected market to five or less would be problematic. Now, in reality, a great many mergers reducing the number of players to five or less were ultimately approved throughout the 1980s and 1990s, but that is because the agency concluded in all such cases after close scrutiny that ease of entry or powerful buyers or some other market dynamic sufficed to rebut the otherwise applicable presumption of anticompetitive effect.
Those guidelines have been revised several times over the ensuing years but the heart of them as issued in 1982 remains in place to this day. On the other hand, a new reality has taken hold. By the mid-1990s, as economic analysis became more sophisticated but also as courts began getting tougher in their evaluations of mergers that the agencies chose to challenge, the operative threshold began to slide down. The agencies came to see five rivals in a post-merger market as ordinarily enough to ensure competitive market conditions. The only mergers seriously threatened with an agency challenge were those that would reduce the number of players in the post-merger market to four or less. Indeed, by the end of the Clinton Administration, few if any mergers were seriously considered for challenge, or were successfully challenged in court, unless they reduced the number of players to three or less.
So now where are we headed on this front in the Muris/James era? It is safe to say that the Muris and James agencies are most unlikely to push back in the stricter direction. Is it possible that, by the end of their terms, the only mergers likely to face challenge are those changing the market from three to two or from two to one? At least for large parts of the economy where markets are subject to rapid change, that does appear to be where we end up. Indeed Chairman Muris, in articles he authored in the years immediately before taking office, attacked the whole idea of a "presumption" of illegality from any level of concentration and questioned the validity of longstanding theories of concentration-related anticompetitive effects. He called for a "new empiricism" that would require solid evidentiary support that a merger would bring about anticompetitive behavior before concluding that it should be challenged. He also called attention to economic research supporting the hypothesis that in some industries a merger from four to three may actually increase competition by resulting in a stronger number-three firm up against two other leading firms. In fact that idea was an expressed basis on which the Muris Commission announced its approval of a merger from four to three in the drug wholesaling industry in August of last year.
Economists within both of the agencies are now hard at work on empirical research of various sorts aimed at determining with some precision industry conditions under which collusion and other forms of anticompetitive conduct are in fact likely and industry conditions under which such conduct is unlikely to occur. This research is plainly intended to inform and ultimately govern merger enforcement decision-making processes in the years ahead. It is predictable that the result will be heightened evidentiary requirements for any merger challenge and, consequently, diminished prospects for any challenge involving a merger that would leave three competitors in the post-merger market.
One irony in this situation is that criminal cartel enforcement activity over the past decade has demonstrated that collusion has in fact occurred and endured for long periods of time in industries populated by several more than just three major players. One of Mr. James' chief lieutenants made this point in a speech last month, noting that the number of participants in several cartel prosecutions in recent years was "surprisingly high"; five or six members "were not uncommon" and occasionally the agency has "uncovered cartels with 10 or more members." The relevance of this experience to merger policy appears to elude some prominent participants in the merger debate who are slow to credit collusion concerns while quick to embrace merging parties' stories about procompetitive "efficiencies" that their mergers are expected to generate.
If in any event we are now in or rapidly moving toward a period in which merger policy provides a virtual safe harbor for most if not all mergers that leave only three players in the post-merger market, we should be hearing ominous growls from the ghost of Earl Warren sounding off about this disregard of the will of Congress in its directive to stop concentration. Perhaps Senator Hollings, in search of a sequel to the dustup over the clearance agreement, will want to sink his teeth into this situation. He might even garner some support for upsetness over what is unfolding from the ghost of Bill Baxter who never expected his Merger Guidelines to morph in this way. Indeed, at precisely the same time he was putting the finishing touches on his guidelines, he announced the first merger challenge of his regime -- stopping cold the proposed combination of Heileman and Schlitz and thereby rejecting the parties' contention that their merger would increase competition by creating a strong number-three against dominant brewers Anheuser-Busch and Miller. Baxter believed that consumers were entitled to more than just three major rivals for their beer dollars.
Of course, ghosts aside, we are a long way from 1962 and even from 1982 in this second year of a new millennium. Capturing the spirit of our times, two business professors -- Jagdish Sheth and Rajendra Sisodia -- have written a new book provocatively entitled "The Rule of Three: Surviving and Thriving in Competitive Markets." Their thesis is that the ideal "natural" equilibrium structure for most if not all important markets throughout today's economy is three major generalists along with a fringe of smaller specialists. Three is the right number whether we are talking about airlines, automobile or petroleum or chemical producers, the pharmaceutical or computer or database software markets, coffee or bread or cereal or candy products, long distance telephone or commercial banking or accounting services, network broadcasting or credit card networks, hamburger or pizza or drugstore or warehouse club or movie theatre chains, etc., etc. As you might expect, the authors devote a lot of their pages to explaining away exceptions to their rule and justifying their disregard of some players in markets they use as support for their rule. Contrary facts aside, they offer up in academic research garb the global conclusion that three has become the magic number -- less than that is not enough for effective competition, but more than that is too much for a reasonable level of profitability and longterm viability.
These guys have not yet made it onto Oprah Winfrey, but they are promoting an idea that eerily fits how things appear to be going within the corridors of the FTC and Antitrust Division. So it has the potential to become something of a self-fulfilling prophecy to the extent that merger enforcement policy moves more definitively in that same direction.
I don't know whether that prospect is agreeable or disagreeable to the audience before me. Perhaps it is a little of both to most of us. Or, more likely, the idea is a bit too general or grandiose if not overwhelming to absorb in one bite. That's okay because antitrust history teaches us that unpredictable shifts in direction do occur and there are multiple checks and balances in the antitrust system that protect against singular control by any would-be controlling theology. I have already touched briefly on the E.C. merger control apparatus as one significant counterweight to the U.S. side. Notwithstanding a lot of talk about efforts at "convergence" between the two continents on merger review standards, the E.C. will remain independent and resist subjugation to the policy predilections of the Bush agencies. Beyond the E.C., there are now in excess of 60 other jurisdictions around the world that have gotten into the merger review game. Like the Lilliputians in Gulliver's Travels, they will develop strength in numbers and demand to be heard on mergers that affect the welfare of their citizens.
Closer to home, I have already talked about state AGs and the heartburn they are now generating on the Microsoft front. They have, however, also long played a merger enforcement role and represent another potential counterweight to evolving directions at the federal agencies. Twelve years ago, the Supreme Court upheld the right of the State of California to stop a major supermarket merger that the Reagan FTC saw fit to clear; that ruling remains a powerful precedent enabling the states generally to reemerge in the months and years ahead as independent-minded merger policy designers and enforcers that need not follow the Muris/James lead.
Finally, there are what Congress created several decades ago and what the courts have aptly characterized as a vast army of "private attorneys-general": the plaintiffs' private antitrust bar and their ability to initiate and prosecute suits of their own on behalf of competitors or other private parties against mergers that the Feds may clear. Three years ago, a federal court of appeals upheld a private challenge to and injunction against a merger between competing aircraft landing gear systems manufacturers that the FTC had cleared. Again, that decision along with a handful of others over the past decade can be expected to enable and encourage the private bar to remain as another counterweight to would-be monopolists of merger policy development at the federal agencies.
Speaking of monopolists, the private plaintiffs' bar has also long been a player on antitrust law development in the important area of dominant-firm conduct -- prosecuting cases that call on the courts to delineate lines between aggressive but lawful rivalry on the merits and exclusionary or predatory practices that the Sherman Act prohibits. No informed observer of the agencies in Washington expects to see a new government case against dominant firm conduct anything like the Microsoft case any time in the foreseeable future. Private attorneys-general are filling that void: they on behalf of AOL and Sun recently filed antitrust suits against the Beast from Redmond seeking not only billions of dollars in treble damages but also injunctive relief with more bite than even the states are now seeking in their pending case. A private suit against U.S. Tobacco challenging an array of predatory practices resulted in a billion-dollar recovery for a smaller rival that a federal court of appeals just upheld three weeks ago. Other major private actions against dominant firm conduct are now pending around the country; they will contribute to antitrust law development over the years ahead, and not necessarily in directions consistent with the antitrust theology now in vogue within Washington salons.
So what is a good new name for today's emerging antitrust school, successor to the "Post-Chicago" school that I talked about five years ago? My suggestion is the new Multipolar Moving-Around-in-Too-Many-Conflicting-Directions-to-Name, Highly-Fluid, Post-Hoc-and-Anyone's-Guess School of Antitrust Law. I'll come up with a shorter name when you call me back five years from now.