U.S. Department of Justice Analysis of Single-Firm Conduct
The statement of enforcement policy released yesterday by the U.S. Department of Justice prompted an immediate rebuttal from three commissioners of the antitrust sister agency, the Federal Trade Commission, and highlighted the generally pro-business approach of the DOJ under the Bush Administration, a trend which will either continue or not depending on the results of the U.S. presidential election in November.
The 213-page DOJ report, “Competition and Monopoly: Single-Firm Conduct Under Section 2 of the Sherman Act,” resulted from joint DOJ/FTC hearings which began two years ago to consider whether and when specific types of single-firm conduct may or may not violate Section 2 of the Sherman Act by harming competition and consumer welfare.
Section 2 of the U.S. Sherman Act prohibits a firm from illegally acquiring or maintaining a monopoly, meaning the ability to exclude competitors and profitably raise price significantly above competitive levels for a sustained period of time. Unlike antitrust laws that prohibit anticompetitive mergers or other agreements among firms, Section 2 particularly targets single-firm conduct, such as decisions regarding whether and on what terms to sell to or buy from others. Although possessing monopoly power is not unlawful, using an improper means to seek or maintain monopoly power is unlawful where it can harm competition and consumers.
In a Statement accompanying the Report, Thomas O. Barnett, Assistant Attorney General in charge of the Department's Antitrust Division, observed that “Single-firm conduct offers some of the greatest challenges in antitrust enforcement today . . .While we need to identify and prohibit conduct that harms the competitive process, we also need to avoid interfering in the rough and tumble of beneficial competition that drives innovation and economic growth.”
The report discusses a number of areas of consensus among the courts, the antitrust agencies, and economists with respect to the proper treatment of single-firm conduct, and highlights those areas in which there is not yet consensus. The report seeks to make progress toward the goal of developing sound, clear, objective, effective and administrable standards for Section 2 analysis, and addresses the principal classic single-firm issues: monopoly power; conduct standards; predatory pricing and bidding; tying; bundled and single-product loyalty discounts; unilateral, unconditional refusals to deal with rivals; exclusive dealing; remedies; and international perspectives.
The DOJ Report continues the importance of market share in determining the existence of “monopoly power,” the power to increase prices without effective competitive defense. The DOJ continues its position that when a firm has maintained a market share in excess of two-thirds for a significant period and its market position would not likely be eroded in the near future, the DOJ normally will presume that the firm possesses monopoly power, absent convincing evidence to the contrary. But the DOJ also restates its position that no single test for determining whether conduct is anticompetitive-such as the effects-balancing, profit-sacrifice, no-economic-sense, equally efficient competitor, or disproportionality tests-works well in all cases. The DOJ Report therefore encourages the continuing development of conduct-specific tests and safe harbors, especially since vague or overly inclusive prohibitions against single-firm conduct are particularly likely to undermine economic growth and to harm consumers.
In contrast to vague principles, the DOJ believes that Section 2 prohibitions that are based on clear and objective criteria, and that are carefully tailored to condemn only conduct likely to harm the competitive process, are the prohibitions most likely to increase economic growth and therefore to benefit consumers. If the legal principles are clear, then businesses are better able to comply with the law and avoid violations. Antitrust enforcers can then more easily identify and prove violations; effective and administrable remedies are more likely to be available; and aggressive but beneficial competition is less likely to be deterred.
The DOJ Report continues the debate over the legality of predatory pricing -- when can sales below cost be illegal, even though consumers clearly benefit from the lower costs? The DOJ would limit enforcement to cases that identify loss-creating sales that could force an equally efficient rival out of the market, since the implication would be that prices would then quickly return to or likely exceed levels existing prior to the competitor’s exit.
The DOJ Report continues the modern hostility of virtually all antitrust theorists to the historic automatic illegality of tying arrangements -- selling one product where market power is held only if purchased together with another less-desired product. The Report concludes firmly that “[t]he historical hostility of the law to the practice of tying is unjustified, and the qualified rule of per se illegality applicable to tying is inconsistent with the U.S. Supreme Court’s modern antitrust decisions and should be abandoned . . .” The Report also urges continued fact-specific analysis of bundled discounting, which frequently benefits consumers but which could harm competition, and should be assessed with logic similar to that applied to predatory pricing or tying arrangements.
Perhaps most importantly, the DOJ Report firmly ratifies the modern antitrust approval of mere unilateral, unconditional refusals to deal with rivals. The DOJ states conclusively that unilateral refusals to deal with a competitive enemy “should not play a meaningful role in Section 2 enforcement because compelling access is likely to harm long-term competition and courts are ill suited to be market regulators . . .” The DOJ suggests a clear safe harbor for exclusive-dealing arrangements foreclosing less than 30 percent of existing customers or effective distribution and concludes flatly that these should not be illegal, a position clearly consistent with the presumption of market power suggested at the two-thirds market share level noted above.
The DOJ Report also urges careful application of remedies for conduct that is found to violate Section 2 -- the enforcement result should be limited to re-establishing the opportunity for competition, without unnecessarily chilling competitive practices or undermining incentives to invest and innovate. In short, the cure should not be worse than the disease.
Finally, the DOJ Report recommends further consideration of the current levels of monetary damages and penalties for Section 2 violations, and notes that the DOJ will continue to explore ways of strengthening cooperation with counterparts in foreign jurisdictions and to encourage further convergence of multi-national approaches to sound enforcement policies.
The instant rebuttal to the DOJ Report from three of the four present FTC commissioners attacked the DOJ positions as offering antitrust carte blanche to monopolists and making it nearly impossible to prosecute a case against one of the conduct areas viewed with more favor by the DOJ. American business therefore faces virtually open warfare in some very key conduct areas between the two principal U.S. antitrust enforcement agencies, a classic confrontation that will continue until one or the other of the agencies experiences different commission constituencies under whichever of the potential new administrations takes office next January.
Questions regarding this advisory may be directed to Robert A. McTamaney (212-732-3200, firstname.lastname@example.org), or Gary D. Sesser (212-238-8820, email@example.com) of our New York Office.
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