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AAI Testifies at House Committee on Small Business Hearing on Fair Competition and a Level Playing Field

AAI President Diana Moss testified on March 1, 2022 at the House Committee on Small Business hearing Competition and the Small Business Landscape: Fair Competition and a Level Playing Field.

In her testimony Link, Moss noted that small business is an integral part of the U.S. economy. But indications that its role is declining poses challenging issues for legislators and policymakers.

She also summarized evidence that decades of weak antitrust enforcement in the U.S. has adversely affected competition and how small business may be implicated in this trend. Moss explained how horizontal and vertical integration that has resulted from sweeping consolidation creates and reinforces high concentration that disrupts the role of small business.

Finally, she discussed how the goals of antitrust often, but not always, align with the interests of small business, highlighting the importance of broader public policy approaches to promoting competition.

The description of the House Committee on Small Business overview is:

“Antitrust laws exist to promote competition and prohibit anti-competitive behavior by large firms. However, the U.S. economy has seen continued concentration among its industries since the 1970s. Although this issue is traditionally viewed through the lens of consumers, consolidated industries can be particularly harmful to small firms and new startups. This hearing will examine the history of antitrust law and the historical importance of encouraging fair competition and their potential impacts on small firms. Members will hear from a variety of experts about competition policy through the lens of American small firms.”

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AAI’s Encourages Surface Transportation Board to Update Reciprocal Switching Rules in Light of Ongoing Consolidation and Lack of Competition in Freight Rail

AAI filed comments in the Surface Transportation Board’s (STB’s) Notice of Public Hearing (Docket No. 711) regarding reciprocal switching. Ongoing consolidation in the U.S. rail system has diminished competitive options for shippers of critical commodities, putting more pressure on the competitive access remedies available to the STB, including: (1) the prescription of through routes, (2) terminal trackage rights, and (3) reciprocal switching. Under reciprocal switching, an incumbent carrier transports a shipper’s traffic to an interchange point, where it switches its rail cars over to the competing carrier. This enables a competing carrier to offer its own competitive single-line rate, even if its lines do not physically reach a shipper’s facility. The STB’s proposed regulations eliminate the need to show anticompetitive conduct, a change strongly supported by AAI in its comments. AAI also encourages the STB to reject arguments that the proposed reciprocal switching regulations are unduly costly and will interfere with incentives to invest in rail infrastructure.

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How Should Antitrust Tackle Acquisitions of Nascent Competitors? A Conversation With 2020 Jerry S. Cohen Award Winner for Antitrust Scholarship, Scott Hemphill

In this episode, Diana Moss sits down with Scott Hemphill, the Moses H. Grossman Professor of Law at the New York University School of Law, to chat about his award-winning article: Nascent Competitors (Vol. 168 (No. 7), Penn. L. Review, 2020). Hemphill co-authored the article with Timothy Wu, currently serving as Special Assistant to President Biden for Technology and Competition Policy at the National Economic Council. The article highlights major issues and debate around how antitrust enforcers and the courts go about evaluating acquisitions of nascent competitors that could violate Section 7 of the Clayton Act. Nascent competitors are firms whose prospective innovation is a “threat” to firms in a market. This threat is neutralized if a nascent rival is acquired, sometimes with serious implications for competition and consumers. Attention to acquisitions of nascent competitors has exploded across a number of sectors, including digital technology, fintech, healthcare, digital farming, and others. For business models that are driven by “growth by acquisition,” revisiting antitrust enforcement and competition policy around nascent rivals is particularly timely and important.

 

Antitrust scholarship that is considered and selected for the Jerry S. Cohen Award reflects a concern for principles of economic justice, the dispersal of economic power, the maintenance of effective limitations upon economic power or the federal statutes designed to protect society from various forms of anticompetitive activity. Scholarship reflects an awareness of the human and social impacts of economic institutions upon individuals, small businesses and other institutions necessary to the maintenance of a just and humane society–values and concerns Jerry S. Cohen dedicated his life and work to fostering.

MODERATOR:

Diana Moss, President, American Antitrust Institute

GUEST:

Scott Hemphill is the Moses H. Grossman Professor of Law at NYU School of Law and co-director of the Engelberg Center on Innovation Law and Policy. He teaches and writes about antitrust and intellectual property. His scholarship ranges broadly, from drug patents to digital platforms to the use of trademark law to thwart competition. His most recent work examines the anticompetitive acquisition of startups by dominant firms in the technology sector and probes how institutional investors might weaken competition among their portfolio companies.

Hemphill’s scholarship on tactics to delay the marketing of inexpensive generic drugs has been widely cited by the US Supreme Court and other courts. His writing has appeared in leading law reviews and peer-reviewed journals of economics, science, and law, and he has testified before the US Congress about mergers and proposals to incentivize new drug development, among other matters. Major media outlets have frequently interviewed him on antitrust and IP-related topics.

Hemphill received a PhD in economics and a JD from Stanford, where he was a Nathan Abbott Scholar, graduating first in his law school class. He also holds an AB from Harvard and an MSc in economics from the London School of Economics, where he studied as a Fulbright Scholar. Hemphill clerked for Judge Richard Posner and Supreme Court Justice Antonin Scalia. On public service leave from academia, he served as antitrust bureau chief for the New York Attorney General. Hemphill joined NYU from Columbia University, where he was a professor of law.

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New Article from William Comanor: The Issue of Consumer Welfare in the Government Complaints against Google & Facebook

AAI Advisory Board members William S. Comanor recently published The Issue of Consumer Welfare in the Government Complaints against Google & Facebook with Donald I. Baker in The Antitrust Bulletin.

Abstract

Although the Consumer Welfare doctrine has served as an important feature of antitrust liability since the 1980s, the Department of Justice (DOJ) and Federal Trade Commission (FTC) have downplayed this factor in their respective Google and amended Facebook complaints. Each complaint makes a general reference to this issue, but with few detailed factual allegations. A complicating factor is that the defendants have gained dominant market positions by providing valuable digital services at little or no direct charge to consumers. In this paper, we emphasize that the services offered by the two platforms embody quality as well as price dimensions, both of which can affect consumers positively. Indeed, quality product dimensions may become even more important to consumers in a zero price environment. We construct a simple economic model using privacy as a significant quality attribute through which these issues can be explored, and then draw some appropriate policy conclusions.

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AAI Asks DOJ, USPTO & NIST to Restore Bipartisan Consensus on Remedies for Infringement of Standards-Essential Patents

AAI has filed public comments encouraging the Antitrust Division of the Department of Justice, the U.S. Patent & Trademark Office, and the National Institute for Standards & Technology to ratify their Draft Policy Statement on Licensing Negotiations and Remedies for Standards-Essential Patents Subject to Voluntary F/RAND Commitments.

AAI’s comments applaud the agencies for setting aside their joint 2019 policy statement and restoring two-decades of bipartisan consensus supporting a balanced approach to evaluating remedies for the infringement of standards-essential patents (“SEPs”) subject to a “RAND or F/RAND” licensing commitment.  The comments place the 2019 policy statement in historical context, which reveals it to be an activist departure from two decades of careful research, analysis, and learning regarding the competitive threat of patent holdup in the standards-setting context.

The 2019 statement replaced a 2013 statement that was the product of numerous hearings and reports initiated by the Bush administration in 2002 and continued during the Obama administration.  The 2013 statement was carefully balanced and neutral and met with approval in the federal courts.  But from 2017-19 the Trump Antitrust Division led a campaign to unilaterally reverse more than fifteen years of cooperative advocacy and policy development with the FTC about the competitive problem of patent holdup, culminating in the revised 2019 statement.  The 2019 statement relegated holdup to a footnote, where it was treated equivalently to patent “holdout,” in which a SEP licensee refuses to pay a FRAND license because it is more profitable to delay and impose litigation costs on the SEP owner.

In addition to recognizing the agencies’ current draft statement as a necessary and proper course correction to restore a longstanding bipartisan consensus, AAI’s comments also suggest the statement could be improved in two ways.  First, the draft policy statement should recognize the deceptive nature of holdup in the standard-setting context and the legal consequences that follow accordingly. A SEP owner unmistakably engages in deception when it makes a FRAND commitment during the standard-setting process with a specific intent to withhold a license or charge non-FRAND royalties after the standard incorporating its SEP has become entrenched. But a SEP owner also engages in a form of deception if it fully intends to keep its promise when it makes its FRAND commitment and then subsequently opts to deliberately breach the promise to exploit the monopoly power conveyed by standardization.  Both constitute willful behavior that does not support injunctive relief.

Deception undermines the necessary showing for an injunction under the Supreme Court’s holding in eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006), for two reasons that are not identified in the draft statement.  First, a party with “unclean hands” ordinarily is not entitled to a remedy in equity.  Second, deception has no cognizable efficiency benefits as a matter of law, and rewarding it therefore is never in the public interest.

AAI also argues that the draft policy statement should directly acknowledge the important qualitative differences between holdup and holdout.  In its scrupulous commitment to balance, the current draft statement risks false equivalency. It notes that holdup “can deter investment in and delay introduction of standardized products, raise prices, and ultimately harm consumers and small businesses,” and it notes, “[a]t the same time,” that holdout “can lessen patent holders’ incentives to participate in the [standards] development process or contribute technologies to standards voluntarily,” and consequently “patent holders may opt for closed, proprietary standards that do not offer the same benefits of interoperability and enhanced consumer choice.”

However, these two different forms of socially undesirable behavior have vastly different impacts on the competitive process.  Hold-up is integrally tied to the standardization process and the commitments made therein that can lead to the exercise of market power. Holdout, on the other hand, is simply willful patent infringement, which is an unexceptional phenomenon under patent law. A manufacturer that elects not to accept an SEP license on FRAND terms but nevertheless sells standardized products runs the same risks as manufacturers who fail to obtain a license for non-SEPs.  Accordingly, there is good reason to doubt that holdout is legally relevant to assessing appropriate SEP-infringement remedies or that it poses a meaningful practical competitive threat in the standards-setting context.

AAI Advisory Board members Michael Carrier and Jorge Contreras, who are leading experts on the intersection of antitrust and intellectual property, also filed comments supporting the revised policy statement (available here and here), and numerous other AAI Advisory Board members joined a group of 26 professors of law, economics, business, and policy who likewise provide support (available here).

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Competition in Freight Rail: Unpacking Consolidation, Concentration, and Remedies in a Critical Part of the U.S. Transportation System

In this episode, AAI President Diana Moss sits down with two experts to discuss the state of play in competition in freight rail. Freight rail is a vital part of the U.S. transportation system. It is the second largest mode of transportation in the U.S. and industry sources estimate that freight rail shipments will increase 30% by 2040. Railroads, and the shippers that transport on them, are responsible for the movement of critical commodities and products involving agriculture, energy, automotive, chemical, construction, and forestry. But we don’t hear much in the news about competition in freight rail, despite the fact that the sector has been home to massive consolidation over the last half a century. Since about 1950, over 80 railroad mergers were consummated in the U.S. Today, there are only five domestic Class I railroads operating in the U.S.—two in the west, two in the east, and one down the middle. AAI’s guests on this episode are experts in rail competition and they will unpack what consolidation means for shippers and consumers. They start at the 10,000 foot level and take deeper dives into the adverse effects of railroad mergers, remedies for lost competition, and regulatory policy initiatives for addressing competition, such as reciprocal switching, and others.

Moderator:

Diana Moss, President, American Antitrust Institute

Guests:

Russell Pittman earned his Ph.D. in economics from the University of Wisconsin in 1979. He is Director of Economic Research in the Antitrust Division of the U.S. Department of Justice and a visiting professor at the Kyiv School of Economics. Dr. Pittman has consulted regularly with antitrust enforcers and economic reformers in transition and developing economies, and has acted as an advisor on railroad restructuring projects in Brazil, China, Mexico, Poland, and Russia. He served on the Core Team of the World Development Report 2002, Building Institutions for Markets. He also served on the team of experts for the Russian Regulatory Reform Review carried out by the OECD and the European Conference of Ministers of Transport in 2003-2004 and was one of the three co-authors of its report, Regulatory Reform of Railways in Russia. He is the author of the chapter on railways in the Oxford Handbook of the Russian Economy (2013). He served on the team of experts for a project of the OECD and the International Transport Forum on freight rail regulation in Mexico, co-authoring two reports, Establishing Mexico’s Regulatory Agency for Rail Transport (2016) and Regulatory Governance of the Rail Sector in Mexico (2020).  Most recently he is the author of the chapter on the US in the Handbook on Rail Regulation: Concepts and Practice (2020).

 

Jeffrey Sloan is a Senior Director for Regulatory Affairs at the American Chemistry Council (ACC), a national association representing the leading companies engaged in the business of chemistry.  He focuses on transportation policy, overseeing a broad range of advocacy initiatives on freight rail and hazmat transportation safety. He is the staff lead for ACC’s Distribution Committee and a member of the U.S. Department of Transportation’s Rail Safety Advisory Committee. Jeffrey has been with ACC since 1996, with various roles including Policy Director for ACC’s Chlorine Chemistry Division. Before coming to ACC, he worked as a staff member in the U.S. House Of Representatives. He earned a Master’s degree in Environmental Policy from Indiana University and a Bachelors degree in Political Science from James Madison University.

 

 

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AAI Asks D.C. Circuit to Overturn Dismissal of States’ Monopolization Case Against Facebook (New York v. Facebook)

AAI has submitted an amicus brief urging the D.C. Circuit to overturn a district court ruling granting Facebook’s motion to dismiss a monopolization lawsuit brought by 46 states, the District of Columbia, and the territory of Guam (“States”).

In New York v. Facebook, the States allege that Facebook acquired some of its potential rivals and intentionally injured others as part of a coordinated scheme to deter future entry in the personal social networking services market.  The alleged two-prong “buy or bury” scheme was comprised of actual and attempted exclusionary acquisitions, a deceptive “open first–closed later” network-access strategy, discriminatory API-access policies, dealing on anticompetitive terms, and sabotaging rivals’ content.  Although some of the alleged acts included in the scheme injured or eliminated existing rivals, the alleged goal of the scheme was to build a competitive “moat” around the company in the markets where it competes, in an effort to thwart nascent and future competitors and deter entry.

The district court dismissed the States’ claim because it believed the States did not allege harm to competition that could be redressed with injunctive relief.  It held that the alleged discriminatory API-access policies, standing alone, were not illegal as a matter of law; they were only potentially illegal to the extent they were actually implemented in specific instances, and here the last specific instance in which the policies were allegedly implemented occurred five years ago.  Therefore an injunction would be inappropriate because it would not remedy ongoing and contemporary harm.

The AAI brief calls attention to four errors in the district court’s analysis.  First, the district court failed to evaluate the alleged “buy or bury” scheme as a whole, as Supreme Court law requires.  It reviewed the alleged exclusionary acquisitions separately from the alleged conduct, notwithstanding that the States allege they were part of a unified scheme.  The district court’s improper approach led to its second error, which was to misclassify conditional dealing allegations as a refusal to deal.  The court treated the specific instances in which Facebook allegedly revoked network access to existing competitors as alleging refusals to deal harming existing competitors, when their relevance to the scheme was that they deterred future entrants.  The harm to existing competitors was a means to that end, not the end itself.

Viewed as a coordinated scheme, the States’ allegations make more sense as conditional dealing because of how they fit together with the alleged acquisitions.  Both acquisitions and conditional deals give a monopolist power to shape future entry decisions; refusals to deal eliminate any relationship the monopolist might lever to steer the other firm’s future behavior.  Moreover, the dealing allegations are clearly conditional: they allege that Facebook is willing to deal with developers and other complementors on the platform provided they promise not to facilitate entry into markets where Facebook competes, or to enter themselves.  Enjoining that kind of behavior does not trigger the same policy concerns that courts have raised in cabining liability for unilateral refusals to deal.

The district court’s third error was to fail to properly credit the States’ “open first-closed later” strategy.  The States allege that Facebook pledged a level playing field for apps that compete with Facebook as a means to attract valuable content and then reneged on its promise once the market tipped in its favor.  In a network market, profiting from dishonesty after inducing reliance on an open system is a well recognized form of deception, and courts assume that deception can support a monopolization claim on a motion to dismiss because it is categorically incapable of generating procompetitive benefits.

The district court’s fourth error was its failure to recognize that injunctive relief can redress ongoing harm.  It’s distinction between “having” and “implementing” anticompetitive policies has no basis in antitrust law; both policies and particular acts can support a Section 2 claim if they cause anticompetitive effects.  Moreover, deception is a “particular act” that can support a monopolization claim.  If the States’ allegations had been properly credited, the district court would have realized that injunctive relief can remedy ongoing harm by reopening an unlawfully closed system.

The brief was written by AAI Vice President of Legal Advocacy Randy Stutz, with assistance from AAI Vice President of Policy Laura Alexander and several AAI Advisory Board members.

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AAI Offers Guidance to Ninth Circuit on Defining Digital Markets (Epic v. Apple)

AAI filed an amicus brief urging the Ninth Circuit Court of Appeals to focus on antitrust first principles when defining technology product markets.

Epic Games, Inc., producer of the popular Fortnite video game franchise, sued Apple Inc., alleging that Apple monopolized markets for mobile app distribution and in-app payments on iPhones through a combination of contractual restraints on developers, technological barriers imposed on consumers, and anti-steering measures.  Epic alleged Apple’s conduct violated Sections 1 and 2 of the Sherman Act, as well as California’s Cartwright Act and Unfair Competition Law (“UCL”).  After a three-week bench trial, the district court found Apple had not violated the Sherman Act, but that its anti-steering measures violated California’s UCL.

Market definition was central to the district court’s resolution of Epic’s Sherman Act claims.  Epic alleged that relevant markets limited to app-distribution services and in-app payments for iPhone exist because users are locked in to iPhone-specific services once they purchase an iPhone.  Apple prevents developers from distributing apps to iPhone users, except through its App Store, and prevents most apps in its App Store from using any in-app payment system except Apple’s.    The district court held that no such relevant markets exist, and that the relevant market applicable to Epic’s claims is the mobile gaming market, where Apple lacks market power.  The court found for Epic on its UCL claims, however, holding that Apple’s restrictions on app developer communications with iPhone users amounted to unfair competition, because they deprived consumers of critical information.  Apple and Epic cross-appealed.

The AAI brief argued that the district court’s approach to market definition was inconsistent with its findings that iPhone users face switching and information costs and that Apple’s conduct had anticompetitive effects on iPhone users’ and developers’ app-distribution and in-app payment choices.  The district court’s fundamental error was a failure to adhere to first principles and confront market realities when applying old precedents to new markets.  In its brief, AAI explained how the district court misunderstood the significance of its own findings of switching and information costs and market power in its holding that iPhone app-distribution and in-app payments are not relevant aftermarkets.  Instead, AAI urged, the district court should have realized that the presence of switching and information costs, and direct evidence of Apple’s ability to exercise market power over these products, necessarily suggests these are relevant antitrust aftermarkets.

The AAI brief also argued that the district court  fell into an analytical trap when held that mobile handsets and operating systems form a single product and thus a single market and its holding that app-distribution and in-app payments are part of a single product and thus a single market; it mistook Apple’s decision to limit consumer choices for an accurate reflection of what consumers would choose in a free market.  Instead, AAI urged, the district court should have focused on what consumers would choose if Apple did not artificially constrain those choices.

Finally, the AAI brief argued that the district court  applied Ohio v. American Express, 138 S.Ct. 2274 (2018) (“Amex”), without sufficient attention to whether the economic conditions underlying that decision applied to the markets at hand.  The AAI brief argued that Amex is rooted in a particular set of economic circumstances that are not satisfied by app-distribution services.  In addition, the AAI brief argued that the district court applied Amex too broadly, ignoring clear evidence of competition in a one-sided market because it wrongly found an expansive two-sided market under Amex.

The brief was written by AAI Vice President of Policy Laura Alexander and AAI Vice President of Advocacy Randy Stutz.

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AAI Issues 2021 Impact Report: Details Work to Strengthen Antitrust Enforcement and Advance Competition Policy

The American Antitrust Institute issued its 2021 Impact Report. The report highlights AAI’s work in 2021 to strengthen and invigorate enforcement of the antitrust laws and to support comprehensive competition policy. Over the past year, AAI’s progressive research, education, and advocacy programs once again produced some of the most respected, cited, and talked-about analysis. The report details how AAI’s work positively impacts the consumers, workers, and businesses that are at risk from the exercise of market power from mergers and by dominant firms and oligopolies. Looking forward to 2022, AAI will continue to expand its resources, networks, and impact to serve the public interest.
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Download the Impact Report

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AAI Asks Third Circuit to Remove Inappropriate Roadblocks to Pay-for-Delay Class Actions (In re Niaspan Antitrust Litigation)

AAI has submitted an amicus brief urging the Third Circuit Court of Appeals to overturn a district court ruling denying class certification to end-payer victims of an allegedly illegal reverse payment settlement on grounds that identifying class members would not be administratively feasible.

In In re Niaspan Antitrust Litigation, the plaintiffs are a proposed class of health insurers and health plans that pay for prescription drugs on behalf of patients.  They allege that the defendants, brand and generic manufacturers of the drug Niaspan, which is used to treat lipid disorders, entered an illegal pay-for-delay agreement, harming payors and patients.  The district court denied certification of the proposed class pursuant to the Third Circuit’s heightened “ascertainability” requirement, which requires an “administratively feasible mechanism” for identifying class members as well as an objective class definition.  Whereas all courts interpret Rule 23 to require an objective class definition, the Third Circuit’s administrative feasibility test is controversial and arguably grafts extra-legal requirements for class certification onto the requirements set forth in Rule 23.

As AAI chronicled in the most recent issue of its biannual Class Action Issues Update, each of the last six circuit courts to consider a heightened administrative feasibility requirement have rejected it, including the Second, Sixth, Seventh, Eighth, Ninth, and Eleventh Circuits.  Mindful of criticism from other circuits and the potential for inconsistency, the Third Circuit’s more recent ascertainability cases have softened the administrative feasibility requirement.  The district court’s decision in Niaspan, which was based entirely on administrative feasibility, put the issue squarely before the appellate court in an antitrust case.

The AAI brief argues that the Third Circuit’s administrative feasibility requirement has been evolving to focus on practical considerations, which is necessary for the court’s ascertainability rules to accord with the language of Rule 23.  Among other things, the Third Circuit’s recent cases show that classes are sufficiently ascertainable when class members are capable of being identified using data in combination with affidavits, which was true in this case.  Under a proper reading of the court’s standards, end-payor classes are very likely to be ascertainable in the pharmaceutical industry in particular, because a combination of legal and regulatory requirements, practical business needs, and financial incentives all ensure that rich data involving prescription drug purchases is collected and retained.  Moreover, sound policy reasons support the recognition of administrative feasibility to help combat the harm caused by pay-for-delay agreements, which has been a top priority of the federal government and leading health policy advocates.

The brief was written Berger Montague Shareholder and UC Hastings Research Professor Joshua Davis, with assistance from AAI Vice President of Legal Advocacy Randy Stutz.