SPEAKERS CONTENTS INSERTS
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64–737
2000
ANTITRUST ENFORCEMENT AGENCIES: THE
BUREAU OF COMPETITION OF THE FEDERAL
TRADE COMMISSION AND THE ANTITRUST
DIVISION OF THE DEPARTMENT OF JUSTICE
HEARING
BEFORE THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
APRIL 12, 2000
Serial No. 104
Printed for the use of the Committee on the Judiciary
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For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
COMMITTEE ON THE JUDICIARY
HENRY J. HYDE, Illinois, Chairman
F. JAMES SENSENBRENNER, Jr., Wisconsin
BILL McCOLLUM, Florida
GEORGE W. GEKAS, Pennsylvania
HOWARD COBLE, North Carolina
LAMAR S. SMITH, Texas
ELTON GALLEGLY, California
CHARLES T. CANADY, Florida
BOB GOODLATTE, Virginia
STEVE CHABOT, Ohio
BOB BARR, Georgia
WILLIAM L. JENKINS, Tennessee
ASA HUTCHINSON, Arkansas
EDWARD A. PEASE, Indiana
CHRIS CANNON, Utah
JAMES E. ROGAN, California
LINDSEY O. GRAHAM, South Carolina
MARY BONO, California
SPENCER BACHUS, Alabama
JOE SCARBOROUGH, Florida
DAVID VITTER, Louisiana
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JOHN CONYERS, Jr., Michigan
BARNEY FRANK, Massachusetts
HOWARD L. BERMAN, California
RICK BOUCHER, Virginia
JERROLD NADLER, New York
ROBERT C. SCOTT, Virginia
MELVIN L. WATT, North Carolina
ZOE LOFGREN, California
SHEILA JACKSON LEE, Texas
MAXINE WATERS, California
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts
ROBERT WEXLER, Florida
STEVEN R. ROTHMAN, New Jersey
TAMMY BALDWIN, Wisconsin
ANTHONY D. WEINER, New York
THOMAS E. MOONEY, SR., General Counsel-Chief of Staff
JULIAN EPSTEIN, Minority Chief Counsel and Staff Director
C O N T E N T S
HEARING DATE
April 12, 2000
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OPENING STATEMENT
Hyde, Hon. Henry J., a Representative in Congress From the State of Illinois, and chairman, Committee on the Judiciary
WITNESSES
Baker, Jonathan, associate professor, Washington College of Law at American University
DeLong, James V., vice president and general counsel, National Legal Center for the Public Interest
Farrar, Steven, director of international business, Guardian Industries
Hamberger, Ed, president and CEO, Association of American Railroads
Klein, Joel, Assistant Attorney General, Antitrust Division, Department of Justice
Pitofsky, Robert, Chairman, Federal Trade Commission
Rein, Bert, partner, Wiley, Rein & Fielding
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Rill, Jim, co-chair, International Competition Policy Advisory Committee
Strenio, Andy, partner, Powell, Goldstein, Frazer & Murphy
Voltmann, Robert, executive director and CEO, Transportation Intermediaries Association
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Baker, Jonathan, associate professor, Washington College of Law at American University: Prepared statement
DeLong, James V., vice president and general counsel, National Legal Center for the Public Interest: Prepared statement
Farrar, Steven, director of international business, Guardian Industries: Prepared statement
Hamberger, Ed, president and CEO, Association of American Railroads: Prepared statement
Hyde, Hon. Henry J., a Representative in Congress From the State of Illinois, and chairman, Committee on the Judiciary: Prepared statement
Jackson Lee, Hon. Sheila, a Representative in Congress From the State of Texas: Prepared statement
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Klein, Joel, Assistant Attorney General, Antitrust Division, Department of Justice: Prepared statement
Pitofsky, Robert, Chairman, Federal Trade Commission: Prepared statement
Rein, Bert, partner, Wiley, Rein & Fielding: Prepared statement
Rill, Jim, co-chair, International Competition Policy Advisory Committee: Prepared statement
Strenio, Andy, partner, Powell, Goldstein, Frazer & Murphy: Prepared statement
Voltmann, Robert, executive director and CEO, Transportation Intermediaries Association: Prepared statement
APPENDIX
Material submitted for the record
ANTITRUST ENFORCEMENT AGENCIES: THE BUREAU OF COMPETITION OF THE FEDERAL TRADE COMMISSION AND THE ANTITRUST DIVISION OF THE DEPARTMENT OF JUSTICE
WEDNESDAY, APRIL 12, 2000
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House of Representatives,
Committee on the Judiciary,
Washington, DC.
The committee met at 10:10 a.m. in Room 2141 of the Rayburn House Office Building, the Honorable Henry J. Hyde, chairman of the committee, presiding.
Members present: Representatives Henry J. Hyde, George W. Gekas, Howard Coble, Steve Chabot, Bob Barr, William L. Jenkins, Asa Hutchinson, Edward A. Pease, Chris Cannon, James E. Rogan, Mary Bono, Joe Scarborough, John Conyers, Jr., Barney Frank, Howard L. Berman, Jerrold Nadler, Robert C. Scott, Melvin L. Watt, Zoe Lofgren, Sheila Jackson Lee, Martin T. Meehan, William D. Delahunt and Robert Wexler.
Majority staff present: Thomas E. Mooney, Sr., general counsel-chief of staff; Jon Dudas, deputy general counsel-staff director; Diana Schacht, deputy staff director-chief counsel; Daniel M. Freeman, parliamentarian-counsel; Joseph Gibson, chief antitrust counsel; Sharee Freeman, counsel; Sheila F. Klein, executive assistant to general counsel; Patrick Prisco, assistant to the staff director-deputy general counsel; Amy Rutkowski, staff assistant; Samuel F. Stratman, communications director; Terry Shawn, deputy press secretary.
OPENING STATEMENT OF CHAIRMAN HYDE
Mr. HYDE [presiding]. The committee will come to order. Today the committee conducts a general oversight hearing on the antitrust enforcement agencies, the Bureau of Competition of the Federal Trade Commission, and the Antitrust Division of the Department of Justice.
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We hold this hearing, because Rule X of the House of Representatives requires us to exercise continuing oversight of the agencies that administer and execute the laws under our jurisdiction. Under that same rule, we have jurisdiction over the antitrust laws.
Our committee last held a general oversight hearing on these agencies in 1997. At that time, I said I would like to hold such a hearing at least every Congress, so today's hearing will fulfill that commitment for the 106th Congress.
Let me emphasize I did not schedule this hearing for the purpose of criticizing any particular action of those agencies. In general, I believe they are doing a good job, and I am glad we have two agencies to enforce these important laws.
Depending on how events develop, this may well be the last such hearing we have while Chairman Pitofsky, Assistant Attorney General Klein, and I hold our current positions. So, I want to take a moment to thank both of them personally. Though we come from different parties and differing parties, you are both excellent men who have done an outstanding job under a lot of pressure. I want to thank both of you for all the help and personal courtesy you have shown to me and the committee over the years.
I also want to make it clear that I did not schedule this hearing in response to any particular recent event. The fact is that this hearing has been scheduled for this date since last January.
I do think the practice of having such general oversight hearings on a regular basis fosters ongoing communication between us and the agencies. It also allows the general public to hear that communication and to comment on it. By having such regular communications, we can understand each other better and criticize each other less often.
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We will hear first from the heads of the two agencies, and then we will hear from other witnesses who will testify on some antitrust topics that are of current interest. These topics will be the FTC's authority to seek disgorgement in antitrust cases, the role of antitrust in the international realm, the Surface Transportation Board's antitrust authorities, and the role of antitrust in the new economy.
Let me say a word about why we chose these particular topics. With respect to disgorgement, the FTC recently brought a lawsuit against Mylan Laboratories, a generic drug manufacturer. In that suit, it sought to have Mylan disgorge all $120 million in allegedly illegal profits. Because that suit is still pending, I have asked our witnesses not to address the merits or specifics of that case. However, I do believe we can appropriately discuss the legal issue of whether the Federal Trade Commission Act authorizes this remedy. That issue raises a number of interesting questions, which we will hear Mr. Rein and Mr. Strenio cover.
With respect to the application of the antitrust laws in the international realm, we will hear about the recommendations of the International Competition Policy Advisory Committee, which recently issued its report. We will also hear about a real-life example of those issues, the difficulties American companies encounter in selling flat glass in Japan. Mr. Rill will address the recommendations of the Advisory Committee, and Mr. Farrar will discuss the flat glass example.
With respect to the antitrust authorities of the Surface Transportation Board, the Board regulates the railroad industry. It has extraordinary antitrust authority of a specialized regulatory agency that is specific to a particular industry, including the authority to confer antitrust immunity on railroad mergers. As a general philosophical matter, I believe it is unwise to take antitrust decisions from the antitrust enforcers and put them in the hands of industry regulators. Service disruptions that have followed recent mergers in the railroad industry further heighten my concerns. So, without getting into the specifics of any particular pending merger, Mr. Voltmann will give us the negative view of the STB's antitrust authority, and Mr. Hamberger will give us the positive view.
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Finally, with respect to the new economy issue, the Microsoft case raises a number of interesting policy issues that extend beyond that case. I do not want to comment on that case other than to say that everyone would benefit from a toning-down of the rhetoric and a greater faith in the court system to come to the right resolution. Again, I have asked the witnesses not to comment on the specifics or merits of that case but to limit themselves to general policy issues. Some argue that antitrust is obsolete in the world of the Internet and computers, and that it is simply too slow to do any good in this new world. Others, including me, argue that the fundamentals of economics and human behavior have not changed since the 1890's and many centuries before that, and that antitrust remains a viable tool and a strong bulwark against government regulation of the new economy. Mr. DeLong and Professor Baker will share with us their thoughts on that interesting question, so that should make for a full day.
Members should feel free to ask questions of the Agency heads on any topic within the area of antitrust. You are not limited to these four areas on which we have scheduled other witnesses.
With that, I will turn to Mr. Conyers for an opening statement, because we have a lot to cover today. We will adhere to our usual practice and ask other members who may have opening statements to submit them for the record or to make them during their question time.
[The prepared statement of Mr. Hyde follows:]
PREPARED STATEMENT OF HON. HENRY J. HYDE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ILLINOIS, AND CHAIRMAN, COMMITTEE ON THE JUDICIARY
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Today the Committee conducts a general oversight hearing on the antitrust enforcement agencies: the Bureau of Competition of the Federal Trade Commission and the Antitrust Division of the Department of Justice.
We hold this hearing because Rule 10 of the House of Representatives requires us to exercise continuing oversight of the agencies that administer and execute the laws under our jurisdiction. Under that same rule, we have jurisdiction over the antitrust laws.
Our Committee last held a general oversight hearing on these agencies in 1997. At that time, I said that I would like to hold such a hearing at least every Congress. So today's hearing will fulfill that commitment for the 106th Congress.
Let me emphasize that I did not schedule this hearing for the purpose of criticizing any particular action of these agencies. In general, I believe that they are doing a good job, and I am glad that we have two agencies to enforce these important laws. Depending on how events develop, this may well be the last such hearing we have while Chairman Pitofsky, Assistant Attorney General Klein, and I hold our current positions. So, I want to take a moment to thank both of them personally. Though we come from different parties, you are both fine men who have done an outstanding job under a lot of pressure. I want to thank you both for all the help and personal courtesy that you have shown to me over the years.
I also want to make clear that I did not schedule this hearing in response to any particular recent event. The fact is that this hearing has been scheduled for this date since January.
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I do think the practice of having such general oversight hearings on a regular basis fosters ongoing communication between us and the agencies. It also allows the general public to hear that communication and to comment on it. By having such regular communications, we can understand each other better and criticize each other less often.
We will hear first from the heads of the two agencies, and then we will hear from other witnesses who will testify on some antitrust topics that are of current interest. These topics will be: the FTC's authority to seek disgorgement in antitrust cases, the role of antitrust in the international realm, the Surface Transportation Board's antitrust authorities, and the role of antitrust in the New Economy.
Let me say a word about why we chose these particular topics. With respect to the disgorgement issue, the FTC recently brought a lawsuit against Mylan Laboratories, a generic drug manufacturer. In that suit, it sought to have Mylan disgorge $120 million in allegedly illegal profits. Because that suit is still pending, I have asked our witnesses not to address the merits or specifics of that case. However, I believe we can appropriately discuss the legal issue of whether the Federal Trade Commission Act authorizes this remedy. That issue raises a number of interesting questions which we will hear Mr. Rein and Mr. Strenio cover.
With respect to the application of the antitrust laws in the international realm, we will hear about the recommendations of the International Competition Policy Advisory Committee which recently issued its report. We will also hear about a real life example of those issues: the difficulties that American companies encounter in selling flat glass in Japan. Mr. Rill will address the recommendations of the Advisory Committee, and Mr. Farrar will discuss the flat glass example.
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With respect to the antitrust authorities of the Surface Transportation Board, the Board regulates the railroad industry. It has extraordinary antitrust authority for a specialized regulatory agency that is specific to a particular industry, including the authority to confer antitrust immunity on railroad mergers. As a general philosophical matter, I believe it is unwise to take antitrust decisions from the antitrust enforcers and put them in the hands of industry regulators. Service disruptions that have followed recent mergers in the railroad industry further heighten my concerns. So, without getting into the specifics of any particular pending merger, Mr. Voltmann will give us the negative view of the STB's antitrust authority, and Mr. Hamberger will give us the positive view.
Finally, with respect to the New Economy issue, the Microsoft case raises a number of interesting policy issues that extend beyond that case. I do not want to comment on that case other than to say that everyone would benefit from a toning down of the rhetoric and a greater faith in the court system to come to the right resolution. Again, I have asked the witnesses not to comment on the specifics or the merits of that case, but to limit themselves to the general policy issues. Some argue that antitrust is obsolete in the world of the Internet and computers and that it is simply too slow to do any good in this new world. Others, including me, argue that the fundamentals of economics and human behavior have not changed since the 1890s and that antitrust remains a viable tool and a strong bulwark against government regulation of the New Economy. Mr. DeLong and Professor Baker will share with us their thoughts on that question. So that should make for a full day.
Members should feel free to ask questions of the agency heads on any topic within the area of antitrust. You are not limited to these four areas on which we have scheduled other witnesses.
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With that, I will turn to Mr. Conyers for an opening statement. We have a lot to cover today, so we will adhere to our usual practice and ask other Members who may have opening statements to submit them for the record or make them during their question time. Mr. Conyers.
Mr. HYDE. Mr. Conyers.
Mr. CONYERS. Chairman Hyde, members of the committee, I am very happy that we are calling this hearing. It is true we intend to increase the number of hearings that we have in antitrust oversight, and I think that is a very important thing. It is an important hearing today. Vigorous enforcement of our antitrust laws is the cornerstone of preserving our free-market economy.
For over a century, the antitrust laws have provided the ground rules for fair competition. In a way, they are our economic bill of rights. Antitrust principles are necessary to preserve competition and to prevent monopolies from stifling innovation. Competition produces better products and lower prices, all to the benefit of consumers. Nowhere is this keen scalpel of strong antitrust enforcement more important than in the high-tech industry.
Joel Klein and the Department of Justice are, in my view, to be commended for their work in the area. There are characteristics of the new economy that create new challenges for antitrust law, such as the existence of network effects and an increased likelihood of market tipping and the potential for the use of intellectual property rights to tie the hands of competitors. I am disturbed about how the subject of the Department's antitrust enforcement is now causing some people to attempt to politicize and attack the Department for simply enforcing the rule of law in the Microsoft case.
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There is a Republican-appointed Federal Judge, Judge Jackson, who found, in no uncertain terms, that this giant had used its monopoly power to prevent competition by Java, Linux, and other operating system competitors, and that it was using its power to move horizontally to control the portals of the Internet economy, such as Web-browsing and streaming. Anyone who knows the facts and knows the law will understand that the Department was seeking to vindicate longstanding antitrust traditions that spur innovation and make consumers benefit from vigorous competition.
So, we hope that there will not be those that will be using this case as a fund-raising cash cow or an attempt to intimidate the Department's law enforcement efforts. How big money is now being used to create an advertising campaign in the middle of the judicial proceeding is not a pretty sight to witness.
I am also disturbed, in the same vein, that one of the candidates for the office of President said he would derail this pro-consumer, pro-innovation lawsuit if he were in office. He articulated a somewhat ancient view that antitrust laws are only for price-fixing, which, of course, would return us to the dark ages of antitrust. I doubt whether this committee would agree with this view.
Politicians and big money ought to stay out of the process, and continuing politicization only engenders a further cynicism about these abusive practices. So, while I commend Joel Klein for his action, I also want to point out that I would like to see vigorous action elsewhere. For example, in the agricultural processing sector, according to a recent study by Dr. Heffernan, a sociologist at the University of Missouri, the top four firms control 79 percent of beef processing capacity, 50 percent of pork processing capacity, and 62 percent of flour milling.
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The list goes on. The highly publicized acquisition of Continental Grain by Cargill would mean that Cargill would control more than 40 percent of all U.S. corn exports and a third of all soybean exports. Likewise, in the health insurance industry, we have seen enormous consolidation. Aetna recently agreed to acquire Prudential Health Care, the fifth largest for-profit health care company at the same time it was in the midst of completing its purchase of New York Life. Now, what is the result of these acquisitions? Aetna will have contracts with approximately 400,000 doctors, two-thirds of the Nation's physicians.
These are two examples, but they are indicative of an overall trend. Other industries—petroleum, gasoline, pharmaceuticals, medical devices, food retailing, household products—have also had a slew of mergers.
Chairman Pitofsky and Assistant Attorney General Klein, I need to know what is being done to prevent over-consolidation and the creation of oligopolies and monopolies in these and other industries. I have here a letter for Attorney General Reno to investigate claims that gun companies may have conspired to punish Smith & Wesson for agreeing to make changes in the way it designs and distributes handguns. These charges of collusion, if true, are not only a blatant effort to deter other manufacturers from following Smith & Wesson's example but also give rise to possible antitrust liability.
My final concern is about an international enforcement of our antitrust laws. I understand that, despite vigorous efforts over more than a decade, and despite the existence of bilateral trade agreements on flat glass, Guardian and other U.S.-based flat glass producers have been denied meaningful access to the Japanese flat glass market. The Department of Justice should be raising these issues with the Japan Fair Trade Commission and insisting that they enforce our bilateral agreements.
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I thank you very much for this opportunity to present this statement before the committee.
Mr. HYDE. Thank you, Mr. Conyers. Any other members who have an opening statement? Without objection, it will be received and put in the record at this point.
[The prepared statement of Ms. Jackson Lee follows:]
PREPARED STATEMENT OF HON. SHEILA JACKSON LEE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS
Mr. Chairman, I thank you for convening this important oversight hearing on the Antitrust Enforcement Agencies of our federal government.
It is a timely hearing that should enable Members to voice their views or concerns on important trends in our global marketplace. The enforcement of antitrust laws and consumer protection laws are highly important matters in this global information age.
The Federal Trade Commission and the Antitrust Division of the Department of Justice clearly play a pivotal role in antitrust enforcement. I appreciate that both your agencies are given the immense responsibility of ensuring that consumers receive the benefits of a competitive marketplace. That responsibility is no simple task in our economy.
I recognize that the government must enforce the antitrust laws with vigor, and protect consumers from abuses of market power in whatever form. At the same time, the government must recognize the costs that government intervention can place on private parties.
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We all know that Congress decided long ago that that a competitive economy is vastly preferable to an economy reliant on government regulation of the conduct of firms with market power.
The economy is rapidly being changed, and markets are being created or redefined on a constant basis. It continues to be reshaped by the explosion of electronic commerce, deregulation of industries like telecommunications, financial services and electricity, and the convergence of technologies.
Although the Commission and the Department of Justice have a significant responsibility in responding to these rapidly changing market trends, the agencies must also recognize the important principle of avoiding unnecessary intrusions and to minimize, to the extent possible, the burdens placed on businesses by its efforts to protect consumers.
This hearing provides a good opportunity to explore the areas in which extensive merger activity and antitrust litigation in general will affect the average consumer in America.
And although today's hearing was not scheduled as a result of recent events in antitrust litigation involving Microsoft, broader policy concerns have nonetheless been legitimately raised as a reaction to the ongoing litigation.
Last week, the United States District for the District of Columbia found that Microsoft Corporations had violated the antitrust laws. U.S. Microsoft Corp., 84 F. Supp.2d 9 (D.D.C. 1999) (finding of fact) and 2000 U.S.Dist.Lexis 4014 (D.D.C. 2000) (conclusions of law).
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The litigation involving the Microsoft Corporation raises serious questions about how antitrust laws should apply in the global marketplace.
Perhaps electronic commerce moves simply faster than anything that has gone before. Or perhaps antitrust moves too slowly for a constantly changing global marketplace.
As we enter the 21st century, we should be mindful that as much as we share a desire to enforce our antitrust laws we must still protect consumer rights in a careful, deliberative fashion. That, Mr. Chairman, will be our greatest challenge.
Mr. HYDE. Our first panel consists of the heads of the two agencies we are considering today.
First, we have Chairman Robert Pitofsky of the Federal Trade Commission. He is a graduate of New York University and Columbia Law School. He is now serving his third tour of duty at the Commission. He was the Director of the Bureau of Consumer Protection from 1970 through 1973. He was a Commissioner from 1978 through 1981. He became chairman in April 1995, and in between he has been both the dean and a professor at Georgetown University Law School, and of counsel to the Washington law firm of Arnold & Porter.
On behalf of the Antitrust Division, we have the Assistant Attorney General for Antitrust, Joel Klein. Mr. Klein is a graduate of Columbia University and Harvard Law School. After law school, he clerked for Supreme Court Justice Lewis Powell before going into private practice from 1976 to 1993. From '93 to '95, he served as Deputy Counsel to the President. In 1995, he moved to the Antitrust Division and became its head in July, 1997.
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Chairman Pitofsky, we'll hear from you first with our usual prayerful request that your remarks can be held approximately to 5 minutes. Your full statement will be put in the record, and then we'll question you. Chairman Pitofsky.
STATEMENT OF ROBERT PITOFSKY, CHAIRMAN, FEDERAL TRADE COMMISSION
Mr. PITOFSKY. Thank you very much, Mr. Chairman, Mr. Conyers, members of the committee. As always, I am very pleased to appear before this group to address issues of antitrust enforcement.
These are, as we all know, extremely fast-changing times, but I believe that the bedrock principles that have guided competition in this country under the Sherman and Clayton Acts—the notion that a free market protected by antitrust is the best way to organize an economy—continue to be valid.
I read with admiration, Mr. Chairman, your article recently, which said very much the same thing. We try to enforce the antitrust laws with vigor. On the other hand, we try to pay attention to the facts, and we try not to impose unnecessary burdens on the business community. The merger wave continues to generate the bulk of the work that we do on the antitrust side.
Two-thirds of our antitrust resources are committed to reviewing mergers. There were 4600 merger filings last year. About the same as the year before. This year, I am astonished to find that merger filings are up another 20 percent. It's not just the number of filings that matters. Many of these mergers involve companies of enormous size, and have an impact in dozens of different markets.
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The FTC reviewed the proposed merger of Exxon/Mobil, an $80 billion merger. We are now in the process of taking a look at AOL/Time-Warner, a $186 billion merger. It is an enormous burden for us to keep up with this merger wave. On the other hand, we still thoroughly investigate, that is to say we issue second requests, in only about 3 percent of the mergers we see, and we challenge somewhere between one and 2 percent.
I don't think the merger wave is the problem. I think it is a symptom of the most dynamic economy this country has seen in generations. I do share Mr. Conyers' concern that there are mega-mergers at the top of markets involving firms with very large market shares that we must pay attention to. We try to do that. I am also pleased to say that, in my 5 years at the Commission, of the ten or so mergers that we challenged in court, we won all but two cases.
Many other mergers were settled by an order, or they were abandoned by the parties. Under the Government Performance and Results Act, the kind of accounting that they specify, it is estimated that we saved consumers $1.2 billion over the last 5 years.
Let me say also that I have long believed that the Federal Trade Commission should be more than an enforcement agency. The people that established the FTC in 1914 had in mind that the Agency would anticipate economic problems as they developed and report to Congress, report to the public about these new developments. I think of us as an arm of the Congress in terms of investigations. We have conducted investigations of global competition, and high-tech competition, and issued reports we'll soon have several days of a workshop on slotting allowance payments by manufacturers to assure shelf space in supermarkets and other stores. In collaboration with the Department of Justice, we have issued guidelines elaborating on how we treat claims of efficiency in merger review. Just last week, we issued a final set of guidelines on competition collaboration, that is, on joint ventures.
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In particular, we try to pay special attention to the high-tech sector of the economy and to the Internet, which I think of as one of the most pro-consumer developments in the marketplace in many, many years. We try to ensure principally that access to the Internet remains open. If parties try to boycott rivals who sell on the Internet—and we've seen a case like that—or there are mergers that are designed to exclude people from playing a role on the Internet, we give particular attention to cases like that.
Another area of emphasis is health care, and, since I know the panel following me is going to discuss disgorgement in the Mylan case, let me offer just briefly a view of my own on that case. Now, this case is in court, so much of what I describe will be allegations—not proof—at this time.
First we allege that a generic drug manufacturer cornered the market on a key ingredient for a generic product. As a result, virtually overnight, the prices of two of those products sold by this generic company were raised. Price on one product was raised from $11.36 per bottle to $377.00 per bottle, and the other, $7.30 to $190.00 per bottle. These were anti-anxiety drugs, many of which are purchased by people who are on fixed incomes.
Now, the question is why didn't we do our typical thing and seek only a cease-and-desist order. We usually do that. We bring disgorgement cases very, very rarely, maybe two in the last 10 years. The answer to that, in general, is that we are concerned that, if all we do is say to a company after it has allegedly violated the law—if they did violate the law—stop doing it, and, if they keep the profits of their inappropriate behavior, then I fear that CEOs will discuss these matters within the executive group and they'll say to themselves. Well, if all they're going to do is tell us to stop after they find a violation, why don't we go ahead and do it, and, then, if and when they tell us to stop, we'll stop. But the important thing is we will keep the additional money. That is the reason for a disgorgement approach in antitrust. I say, again, we are very cautious and careful about the circumstances in which we seek any such remedy.
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Let me conclude very briefly by saying that my Agency has never been busier. I have never seen as many of our staff working on Saturday and Sunday litigating cases, reviewing mergers, reviewing other transactions. This committee has helped us in our budget requests in previous years. We have had some modest increases, but I must say that, without significant increases in the future, given the level of activity in the commercial market today, particularly with respect to mergers, it is going to be very hard for us to continue to discharge our responsibilities in the way that I know this committee would have us do.
Thank you very much.
[The prepared statement of Mr. Pitofsky follows:]
PREPARED STATEMENT OF ROBERT PITOFSKY, CHAIRMAN, FEDERAL TRADE COMMISSION
Mr. Chairman and Members of the Committee, I am Robert Pitofsky, Chairman of the Federal Trade Commission. I am pleased to appear before you to present the Commission's testimony providing an overview of our antitrust enforcement activities. Today I will review the Commission's activities since I last testified before this Committee for general antitrust oversight purposes.(see footnote 1) The Commission is charged with the enormous responsibility of ensuring that consumers receive the benefits of a competitive marketplace, a mission that we share with the U.S. Department of Justice. We welcome that responsibility and believe that we are fulfilling our obligation.
The Commission strongly believes in the bedrock principle that protecting competition by preventing improper creation, acquisition, or exercise of market power enhances the welfare of consumers. Congress decided long ago that a competitive economy is vastly preferable to an economy reliant on government regulation of the conduct of firms with market power. Competition is the best way to ensure that consumers receive the benefits of lower prices, higher quality and quantity of goods and services, and greater innovation. As Chairman Hyde has observed: ''Antitrust is the antithesis of government regulation. . . . Antitrust remains the preeminent defender of economic freedom for the individual consumer against private concentrations of power.''(see footnote 2)
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These are dynamic times for the economy, and with these changes come many challenges for the antitrust agencies. The economy is rapidly being reshaped, and markets are being created or redefined, by numerous forces operating at the same time, including: the explosion of electronic commerce; deregulation of critical industries such as telecommunications, financial services and electricity; convergence of technologies and, indeed, of markets; and globalization. These forces result in a fast-changing, more complex economy, even with respect to basic sectors of the economy such as electricity. While these changes carry the promise of tremendous benefits for consumers, some may also create incentives and opportunities for anticompetitive behavior. The challenge for us, apart from the sheer magnitude of the amount of activity, is to understand these changes and to know when antitrust intervention is appropriate.
The Commission's approach to antitrust enforcement is guided by two important principles. First, we seek to enforce the antitrust laws with vigor, and protect consumers from abuses of market power in whatever form. It is the Commission's responsibility to protect consumers from anticompetitive consequences of private agreements, the abuse of monopoly power, or illegal mergers. The Commission also recognizes, however, the costs that government intervention can place on private parties. For this reason, our second guiding principle is to avoid unnecessary intrusions and to minimize, to the extent possible, the burdens placed on businesses by our efforts to protect consumers. We have an important responsibility to ensure that antitrust policy makes sense and is sensibly and effectively applied.
I will begin this overview with a topic that is not new news, but is still big news—the astounding level of merger activity. We are busier than ever on that front. I will review some recent merger enforcement actions that have had particularly immediate significance for consumers. I will then cover several other areas that receive our close attention: competitor collaborations, retailing, and health care markets.
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LEVEL OF MERGER ACTIVITY
The number of mergers reported to the FTC and the Justice Department pursuant to the Hart-Scott-Rodino Act has more than tripled over the past decade, from 1,529 transactions in fiscal year 1991 to 4,642 transactions in fiscal 1999. Thus far in fiscal year 2000, filings are at a record pace; if this continues, filings for the year will be approximately 18% above the record set in fiscal 1998.
Currently, more than two-thirds of our competition resources are dedicated to merger enforcement, compared to an historical average of closer to 50%. The merger wave strains the FTC resources to the breaking point. The Washington Post recently characterized the merger wave as a ''frenzy of merger madness, capping a dramatic wave of corporate consolidation that has been gaining momentum through much of the decade.''(see footnote 3) The article quotes merger experts who note that a key force driving merger activity is the new world of electronic commerce.
While the number of merger filings has more than tripled in the past decade, the dollar value of commerce affected by these mergers has risen on an even steeper trajectory, increasing an astounding eleven-fold during the past decade.(see footnote 4) This represents a vast increase in the potential for consumer harm from anticompetitive mergers if left unaddressed. Moreover, mere numbers do not fully capture the complexity and the challenge of the current merger wave. Today's merger transactions not only are larger, but often raise novel or complex competitive issues requiring more detailed analysis. In the past year alone, companies filed notifications for 273 mergers with a transaction size of one billion dollars or more, and many of these mergers involved overlaps in multiple products or services.
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There are many reasons for the current merger wave. A large percentage of these transactions appear to be a strategic response to an increasingly global economy. Many are in response to new economic conditions produced by deregulation (e.g., telecommunications, financial services, and electric utilities). Still others result from the desire to reduce overcapacity in more mature industries. The rapidly evolving world of electronic commerce has a substantial impact on the merger wave because consolidations often quickly follow the emergence of a new marketplace. These factors indicate that the merger wave reflects a dynamic economy, which on the whole is a positive phenomenon. But some mergers, as well as some other forms of potentially anticompetitive conduct, may be designed to stifle competition in important sectors of this dynamic economy.
Out of necessity, our scarce resources are directed at preserving competition in the most important areas of the economy. The Commission dedicates the bulk of its antitrust enforcement to sectors that are critical to our everyday lives, such as health care, pharmaceuticals, retailing, information and technology, energy, and other consumer and intermediate goods. Rather than recite a litany of cases, I will focus on some cases that underscore the importance of the Commission's antitrust enforcement as we move forward in this new century.
MERGER ENFORCEMENT
In the last two fiscal years and fiscal 2000 to date, the Commission has brought over 60 enforcement actions in industries ranging from food retailing to basic industrial products.(see footnote 5) Retailing, energy, and pharmaceuticals commanded the most enforcement resources.(see footnote 6)
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The Commission has committed considerable resources to addressing the wave of consolidation in the petroleum and gasoline industry. In fiscal years 1999 and 2000 to date, the FTC's Bureau of Competition used a staggering one-third of its enforcement budget to address issues in energy industries. In February of this year, the Commission filed an action in federal district court in San Francisco seeking a preliminary injunction against the proposed merger of BP Amoco p.l.c. and Atlantic Richfield Company (''ARCO'').(see footnote 7) The complaint alleges that the merger would combine the two largest firms exploring for and producing crude oil on the North Slope in Alaska; that BP already exercises market power in the sale of crude oil on the West Coast; and that by acquiring ARCO, BP would eliminate as an independent competitor the firm most likely to threaten BP's market power.(see footnote 8) The Commission's suit has been joined by suits filed by the States of California, Oregon, and Washington. This is the latest of a number of enforcement actions in which the Commission worked with various states in pursuit of our common interest in protecting American consumers. Last month, the Commission, the states and the parties obtained an order from the Court adjourning the preliminary injunction hearing while the Commission evaluates the parties' proposal to sell all of ARCO's Alaska operations to Phillips Petroleum Co.
The BP/ARCO case comes on the heels of the Commission's investigation of the merger between Exxon and Mobil. After an extensive review, from oil fields to the gas pump, the Commission required the largest retail divestiture in FTC history—the sale or assignment of 2,431 Exxon and Mobil gas stations in the Northeast and Mid-Atlantic, and California, Texas and Guam.(see footnote 9) The Commission also ordered the divestiture of Exxon's Benicia refinery in California; light petroleum terminals in Boston, Massachusetts, Manassas, Virginia, and Guam; a pipeline interest in the Southeast; Mobil's interest in the Trans-Alaska Pipeline; Exxon's jet turbine oil business; and a volume of paraffinic lubricant base oil equivalent to Mobil's production. The Commission coordinated its investigation with the Attorneys General of several states and with the European Commission (about 60% of the merged firm's assets are located outside the United States).
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There are several particularly noteworthy aspects of the Exxon/Mobil settlement. First, the divestiture requirements eliminated all of the overlaps in areas in which the Commission had evidence of competitive concerns. Second, while several different purchasers may end up buying divested assets, each will purchase a major group of assets constituting a business unit. This is likely to replicate, as nearly as possible, the scale of operations and competitive incentives that were present for each of these asset groups prior to the merger. Third, these divestitures, while extensive, represent a small part of the overall transaction. The majority of the transaction did not involve significant competitive overlaps. In sum, we were able to resolve the competitive concerns presented by this massive merger without litigation.
The Commission also required divestitures in the merger between BP and Amoco,(see footnote 10) and in a joint venture combining the refining and marketing businesses of Shell, Texaco and Star Enterprises to create at the time the largest refining and marketing company in the United States.(see footnote 11)
The Commission challenged potentially anticompetitive mergers in other energy industries as well.(see footnote 12) Three recent matters served to protect emerging competition in electric power generation. Two of these cases were so-called ''convergence mergers,'' where an electric power company proposed to acquire a key supplier of fuel used to generate electricity. One involved PacifiCorp's proposed acquisition of The Energy Group PLC and its subsidiary, Peabody Coal. PacifiCorp's control of certain Peabody coal mines allegedly would have enabled it to raise the fuel costs of its rival generating companies and raise the wholesale price of electricity during certain peak demand periods. The Commission secured a consent agreement to divest the coal mines, but the transaction was later abandoned by the parties.(see footnote 13) In another case, Dominion Resources, an electric utility that accounted for more than 70% of the electric power generation capacity in the Commonwealth of Virginia, proposed to acquire Consolidated Natural Gas (''CNG''), the primary distributor of natural gas in southeastern Virginia and the only likely supplier to any new gas-fueled electricity generating plants in that region. Dominion allegedly could have raised the cost of entry and power generation for new electricity competitors. Working closely with Commonwealth officials, the Commission required the divestiture of Virginia Natural Gas, a subsidiary of CNG.(see footnote 14) In a third matter, the Commission challenged CMS Energy Corporation's proposed acquisition of two natural gas pipelines.(see footnote 15) The Commission alleged that the acquisition would have enabled CMS to raise the cost of transportation for its gas and electric generation customers. This case did not require divestitures, but the Commission's consent order assures that CMS cannot restrict access to its pipeline network, thus allowing new entry that should maintain a competitive market.
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Another highlight from the past two years is the Commission's successful challenge to the proposed mergers of the nation's four largest drug wholesalers into two firms. McKesson Corp. proposed to acquire AmeriSource Health Corp., and Cardinal Health, Inc. proposed to acquire Bergen Brunswig Corp. The two surviving firms would have controlled over 80% of the prescription drugs sold through wholesalers. These mergers allegedly would have increased costs to these wholesalers' customers—thousands of pharmacies and hospitals. These two cases were among the few that have led to litigation in recent years (although many more had to be prepared for trial). The district court granted a preliminary injunction against both mergers, and the transactions were later abandoned.(see footnote 16) Another significant aspect of these two cases is that the district court's thoughtful and well-articulated opinion helped to update merger case law in several respects, including market definition and analysis of entry conditions, competitive effects, and efficiencies. This helps make antitrust law more transparent, and provides more guidance to the business community. The court's analysis is consistent with the Commission's analytical approach under the 1992 Horizontal Merger Guidelines, issued jointly by the Commission and the U.S. Department of Justice.(see footnote 17)
Food retailing is another sector that is experiencing a period of consolidation. The number of supermarket mergers has increased dramatically just in the last three years. While the Commission has not challenged geographic expansion mergers, many mergers among direct local competitors have raised competitive concerns. The Commission has taken enforcement action where appropriate. Last June, for example, the Commission took steps to prevent undue market concentration resulting from Albertson's acquisition of American Stores—combining the second and fourth largest supermarket chains in the United States.(see footnote 18) In Albertson's the Commission required the divestiture of over 140 stores in California, Nevada and Arizona—at the time, the largest retail divestiture in Commission history (but now surpassed by the Exxon/Mobil divestiture). In the last four years alone the Commission has brought more than 10 enforcement actions involving supermarket mergers, requiring divestiture of nearly 300 stores in order to maintain competition in local markets across the United States.
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Another major transaction the agency reviewed last year was Barnes & Noble's attempted acquisition of Ingram Book Group. Barnes & Noble was the largest book retailing chain in the United States, and Ingram was by far the largest wholesaler of books in the United States. Thus, it was largely a vertical transaction. While many vertical transactions are likely to be efficiency-enhancing, and therefore few are challenged, in this case there were concerns raised that the transaction posed a serious competitive threat to thousands of independent book retailers and new rivals such as Internet book sites. The acquisition of an important upstream supplier such as Ingram might have enabled Barnes & Noble to raise the costs of its bookselling rivals by foreclosing access to Ingram's services, or denying access on competitive terms. If rivals became less able to compete, Barnes & Noble could have increased its profits at the retail level or prevented its profits from being eroded by competition from new business forms such as Internet retailing. The Commission did not take formal action on this merger because the parties abandoned the transaction.
We have also challenged a number of other large mergers involving products and services that are highly important to consumers, including pharmaceutical products,(see footnote 19) medical devices,(see footnote 20) household products,(see footnote 21) and insurance services.(see footnote 22) In each of these cases, our goal has been to protect consumers from the potential exercise of market power by the merged firm, either unilaterally or in combination with others. Under the methodology we use to determine consumer savings pursuant to the Government Performance and Results Act, we estimate that the Commission's merger enforcement actions in fiscal year 1999 saved consumers from paying $1.2 billion in higher prices.(see footnote 23) In contrast, the Commission's budget for the competition mission in fiscal 1999 was only $55.7 million.
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We have taken steps to ensure that these consumer savings are in fact realized by implementing changes that result in better remedies. Last year, the staff completed a major study of merger remedies based on the Commission's merger cases in the early 1990s.(see footnote 24) The study found that while most of the cases settled through divestitures resulted in the establishment of a new competitor to replace the one lost through the merger, there were some ways in which merger remedies could be improved to avoid potential problems. One of the steps we have taken is to require, in a greater number of cases, that the merging parties bring us qualified purchasers for the divestiture assets before the transaction may be consummated. This procedure, referred to as the ''up-front buyer'' requirement, requires the merging parties to find a suitable purchaser before the Commission accepts a settlement agreement. This procedure has several benefits for consumers: we know before accepting a divestiture settlement that a suitable buyer exists and that the divestiture package is an appropriate one, and we can restore the lost competition more quickly and with greater confidence that the divestiture will succeed. It also reduces the burden of uncertainty on the merging parties because they know up front that they have an acceptable candidate, and they can then devote their full attention to their newly merged business.
While we are on the subject of mergers, we would like to offer a few observations about proposed legislation which seeks to amend various aspects of the Hart-Scott-Rodino (HSR) process. As you know, the HSR Act has not been amended since its enactment in 1976. Because the Act has not been amended for some time, we agree that serious consideration should be given to issues such as raising the size-of-transaction threshold for reporting transactions and the use of a tiered structure for premerger notification filing fees.
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There has been some attention focused recently on burdens associated with the HSR process. Senate Bill S. 1854 contains certain provisions intended to reduce those burdens. While the Commission agrees with the burden-reduction goals of S.1854, we believe that the procedures contemplated by the bill are unnecessary and impractical, would themselves cause substantial delay in the process, and could seriously impair our efforts to protect consumers from anticompetitive mergers.
The burdens placed on the merger process by antitrust review need to be put into an appropriate perspective. The vast majority of merger filings are cleared within 20 days. Fewer than 3% of reported transactions receive a request for additional information (the ''second request''). The issuance of a second request is not undertaken lightly, and the care we take in choosing when to issue them is illustrated by the fact that a large majority of those transactions that receive second requests result in some form of enforcement action. In addition, most second request investigations are resolved without major document production. Over 60% of the investigations result in productions of fewer than 20 boxes of responsive documents, and over 85% of the second request investigations are resolved without the parties' having to complete their document production (i.e., ''substantially comply'' with the second request).(see footnote 25)
Last week the Commission announced a series of procedures to address the concerns over HSR burdens. First, all second requests will be reviewed prior to issuance by senior management in the Bureau of Competition. The greater involvement by senior management is intended to provide additional scrutiny of the scope of the second request, to assure consistent and focused requests that are narrowly tailored to limit the burdens on businesses. Second, staff will convene a conference promptly following the issuance of a second request, to discuss with the parties the competitive issues raised by the proposed transaction. Third, staff will respond to party requests for modifications of second requests within five business days. Prompt responses by staff will afford the parties greater opportunities for more focused searches of their records. Finally, parties will have recourse to the Commission's General Counsel for resolution of second request modification issues not resolved after discussions with staff. This new procedure sets short deadlines for completion of the process—10 business days from appeal to decision.
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Other initiatives are also under way. The agency is developing a set of ''best practices'' for staff's conduct of premerger investigations. In addition, the agency will evaluate its FY 1998 and 1999 investigations to identify strengths and weaknesses and to assess how to improve management of future investigations. Finally, the Bureau of Competition will provide specialized staff training in an effort to make the second request process more efficient. We will continue to work with the business community to address their concerns and receive their valuable input.
In sum, we can all agree that the process can be improved, and we acknowledge the leadership and assistance of Chairman Hyde and Congressmen Conyers, Rogan, and Delahunt in addressing these issues. Over the past several months we have been working with Congress, the business community and members of the private bar to find common ground for improving the process. We believe we have taken an important step in that direction.
COLLABORATIONS AMONG COMPETITORS
Let us now shift gears and briefly discuss conduct in which competitors do not merge, but instead collaborate with each other. In today's markets, competitive forces are driving firms toward complex collaborations to achieve goals such as expanding into foreign markets, funding expensive innovation efforts, and lowering production and other costs. Most of these collaborations are procompetitive business arrangements that will benefit consumers; some, however, are not. Last week, the Federal Trade Commission and the Antitrust Division of the Department of Justice jointly issued ''Competitor Collaboration Guidelines,'' which provide an analytical framework to assist businesses in assessing the likelihood of an antitrust challenge to a collaboration among two or more competitors. The Guidelines were first issued in draft form last October and placed on the public record for comment. They have received praise from sources as diverse as the Chamber of Commerce;(see footnote 26) antitrust's leading treatise author, Professor Herbert Hovenkamp;(see footnote 27) and practitioners, who found that ''[b]y synthesizing the existing cases into an analytical framework, the Federal Trade Commission and the Department of Justice will have made antitrust analysis vastly more accessible to smaller law firms and their clients.''(see footnote 28)
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RETAILING
As a result of global and innovation-based changes, consumers are becoming aware that a ''retail revolution'' is underway. To remain competitive, retailers—whether brick-and-mortar or online—are seeking new ways to market new and old products. This dynamic is leading to much pro-consumer innovation in retailing. For example, the Internet has changed traditional sales and distribution patterns for products of all types, providing faster, cheaper, and more efficient ways to deliver goods and services. A market study by Jupiter Communications estimates that annual consumer sales on the Internet will explode from $15 billion in 1999 to $78 billion by 2003. There appears to be tremendous demand for Internet-based services.
However, whenever there is great upheaval in the marketplace, traditional retailers sometimes respond by trying to forestall new forms of competition. Some of those actions may be legitimate defensive maneuvers, but when conduct steps over the lines of the antitrust laws, enforcement action is needed to ensure that anticompetitive practices do not deter development of procompetitive innovations.(see footnote 29) In 1998, for example, the FTC charged 25 Chrysler dealers with an illegal boycott designed to limit sales by a car dealer that marketed on the Internet. These brick-and-mortar dealers allegedly had planned to boycott Chrysler if it did not change its distribution of vehicles in ways that would disadvantage Internet retailers. The competitive danger of such a tactic is obvious: a successful boycott could have limited the use of the Internet to promote price competition and reduced consumers' ability to shop from dealers serving a wider geographic area via the Internet. An FTC consent order prohibits the dealers from engaging in such boycotts in the future.(see footnote 30)
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The Internet is not the only place where we have seen popular new forms of retailing. Another example involves the Commission enforcement action alleging abuse of market power by Toys ''R'' Us, the nation's largest toy retailer. As alleged by the Commission, Toys ''R'' Us used its market power to try to stop warehouse clubs, such as Costco, from selling popular toys, such as Barbie dolls, in ways that allowed consumers to make comparisons to the prices charged by Toys ''R'' Us. Warehouse clubs, as you know, are a relatively new retailing format that has grown significantly in the past decade. Toys ''R'' Us's concern was that warehouse clubs were selling some toys at lower prices and beginning to take market share away from traditional toy retailers. In response, Toys ''R'' Us allegedly pressured toy manufacturers to deny popular toys to warehouse clubs, or to sell them on less favorable terms. The FTC issued an administrative order to stop these practices, and the matter is now on appeal to the U.S. Court of Appeals for the Seventh Circuit.(see footnote 31) Although the products were toys, and the rivalry was between two different kinds of brick-and-mortar firms, the enforcement principles underlying the Commission's action apply with equal—and perhaps even greater—force to the new world of online retailing.
Of course, much of our enforcement effort focuses on traditional retailing. Last month, the FTC and the Attorneys General from 56 U.S. states, territories, commonwealths, and possessions settled charges that Nine West, one of the country's largest suppliers of women's shoes, engaged in resale price maintenance, resulting in higher prices for many popular lines of shoes. The FTC's proposed consent order prohibits Nine West from engaging in future resale price maintenance. In addition, to settle the charges with the states, Nine West agreed to pay $34 million, which will be used to fund women's health, vocational, educational, and safety programs.
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Slotting allowances are another retailing-related topic of current interest at the Commission. The term ''slotting allowance'' typically refers to a lump-sum, up-front payment that a supplier, such as a food manufacturer, might pay to a retailer, such as a supermarket, for access to its shelves.(see footnote 32) These allowances can amount to tens or hundreds of thousands of dollars. Slotting allowances can be either beneficial or harmful. They can be beneficial if they fairly reimburse retailers for the costs and risks of taking on an unproven new product, or when they result in lower prices to consumers. On the other hand, slotting allowances can be harmful if they permit one manufacturer to acquire a degree of exclusivity, across many retail outlets, sufficient to prevent other firms from becoming effective competitors. Still other situations fall in an intermediate grey area. To sharpen our understanding of the circumstances under which slotting allowances can be beneficial or harmful to competition and to consumers, the Commission will hold a two-day workshop on May 31 and June 1. This session will bring together people from manufacturing, retailing, economics, and other relevant disciplines to discuss the issues involved in this very complex subject.
The Commission recently examined charges of price discrimination in a related retailing context. By majority vote, the Commission charged McCormick & Company, the world's largest spice company and by far the leading supplier in the United States, with engaging in unlawful price discrimination in the sale of spice and seasoning products. Some retailers allegedly were charged substantially higher net prices than were others, and discounts to favored chains allegedly were conditioned on an agreement to devote all or a substantial portion of shelf space to McCormick products. McCormick agreed to settle the charges by accepting an order that would prohibit the selling of spices at different prices to different retailers, except when permitted by the Robinson-Patman Act.
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HEALTH CARE AND PHARMACEUTICALS
Health care is an increasing part of overall consumer expenditures, and the significant rise in health care costs is felt by all consumers. For many years, the Commission has been at the forefront in bringing enforcement actions to protect the competitive process in all types of health care markets, including services provided by hospitals and health care professionals as well as products provided by the pharmaceutical and medical equipment industries. In the past two years alone, the Commission has brought more than a dozen enforcement actions involving health care, pharmaceuticals, and medical devices.
In one of these cases the Commission, jointly with several states, sued Mylan Laboratories, one of the nation's largest generic pharmaceutical manufacturers, charging Mylan and other companies with monopolization, attempted monopolization and conspiracy to eliminate much of Mylan's competition by tying up the key active ingredients for two widely-prescribed drugs used by millions of patients.(see footnote 33) The FTC's complaint charged that Mylan's agreements allowed it to impose enormous price increases—over 25 times the initial price level for one drug, and more than 30 times for the other. For example, in January 1998, Mylan raised the wholesale price of clorazepate from $11.36 to approximately $377.00 per bottle of 500 tablets, and in March 1998, the wholesale price of lorazepam went from $7.30 for a bottle of 500 tablets to approximately $190.00. In total, the price increases resulting from Mylan's agreements allegedly cost American consumers more than $120 million in excess charges. The Commission filed this case in federal court under Section 13(b) of the FTC Act seeking injunctive and other equitable relief, including disgorgement of ill-gotten profits. In July of last year the district court upheld the FTC's authority to seek disgorgement and restitution for antitrust violations.
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Just last month, the Commission charged four other pharmaceutical companies with entering into anticompetitive agreements that allegedly delayed the entry of generic drug competition, potentially costing consumers hundreds of millions of dollars a year. The administrative complaint issued against Hoechst Marion Roussel (now Aventis) and Andrx Corporation charges that Hoechst, the maker of Cardizem CD, a widely prescribed drug for treatment of hypertension and angina, agreed to pay Andrx millions of dollars to delay bringing its competing generic drug, or any other non-infringing version, to market.(see footnote 34) Cardizem CD is a form of diltiazem, and Hoechst accounts for about 70% of the sales of $1 billion once-a-day diltiazem products in the United States. Cardizem is prescribed to over 12 million consumers each year. The complaint further alleges that, because the Hatch-Waxman Act(see footnote 35) grants an exclusive 180-day marketing right to Andrx, Andrx's agreement not to market its product was also intended to delay the entry of other generic drug competitors.
The complaint against two other companies, Abbott Laboratories and Geneva Pharmaceuticals, Inc., which the companies agreed to settle, involved allegations of similar conduct in connection with Hytrin, that Abbott manufactures, and a generic version that Geneva prepared to introduce.(see footnote 36) Hytrin is used to treat hypertension and benign prostatic hyperplasia (BPH or enlarged prostate)—chronic conditions that affect millions of Americans each year, many of them senior citizens. BPH alone afflicts at least 50% of men over age 60. In 1998, Abbott's sales of Hytrin amounted to $542 million (over 8 million prescriptions) in the United States. The complaint alleges that Abbott agreed to pay Geneva approximately $4.5 million per month to keep Geneva's generic version of the drug off the U.S. market. This agreement also allegedly delayed the entry of other generic versions of Hytrin because of Geneva's 180-day exclusivity rights under the Hatch-Waxman Act. Abbott was charged with monopolization of the market, and both companies were charged with conspiracy to monopolize. The proposed consent order enjoins such practices. Once Abbott and Geneva became aware of our investigation and terminated their agreement, the entry of generic Hytrin may have reduced the price to customers up to 60%. A patient taking one terazosin a day and purchasing at an average discount could save over $200 a year. We believe the savings to purchasers from this enforcement action alone may exceed $100 million a year.
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The drug settlement cases are the first Commission actions to challenge payments by a brand-name drug firm to induce a generic rival to stay out of the market. This is a tremendously important area, with high stakes to consumers and to our Nation's efforts to control medical costs. Generic drugs play a vital role in bringing low-cost drugs to the market, especially for the elderly who often have to pay the full price for drugs. According to a recent Congressional Budget Office study, the savings from the use of generic drugs were between $8 billion and $10 billion for pharmaceutical sales through retail pharmacies alone in 1994.(see footnote 37) Moreover, within the next four years alone, patents on 33 drugs—representing over $14 billion in sales—will expire.(see footnote 38) Consumers can expect major savings from generics if the incumbents do not block competition with illegal agreements.
Another recent enforcement effort was directed at an anticompetitive patent pool between Summit Technology, Inc. and VISX, Inc. Summit and VISX compete in the market for equipment and technology employed in laser vision correction. Most of the approximately 140 million people in the United States with vision problems correct their vision with contact lenses or eyeglasses, but an increasing number are turning to laser techniques. Until recently, VISX and Summit were the only firms with FDA approval to market the laser equipment used for this surgery. The complaint charged that the two companies eliminated competition between themselves by placing their competing patents in a patent pool and agreeing to charge doctors a uniform $250-per-procedure fee every time a Summit or VISX laser was used. In essence, this was price-fixing under the guise of a patent cross-licensing arrangement. After the Commission issued an administrative complaint charging that the patent pool and related agreements were unlawful, the companies dissolved the patent pool and settled this portion of the case in August 1998, with an agreement not to enter into such agreements in the future.(see footnote 39) The per-procedure fees charged by VISX and Summit did not immediately change as a result of the settlement—an example of ''stickiness'' of prices in a tight oligopoly—but competition eventually prevailed. Last month, VISX announced that it would reduce its per-procedure fee from $250 to $100 per eye, and Summit announced that it too would reduce its fee for one of its laser products.(see footnote 40) Had the Commission not taken action, the millions of consumers using this procedure likely would still be paying substantially higher fees.
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The Commission also plays an important role in studying the changing health care marketplace and advising regulators and Congress. The Bureau of Competition's staff has filed comments before the FDA on two recent regulatory initiatives: (1) reform of the generic exclusivity provisions (the regulations at issue in the drug settlement cases) and (2) the citizen petition process.(see footnote 41) We believe this advocacy serves an important role by helping regulators and take competition concerns into account in structuring the regulatory process. In addition, last year the Bureau of Economics issued a detailed report on the rapidly evolving pharmaceutical industry.(see footnote 42) The report found that developments in information technology, federal legislation, and the emergence of market institutions such as health maintenance organizations and pharmacy benefit managers have accelerated change in this industry. The report attempts to provide a more complete understanding of the competitive dynamics of this market and discusses possible competitive problems and procompetitive explanations for pricing strategies and other industry practices. These kinds of studies help inform regulators, enforcers, and Congress on the important public policy issues involving health care.
CONCLUSION
In closing, we believe that antitrust enforcement by the Commission has demonstrable benefits for consumers—benefits that far outweigh the resources allocated to our maintaining competition mission. We are concerned, however, that our growing workload—largely the result of the continuing merger wave—has outstripped our ability to keep pace. Over the past decade, the FTC has performed its mission in the face of a rapidly changing marketplace, with staffing at about half the size it was in 1979. We have done so primarily by stretching our resources, streamlining our processes, and simply doing more with less. In no small measure, that is attributable to our dedicated, hard-working staff. We have also shifted resources from non-merger enforcement to mergers as a stop-gap measure. That has left us understaffed in non-merger matters, but still not at full strength in mergers. If we are to keep up with the growing demands that will be imposed by the 21st Century marketplace, we need significantly more resources. The President's proposed budget for fiscal year 2001 asks for an additional 69 workyears, over the current fiscal year, for our antitrust enforcement efforts.(see footnote 43) We ask for the Committee's support for additional resources for this important mission.
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Mr. Chairman and Members of the Committee, we appreciate this opportunity to provide an overview of the Commission's efforts to maintain a competitive marketplace for American businesses and consumers. We would be pleased to respond to any questions you may have.
Mr. HYDE. Mr. Klein.
STATEMENT OF JOEL KLEIN, ASSISTANT ATTORNEY GENERAL, ANTITRUST DIVISION, DEPARTMENT OF JUSTICE
Mr. KLEIN. Thank you, Mr. Chairman, Mr. Conyers, members of the committee. It is a pleasure to be here today. Mr. Chairman, you mentioned that this may be the last time we'll be together in this room. I would like to say how grateful I and the Antitrust Division are to you and this committee under your leadership.
Mr. Chairman, you said something in your opening remarks that I think is at the core. In your opening remarks, Mr. Chairman, you said law enforcement should not be a partisan matter. I think, under your leadership, this committee has appreciated and, indeed, engaged in that fashion. There have been disagreements. There have been some tough questions, but it has always been professional, and I think the committee has understood the critical force of your comments. For that, as a person as well as the head of the Division, I want to thank you at this hearing, Mr. Chairman.
This is really a remarkable time in our Nation's economy. I believe that America's economy is the greatest in the world, because it is the most competitive in the world. But, the profundity of the changes that we are experiencing are really hard to grasp.
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Just one statistic. In the last year of President Bush's tenure in 1992, we saw $70 billion in mergers in the United States. In the last year of President Clinton's tenure, we are likely to see $2 trillion, or close to 30 times as much merger activity.
The combination of technological advance and globalization has really changed our world and changed the burdens on the Antitrust Division of the Federal Trade Commission. I continue to believe, as I've said many times, that our role is a critical but modest one. Markets that remain competitive will best serve our Nation, but, in the absence of effective, thoughtful antitrust enforcement, we are not going to have competitive markets. I think that is as true, Mr. Chairman, in the new economy as it was in the old.
We need to move with caution, and we need to understand the technologies and the new dynamics, but, at the same time, we need to understand that market power and exclusionary and predatory behavior are mechanisms that can be and have been used in the new economy. We need to assure that effective antitrust enforcement on a bipartisan basis deals with that. Right now, for example, in addition to the Microsoft litigation, we have a critical case that I have talked to this committee before about with respect to American Airlines' hub dominance and access for new entrants.
Almost every member of this committee knows about the importance of that issue, the need to foster an effective climate for new start-ups so that we don't see the kind of thing we saw in Dallas with a doubling of the price and half the service, and key cities like Wichita, Kansas, actually being hurt financially because of the lack of flow of traffic when a new entrant is forced out of the market. That is a concern in Detroit, as Mr. Conyers knows. It is a concern throughout the United States. By the same token, our merger enforcement program, modest though it is, is absolutely critical.
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Whether it was Lockheed Martin, Northrop Grumman going to the heart of this Nation's defense capability, whether it was the Primestar case, or, most recently, a key case involving biotechnology with Monsanto, where it was about to be a potential monopoly in corn and seed production, a critical new technology, we stepped in and the parties abandoned the transaction. The Continental/Northwest stock acquisition that we have now challenged in Federal court, and, indeed, in the farming area, what we did recently with respect to the acquisition by Cargill of Continental.
These are critical matters, although they were a small portion of the vast amount of wealth creation and merger activity we see in the United States. In addition, on the global front, as several members have indicated, we have made real progress working effectively in international cartel enforcement. The Attorney General and I commissioned an independent advisory committee, 12 distinguished Americans working on a bipartisan basis.
Mr. Rill, who is President Bush's head of the Antitrust Division, is here today to testify about it. It is a thoughtful, significant report. The Department and the Division are now allies again.
Finally, let me just take a second, because sometimes we don't fully grasp what the real world of antitrust enforcement is about. Sometimes, a picture really is worth a thousand words. We have had an incredibly important international cartel enforcement program leading last year alone to over a billion dollars in fines—three major European companies, Hofmann-LaRoche, BASF, and Rhone-Poulanc, household names in Europe, engaged in a massive vitamin conspiracy ripping off billions of dollars from U.S. purchasers as a result of this.
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Yes, you still see commentators write in serious newspapers that, ''These are figmentary crimes. Information exchanges between consenting adults.'' In one case, we had a cooperating witness who actually took hundreds of hours of pictures of these cartel meetings.
With the chairman and the committee's indulgence, I would like to take a few minutes simply to walk you through what the real world of cartels is about. This has nothing to do with consenting adults exchanging information. This is theft—out-and-out theft. The brazen nature of it, high-level executives of household names—in this case, we are dealing with Archer Daniels Midland, as well as several co-conspirators in Asia and in Europe.
Can we go to the tapes, please?
We are going to first see a meeting. This is an actual cartel meeting conducted at a meeting of their purchasers, that is, the people who buy from them.
[Film shown.]
Mr. KLEIN. These are people arriving at the meeting. They come in in staggered fashion so that they won't be discovered. They are here at a meeting of their purchasers. These are their customers.
They are laughing. Why aren't our customers at this meeting? One from the FBI is missing at this meeting.
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Here they are sitting there fixing prices, allocating markets, knowing that what they are doing is illegal, creating false agendas as if it were a real meeting and laughing about the fact that these empty chairs should be filled by the FBI and the FTC.
Now, it is most amazing that, the event at the end, someone doesn't knock on the door and one of these folks says. This must be someone from the FBI.
It was, indeed, an FBI agent dressed as a hotel employee, coming there to give our cooperating witness an additional recorder that he had left out. [Laughter.]
Then I want to take 1 minute. One last segment.
This actually shows you setting prices to the penny. We were talking about farmers. We all know the plight of America's farmers.
This right now is a product they buy. These people are setting the price to the penny so that they're going to hurt the farmers in the cost of this feed product that farmers need.
[Film shown.]
Mr. KLEIN. Now the final segment, perhaps in some respects the most shocking we could have. This is a discussion by a very high-ranking official of the Archer Daniels Midland Company talking about their company philosophy.
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[Film shown.]
Mr. KLEIN. Again, these are people sitting there saying. Our customers are going to play us off against each other. We have to hold the line. The Senior Vice President from Archer Daniels Midland said in another tape they have, ''A corporate slogan that penetrates the whole company.'' Our competitors are our friends. Our customers are the enemy. This from Archer Daniels Midland, which bills itself as the supermarket to the world.
In this prosecution, Mr. Chairman, we got guilty pleas from five corporations—ADM, two European, and two Korean—guilty pleas from three individuals, and convictions at trial with 2-year sentences for three people from Archer Daniels Midland. In total, the corporate fines were over $120 million. Individual fines came close to a million dollars.
So, I think it is very important that people understand the real facts. This gives us an opportunity to see the way business is done behind closed doors by these companies, even knowing the risks they face.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Klein follows:]
PREPARED STATEMENT OF JOEL KLEIN, ASSISTANT ATTORNEY GENERAL, ANTITRUST DIVISION, DEPARTMENT OF JUSTICE
Good morning, Mr. Chairman and members of the Committee. It is a pleasure for me to appear again before you today on behalf of the Antitrust Division of the Department of Justice. I would like to say a few words about the current environment in which we enforce the antitrust laws, and then highlight some of our recent enforcement initiatives.
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As members of this Committee appreciate, sound antitrust enforcement is vital to America's economic health. Competition is the cornerstone of this country's economic foundation. American consumers and businesses all benefit from the kind of robust free-market economy that antitrust enforcement promotes and protects. Effective antitrust enforcement helps consumers obtain more innovative, high-quality goods and services at lower prices, and enhances the competitiveness of American businesses in the global marketplace by promoting healthy rivalry, encouraging efficiency, and ensuring a full measure of opportunity for all competitors.
Antitrust enforcement has rightly enjoyed substantial bipartisan support through the years, and we appreciate the active interest and strong support this Committee has shown toward our law enforcement mission.
Our economy is in the midst of dramatic changes, with increased globalization and rapid technological innovation, and deregulation creating an environment in which many firms are choosing to merge or undertake other types of strategic business alliances. While most of these arrangements foster efficiency to the benefit of consumers and businesses alike, some can result in market power that decreases competition. That is why we must look at these arrangements carefully, so that we can take appropriate steps to protect American consumers and businesses from those that threaten competition.
RESPONDING TO CURRENT CHALLENGES
Before I turn to some of our recent enforcement actions, let me talk for a minute about what the changes in the marketplace mean for antitrust enforcement, and how we are responding.
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Globalization of Markets
We are responding to the fact that we live in a global marketplace. Our legal authority under the antitrust laws reaches anticompetitive conduct that takes place off U.S. soil if it has significant effects here, as reaffirmed most recently in the Nippon Paper Industries Co. case. But to help us make effective use of that authority to protect competition in U.S. markets against conduct taking place abroad, we have negotiated numerous mutual assistance agreements with our foreign counterparts. One agreement, negotiated with Australia under the International Antitrust Enforcement Assistance Act of 1994, allows us to share certain confidential information under appropriate protections.
There are an increasing number of mergers that cross international boundaries and are subject to review by more than one country's antitrust authority. To minimize the burden of multi-jurisdictional review on merging parties, and the conflicts that can result from differing conclusions regarding a merger, we have worked hard to cultivate good relations with foreign enforcers so that we understand each other's merger enforcement policies and practices, and to coordinate where it makes sense, bearing in mind each country's sovereign right to conduct its own review of mergers that impact its markets. We learned some valuable lessons from the Boeing/McDonnell-Douglas merger, where the FTC and the EC reached differing conclusions. I believe the more recent MCI/WorldCom and Dresser/Halliburton mergers are a good model for how close consultation in international merger enforcement can and should work. The parties agreed to waive confidentiality, enabling us and the EC to share our independent analyses as they evolved, and we ultimately reached essentially the same conclusions. We've formed a US–EU merger working group, along with the FTC, to build on our experiences in these cases.
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At times, due to jurisdictional and practical limitations, it may make more sense, if a foreign country's markets are most directly affected, for the antitrust authority in that country to investigate a matter in the first instance. To that end, we have included so-called ''positive comity'' provisions in bilateral cooperation agreements with several of our major trading partners, including the European Union, Canada, Japan, Israel, and Brazil—as well as in a special enhanced positive comity agreement with the EU. Our one formal positive comity experience to date—the referral to the European Commission of possible anticompetitive conduct by several European airlines with respect to computer reservation systems—has thus far been successful. In all such agreements, the U.S., of course, retains its sovereign right to undertake antitrust actions under its own laws.
Rapid Technological Change
We have also responded to the challenges posed by the rapid technological advances evidenced in many industries. We spend significant time and energy developing the expertise needed to understand the competitive impact of the new technology. We are mindful that technological change can bring industries previously considered separate and distinct into the same competitive marketplace.
And we critically evaluate the increasingly frequent claim by the parties we are investigating, that technology is changing their industry so rapidly that we should not be concerned. We know, however, that in some cases rapid technological change can actually increase barriers to entry through network externalities and first mover advantages that may cause the market to tip quickly toward a dominant supplier and thereby make new entry extremely difficult.
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The more important that innovation becomes to society, the more important it is to preserve economic incentives to innovate. Timely and effective antitrust enforcement may be essential to preserving the kind of environment in which companies new and old, large and small, can be confident that there will be no anticompetitive barriers to bringing their new products and services to market.
Deregulation and the Introduction of Competition
In recent decades, legislative and regulatory changes in the United States have reversed a generation of pervasive government regulation and deregulated such basic industries as telecommunications, energy, financial services, and transportation. As competition displaces regulation as the industry norm, antitrust enforcement becomes important to ensuring that the procompetitive goals of deregulation can be achieved. In telecommunications, we are seeing the effects of the 1996 Act unfold. When successfully implemented, that Act will significantly restructure the industry and bring enormous competitive benefits to consumers and the economy; but bringing competition to segments of an industry in which regulated monopolies have long held sway will not be fully accomplished overnight. In addition the role we play in advising the Federal Communications Commission on section 271 long-distance entry applications, helping to ensure that the local market is open to competition before long distance entry is granted, we are also paying close attention to mergers and alliances being undertaken in response to deregulation, to ensure that competition is able to spread and flourish.
For example, we challenged the proposed acquisition by Primestar, a joint venture controlled by five of the largest cable companies in the U.S., of the direct broadcast satellite assets of News Corp. and MCI, because we were concerned that it would allow those cable companies to prolong their monopoly in multi-channel video programming distribution. The assets in question included a satellite at the last orbital slot available to independent DBS firms for reaching the entire continental U.S., and allowing it to be transferred to the dominant cable companies would have eliminated one of the most important avenues of new competition to cable. In the face of our challenge, Primestar abandoned the acquisition.
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The electric power industry is beginning to follow a similar path from regulation to competition, and we and others in the Administration look forward to working with Congress to ensure that regulatory restructuring at the federal level is consistent with fundamental competitive principles, and that competition is protected and nurtured as restructuring in the industry proceeds.
RECENT ENFORCEMENT INITIATIVES
I would now like to highlight a few of our important enforcement initiatives over the past year or so, first in criminal enforcement, then in merger enforcement, and finally in civil non-merger enforcement.
Criminal Enforcement
In the area of criminal enforcement, we are continuing to move forcefully against hard-core antitrust violations such as price-fixing and market allocation. In the past few years, a significant number of our prosecutions have been against international price-fixing cartels that have directly impacted substantial volumes of U.S. commerce. We have found that many of these international price-fixing cartels were highly sophisticated, involved leading firms in the industry, and affected a wide variety of goods sold to business and individual consumers. They are also often particularly brazen.
The past fiscal year set yet another new record in terms of criminal antitrust fines secured, on top of several previous record-breaking years—a total of $1.1 billion. One single fine, the $500 million fine against Swiss pharmaceutical giant F. Hoffman La Roche in relation to the international vitamin cartel, was the largest criminal fine in the entire history of the Department of Justice, antitrust or otherwise.
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You should not presume that we will continue breaking records every year. The order of magnitude of criminal antitrust fines since FY 1997 is unprecedented—in the previous decade, they averaged $29 million annually, and that average was itself higher than previous periods. In fact, the amount of fines obtained since FY 1997 is many multiples higher than the sum total of all criminal fines imposed previously for violations of the Sherman Act, dating all the way back to the Act's inception in 1890. The FY 1999 record was itself an almost four-fold leap over the record set the previous year. But the recent fine levels are a direct result of our sustained effort to crack not just domestic price-fixing schemes, but also to focus our resources on the biggest international cartels that victimize American consumers and businesses, to bring the violators to justice, and to send a strong deterrent message throughout the world—an effort that we will continue.
International cartels typically pose an even greater threat to American businesses and consumers than domestic conspiracies, because they tend to be extremely broad in geographic scope and amount of commerce affected, as well as highly sophisticated, characterized by precise and elaborate agreements among the conspirators to carve up the world market by allocating sales volumes among themselves and agreeing on what prices would be charged to customers around the world, including in the United States.
International cartels victimize a broad spectrum of U.S. commerce, costing American businesses and consumers hundreds of millions of dollars a year.
The record-setting fine I mentioned a minute ago resulted from a major investigation into an international cartel organized to fix prices and allocate market shares for vitamins. The conspiracy affected $5 billion in U.S. commerce, involving vitamins used not only as nutritional supplements and food additives, but also as important additives in animal feed; it may well be the most harmful conspiracy we have ever uncovered. The victims who purchased directly from the cartel members included companies with household names such as General Mills, Kellogg, Coca-Cola, Tyson Foods, and Proctor and Gamble. As a result, for nearly a decade, every American consumer—anyone who took a vitamin, drank a glass of milk, had a bowl of cereal, or ate a steak—ended up paying more so that the conspirators could reap hundreds of millions of dollars in additional, ill-gotten revenues.
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Last May, two firms, F. Hoffmann-La Roche and a German firm, BASF Aktiengesellschaft, agreed to plead guilty, with Hoffman-La Roche to pay a fine of $500 million and BASF to pay a fine of $225 million. These prosecutions are part of an ongoing investigation of the worldwide vitamin industry in which there have been 18 prosecutions to date. It has resulted thus far in convictions against Swiss, German, Canadian, and Japanese firms, with over $875 million in criminal fines against the corporate defendants, and in convictions against eleven American and foreign executives who are now serving time in federal prison or awaiting potential jail sentences along with heavy fines.
Other industries where we have brought major criminal prosecutions recently, in addition to vitamins, include: graphite electrodes used in electric arc furnaces in steel mills to melt scrap steel; sorbates used as chemical preservatives to prevent mold in cheese, baked goods, and other food products; marine construction and transportation services; point-of-purchase display materials such as plastic and neon signs; the livestock feed additive lysine; citric acid; the industrial cleaner sodium gluconate; commercial explosives; real estate foreclosure auctions; and metal buildings insulation.
International enforcement of our criminal antitrust laws is a top priority of the Antitrust Division. At present, more than 35 sitting U.S. antitrust grand juries are looking into suspected international cartel activity. We are determined that international cartels not be permitted to prey on American businesses and consumers with impunity. An equally important goal is to ensure that every business person around the world who contemplates price-fixing behavior that could adversely impact American businesses and consumers will choose to forgo such illegal activity because of concern that we will find out about it and prosecute to the full extent of the law. Our efforts to achieve that goal will continue unabated this year and for years to come.
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Merger Enforcement
We are in the midst of a continuing merger wave throughout our economy. A record $1.4 trillion in U.S. merger transactions took place in 1999. In each of the last two fiscal years, more than 4600 transactions were reported to us under the Hart-Scott-Rodino Act, the most in our history, and more than double the number being filed per year just a few years ago. And mergers are continuing at a record pace.
We have devoted tremendous energy to staying on top of this merger wave, so that we can challenge the mergers that would harm competition while minimizing any delays and disruptions in competitively beneficial or benign business combinations, which constitute the overwhelming majority.
In the last fiscal year, we brought 47 merger challenges, the highest level of merger enforcement in our history. So far this fiscal year, we have brought 16 more. While most of our merger challenges have been resolved by consent decrees, we have not hesitated to seek to block transactions in their entirety when necessary to preserve competition. Both the Lockheed Martin/ Northrop Grumman and the Primestar transactions were abandoned after we filed complaints and were well into discovery, and parties have abandoned other transactions, such as Monsanto/ Delta & Pine Land, after learning of our intention to sue. Since July 1, 1997, we have gone to court ten times to full-stop block merger transactions; and on seven other occasions we have been prepared to go to court to full-stop block a merger, but the parties abandoned the transaction prior to our filing a lawsuit.
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Our important merger enforcement actions of the past year include the Cargill/ Continental Grain merger, where we insisted on divestitures in a number of grain storage facilities throughout the Midwest and in the West, as well as in the Texas Gulf, to protect competitive options for grain and soybean producers and to protect competition in the delivery points for the corn and soybean futures markets. This was a particularly important case in that it demonstrates that antitrust enforcement is concerned not only with market power in the possession of sellers, but so-called ''monopsony'' power in the possession of buyers. In this case, the concerns that led to our challenge had to do entirely with the creation of monopsony power in the mergers firm as buyers of grain and soybeans.
In addition to Cargill/Continental and Primestar, other recent merger challenges include:
Lockheed/Northrop Grumman, where the merger would have resulted in unprecedented vertical and horizontal concentration in the defense industry, substantially lessening and in some cases outright eliminating competition in major product markets critical to our national defense. In the face of our challenge, the parties abandoned the merger.
Northwest/Continental, where the proposed transaction would allow Northwest to acquire voting control over Continental, substantially diminishing the incentives for the two airlines—the nation's fourth and fifth largest—to compete against each other. This case is pending and is currently scheduled for trial in October.
Monsanto/DeKalb Genetics, where the merger as proposed would have substantially lessened competition in biotechnological innovation in corn. Monsanto agreed to spin off claims to an important cutting-edge technology used to introduce new genetic traits into corn seed, and to license its proprietary Holden's corn germplasm, to numerous seed companies so they could develop their own special hybrids.
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While we have worked hard to keep top of the merger wave, we have also worked hard to strike the correct balance in merger reviews between our need for information about the industry and the merger and the parties' desire to quickly complete their transaction. Last Thursday, we announced a set of improvements to our procedure for requesting additional information—so-called ''second requests''—under the Hart-Scott-Rodino Act. (The Federal Trade Commission announced similar measures earlier in the week.)
Centralized high-level review of second requests prior to issuance.
Early conferences with the merging parties to identify competitive issues.
Quick turn-around of requests for modifications of a second request.
New procedures for appealing second request issues.
''Best practices'' for second request procedures.
Specialized staff training on second request investigations.
Ongoing consultation with the business community and the private bar to identify further possible means of easing merger review.
We appreciate the assistance of members of this Committee, particularly Chairman Hyde, Congressman Conyers, Congressman Rogan, and Congressman Delahunt, in helping with the development of these proposals.
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Civil Non-merger Enforcement
Civil non-merger enforcement has become especially important in this era of rapid technological change and the growth of network industries, and we have also been very active in this area to ensure that antitrust enforcement keeps up with these changes to protect competition in a variety of industries important to our economy.
Perhaps our best-known recent civil non-merger case is our pending case against Microsoft under sections 1 and 2 of the Sherman Act. Two years ago, we brought suit challenging Microsoft's widespread abuse of its monopoly power in the market for personal computer operating systems and its attempt to extend its monopoly power into the Internet browser market. Last week, after a 78-day trial and review of thousands of pages of Microsoft's own documents, the federal district court ruled that Microsoft's conduct violated the Sherman Act as we alleged. After reviewing the extensive evidence regarding Microsoft's actions, the court concluded:
[O]nly when the separate categories of conduct are viewed, as they should be, as a single, well-coordinated course of action does the full extent of the violence that Microsoft has done to the competitive process reveal itself. In essence, Microsoft mounted a deliberate assault upon entrepreneurial efforts that, left to rise or fall on their own merits, could well have enabled the introduction of competition into the market for Intel-compatible PC operating systems. While the evidence does not prove that they would have succeeded absent Microsoft's actions, it does reveal that Microsoft placed an oppressive thumb on the scale of competitive fortune, thereby effectively guaranteeing its continued dominance in the relevant market. More broadly, Microsoft's anticompetitive actions trammeled the competitive process through which the computer software industry generally stimulates innovation and conduces to the optimum benefit of consumers. (Citations omitted).
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The court has ordered the Department to submit its recommendation regarding appropriate relief by April 28, 2000, and it has set the matter for hearing on May 24, 2000. While we are committed to seeking relief that will stimulate competition, innovation, and consumer choice in this important market, we have not made a final decision regarding the relief that we will recommend to the court.
Let me turn briefly to a few of our other important civil non-merger cases. First let me say a few words about our pending case against American Airlines under section 2 of the Sherman Act for monopolizing airline passenger service on routes emanating from its hub at Dallas/Ft. Worth International Airport. As the complaint we filed sets forth in detail, American repeatedly sought to drive small, start-up airlines out of DFW by saturating their routes with additional flights and cut-rate fares. After it succeeded in driving out the new entrant, American would re-establish high fares and reduce service. Passenger traffic surged when the low-cost airline began operations and more people could afford to fly, and then fell back dramatically after American had driven out the upstart and resumed monopoly pricing. American knew this strategy was a money-loser in the short term, but expected to make that up by preserving its ability to set fares at monopoly levels.
American, like anyone else in our capitalist economy, is free to compete, and compete aggressively. But it crossed a fundamental line into predation. This is the first predation case brought against an airline by the Antitrust Division since the industry was deregulated in 1979. I think it will be tremendously important for our traveling public throughout the country, who deserve the lower fares and expanded choices available in a competitive airline marketplace.
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Our case against VISA/MasterCard is also an important civil non-merger enforcement action. We are charging VISA and MasterCard, the two dominant general purpose credit card networks, with restraining competition among themselves through overlapping governance arrangements among the large banks that own and control them, as well as adopting rules to prevent their member banks from dealing with other credit card networks. The result is that competition and innovation are severely impaired. This case is also pending, and trial is expected this summer.
The final civil non-merger case I'll mention is our case against Dentsply International for unlawfully maintaining a monopoly in the market for artificial teeth in the U.S. Dentsply entered into restrictive dealing arrangements with more than 80 percent of the nation's tooth distributors, preventing them from selling products made by its competitors. Dentsply's efforts to deprive its rivals of an effective distribution network have resulted in increased prices for artificial teeth; they have reduced innovation; they have prevented other firms from competing effectively; and they have deterred new entry into the market. Trial in this case is expected sometime this year.
ANTITRUST DIVISION BUDGET AND STAFFING
As you can see, our workload is expanding, its complexity is increasing, and its importance to American businesses and consumers has never been greater. To continue to effectively carry out our mission, we need increased resources.
For the current Fiscal Year, the Antitrust Division's budget is $110 million, providing for an appropriated staffing level of approximately 360 attorneys. In light of our tremendous ongoing workload and its projected expansion, the President's FY 2001 budget request for the Antitrust Division is $134 million, which includes increases to handle cost-of-living expenses as well as to hire additional attorneys, economists, paralegals, economic research assistants, and other critical support. This increase is needed in light of our increasing workload and the clear importance of competition to the nation's economic health and prosperity. It will for the first time in 20 years enable us to bring our staffing level back up to where it was in 1980, a time when the economy was significantly smaller, less complex, and less globalized. I can assure you that we will put the additional resources to productive and cost-effective use.
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Let me mention something that was included in the President's Budget for the Federal Trade Commission, but also affects our funding. That is a proposed change in the reporting thresholds and filing fee structure for mergers reviewed under the Hart-Scott-Rodino Act. We believe it makes sense to revise the HSR filing fee threshold structure to account for inflation and economic growth since the HSR Act was enacted in 1976. Last week, members of this Committee introduced a very similar proposal, H.R. 4194. Raising the HSR thresholds responsibly, while ensuring the effectiveness of the premerger review program and ensuring that adequate antitrust funding exists, as this legislation does, is good for consumers, businesses, and the American economy.
CONCLUSION
The Supreme Court has described the Sherman Act as the ''Magna Carta'' of the free enterprise system. The responsibility we are given to enforce it is one we take very seriously. We are working hard to carry out our enforcement mission to protect competition in the marketplace against private efforts to thwart it. We are not in the business of picking winners and losers. In a free market economy, that responsibility falls to consumers, who make that determination through their purchasing decisions. The job of the antitrust enforcement is to ensure that the benefits of the competitive process are not blocked by private anticompetitive conduct. We look forward to meeting the ongoing challenge to ensure that businesses can compete on a level playing field and that consumers and businesses are benefited by competition that produces low prices, high quality, and innovative goods and services.
Mr. HYDE. Thank you, Mr. Klein. Mr. Conyers.
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Mr. CONYERS. I want to thank you both for your statements.
I have three areas that I want to deal with—flat glass, the Smith & Wesson developments, and our high-tech field. But, the first one is the assertion that has been made that, because we have so many growing mergers and combinations, that that is an indication of the health and vitality of the economy, and therefore this is good because of the global implications.
Now, if this continues—and it has for the last decade—I see some problems developing here. That is the good side of the picture—is that we have a robust international economy. But, the downside is that we aren't going to have—Everything will be so large there will be no way for anybody to get in the picture.
I would hope that the two leading antitrust leaders of our Nation are concerned about the aggregate impact of antitrust on all business competition and consumer benefits. Can you comment on the underside of this problem at the rate it is going, please?
Mr. PITOFSKY. Let me start. I certainly agree with you, Mr. Conyers.
There are two sides to this. One is that all this activity is a symptom of an extremely dynamic economy. As a result, there are many small deals that involve companies entering the market through acquisition, becoming more efficient, and so forth. But, there is a trend of mega-mergers at the top of the market that I don't think we have seen all that often in the past. It used to be in the typical merger that number seven in a market was merging with number five in order to become number three and compete more effectively with the leaders.
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We see now far more instances in which numbers one and three are merging, or two and three are merging in transactions of unprecedented size. It's those deals that we try to keep our eye on. We investigate them thoroughly. For example, you have, in the oil industry, or you had, a fairly deconcentrated market. But, now, we have seen four mergers among major oil companies, each one of which we have investigated.
Three of them we required restructuring before we let the deal go through. The fourth is presently in litigation. Maybe we can settle it. I think we can on terms that will protect consumers. That is just one industry, but there are other industries like that, where, at the top of the market, we see consolidation among very large firms, which should be a matter of concern. The notion that there is a dynamic economy doesn't answer the question of whether we should address those issues.
Mr. CONYERS. Thank you. Mr. Klein.
Mr. KLEIN. I fundamentally agree that we need to be careful in looking at mega-mergers. I do think that is hard work and why the Division is stretched in the way it is, because we are looking at some critical mega-mergers. But, I don't come to those with any a priori notion that they are necessarily going to be pro-competitive or anti-competitive.
I think you have to look clearly and closely at the facts. Obviously, when you're dealing with the mergers that are 50 or 75 or $100 billion, the implications are significantly different from those that are $20 million or $30 million, and concomitantly will get a different focus of attention.
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But, I do think the good work that both agencies do is to do the hard, factual work, to talk to customers and see what they think about the implications of the merger, to look at the parties' documents, to look at the people who are upstream and downstream from the market and the parties to do the analysis. I believe that, in fact, the balance that has been struck at the Commission and at the Justice Department reflects a healthy, pro-competitive balance.
Mr. CONYERS. You are not letting the advertising wars that are now going on around your work influence you or compromise your positions on these matters, I hope?
We are seeing—we are talking about ads—I can't remember this happening before—where there is a wholesale advertising campaign going on completely apart from the legal battles that I think is an incredible situation.
I add to the fact that, because you are not funded at the full level to cover these increased activities, this puts additional pressure on everybody in your organizations to try to keep up to the level of inquiry, since you are on a time-certain to pass on these increasingly large and complex matters.
So, both of those concerns are at the front of my list of things we have to watch out for.
Let me ask you about the Japan flat glass measure. You know, we have been trying to get something going in terms of cooperation agreements. I understand there is an evidentiary problem. What can we do to speed this situation along?
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There is, to me, an entrenched flat glass cartel that is blocking market access to U.S. firms. Can there be any doubt about that?
Mr. KLEIN. We have, Mr. Conyers, been meeting, actually, with members of the industry. I think they will say that on a repeated basis to get together the evidence. In our business, it is critical, even if you think you know what is going on in a market, to have the evidence.
Mr. CONYERS. Absolutely.
Mr. KLEIN. We have raised the issue with the Japan Fair Trade Commission on a number of occasions. I have committed significant staff to working with members of the flat glass industry in the United States whom I think have engaged in the process with us in a positive, constructive, and, I hope they believe, a mutually rewarding way. That process is continuing to go forward and will continue to have my personal attention.
Mr. CONYERS. Is the Smith & Wesson agreement creating any problems that require you to investigate into the practice of other gun manufacturers?
I've got a letter to the Attorney General that is asking that that be looked into. Where are you on that?
Mr. PITOFSKY. Mr. Conyers, there was a report in the press that the FTC was going to take a look at that. It is an ongoing investigation, and, as you know, I really can't comment on it except to make a commitment to you that we are very serious about our enforcement against boycotts, if there is a boycott.
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We have a record of doing that in other areas. I would certainly expect to take a very careful look at these allegations.
Mr. CONYERS. Thank you very much.
Mr. HYDE. The gentleman from Pennsylvania, Mr. Gekas.
Mr. GEKAS. Thank you, Mr. Chairman. I have been puzzled by what it was that spurred the Justice Department to move against Microsoft. Throughout the time that I have been serving in Congress, I have received, on several issues, something like 15,000 complaints from consumer on one issue, 10,000 on another, 2500. I didn't receive, I don't think, five or six individual—maybe none—no complaints about Microsoft from the consumer segment in my area.
So, I have to conclude that, unless I am isolated totally—and some will say that I am—that this was not brought about by a rash of consumer complaints—in the Justice Department, hundreds of thousands of consumer complaints about Microsoft.
That is one question that I have. What was the impulse that brought it about? Secondly, was it the competition that felt that it could compete with Microsoft, and therefore was not able to compete, and therefore wanted the Justice Department to intervene? Or, was it a, one-on-one, the Justice Department decided—it looked at Microsoft and said there is a target?
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I would like you to disabuse me of my notions and then to abuse me with some answers.
Mr. KLEIN. I'd be delighted, Mr. Gekas. Let me tell you exactly what the basis for our action was. It was a lengthy investigation. We have access to confidential information. People have come forward to the Department who request confidentiality. We did an extensive investigation in this matter before filing.
We subpoenaed many, many Microsoft documents which were critical in our evaluation of the facts in the case—documents about the competitive issues that we thought raised concerns. We took lengthy testimony, and not just from Microsoft competitors; from people who purchased from Microsoft, from large corporations. There was testimony in the trial from the Boeing Corporation about their concerns with these issues.
Mr. GEKAS. They filed complaints with the Justice Department which spurred your investigation?
Mr. KLEIN. I won't identify individuals who filed complaints, but we did have complaints, surely, and that affected our investigation.
Let me be clear, Mr. Gekas. Right before this, we did a lengthy investigation about Microsoft involving MSN—they are Microsoft online services—and questions about that. The Department chose not to pursue that case. We did not sue Microsoft.
Ours is a very careful fact-based analysis, and, of course, the proof of that is we have to take it to court. We had a 78-day trial in this case, where the court heard literally days and days of testimony from a wide variety of people, including customers as well, as people who were in the computer manufacturing business who had to depend upon Microsoft.
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All of that is documented in the courts—literally 208-page findings of fact. I think those findings establish relying largely, frankly, on Microsoft's own internal documents. Those findings establish what I view as classic antitrust violations—exclusionary contracts, a tying of products together, predatory expenditures—that is, expenditures whose only purpose was to increase barriers to entry. I think in that sense it is a question of the facts and the law.
I want to assure you personally that, to me, every case is a question of the facts and the law. We don't single out companies for target. We don't look at any of the other considerations that might be influencing how people in other arenas think about it. Ours is the facts and the law.
Mr. GEKAS. The other thing I want to ascertain, which I think you have asserted, is that this was upon complaint that the investigation was launched. Is that correct?
Mr. KLEIN. There were a variety of complaints.
Mr. GEKAS. Over a period of years?
Mr. KLEIN. With respect to Microsoft, over a period of years.
We have had a large variety of complaints. This particular case, one of the trigger factors was the complaint by Netscape, which has been said publicly the browser company. But, we don't act because we get a complaint. We have other complaints on other matters involving Microsoft. We act because we investigate, and there are lots of cases where we will do an investigation without a complainant.
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Mr. GEKAS. I thought maybe that this was one of them that you might have investigated without complaint.
Mr. KLEIN. No, we did get complaints.
Mr. GEKAS. How do you investigate without complaint?
Mr. KLEIN. We investigate based on facts we may discern in the market, based on stories, based on statements that a company makes. Basically, if we find a trigger that raises the appropriate kinds of concerns, we will then proceed. We may call the company and simply ask several questions and find out if there is a basis to go forward.
Mr. GEKAS. I yield back the balance of my non-time.
Mr. HYDE. The gentleman from California, Mr. Berman.
Mr. BERMAN. Thank you, Mr. Chairman. I would like to explore three areas—one to Mr. Klein and two to Mr. Pitofsky.
Mr. Klein, on this Microsoft matter, what happens now in the context of remedies? What is the relationship between the Justice Department and the State attorneys general? Was the initial action filed by the U.S. and the States, or was this a consolidation of a number of actions? At this particular point, how does strategy of the plaintiffs work in that sense?
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Mr. KLEIN. The action was filed jointly by the United States and 19 attorneys general. Actually, it was 20 and then one dropped. I think we have worked effectively and well together in the process. As may happen on occasion, their views were not always identical to ours, but we have always tried to minimize differences in respect to the litigation.
We are now at a point where the District Court has ordered the submission of remedies with respect to the violations that the court has now concluded existed. We will work with our colleagues from the States, hoping to submit a single remedial proposal when, obviously, they have their independent sovereign rights and the United States has its independent sovereign rights.
So, one can't guarantee an outcome, but we are certainly going to work hard, and we have had an effective working relationship.
Mr. BERMAN. Chairman Pitofsky, I am curious about the relationship of patents and the combination of patents in a particular area and the antitrust implications.
You have, in a sense, two goals here that are somewhat contrary. The whole concept of the Constitutionally mandated or authorized patents is to give the holder of that patent control over that which is patented. This comes up in the context, particularly, of a matter involving VISX, where there was a proposed merger of two different patent-holders, VISX and Summit.
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I take it the FTC looked at it and said no, that would constitute a conglomeration of power and would not be appropriate. That was set aside, but, then, the FTC pursued, with respect to VISX, an issue which seems—and I say this as ranking member of the Intellectual Property Subcommittee—seemed like a Patent Office kind of issue. That is the question of whether or not prior art was concealed.
What is the justification for not leaving that to re-examination in the Patent Office and litigation between impacted parties, but, instead, taking that particular issue, concealment of prior art, and viewing that as an area appropriate for your jurisdiction?
Mr. PITOFSKY. Mr. Berman, first of all, let me say that the general issue you raise is the most important and the issues that arise are the toughest that we are going to face in future years—that is, intersection between antitrust and intellectual property, especially as the economy moves more and more in the direction of intellectual property.
It is a tough call. Under the patent laws, companies receive ''monopolies'' in order to encourage their incentives to engage in research and development, to create incentives to innovate. On the other hand, under the antitrust laws, you don't want to see abuses of market power. In the VISX case, the first part of it, which we settled, was not exactly a merger. It was a cross-license between two companies that had a very special kind of technology. They argued that each wouldn't charge less than a certain price. We brought that case. The companies settled, and we eliminated that term in the transaction.
The other part of it had to do with whether or not one of the key patents that one of the parties held had been obtained through fraud on the Patent Office. That is a rare but traditional form of antitrust enforcement involving an attempt to monopolize. We pursued the second part of the case and eventually came to a conclusion, partly on the basis of what we learned from the Patent Office, that it didn't look like there had been provable fraud on the Patent Office. We withdrew that part of the case. But, the specific answer to your question is that there are Supreme Court cases that say that obtaining patents by fraud on the Patent Office can be an attempt to monopolize.
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Mr. HYDE. The gentleman's time has expired. Mr. Chabot, the gentleman from Ohio.
Mr. CHABOT. Thank you, Mr. Chairman. Mr. Klein, my question also has to do with Microsoft.
Press reports have indicated that the 19 States involved in bringing antitrust lawsuits against Microsoft and the Department of Justice are of two minds in seeking settlement in that case. Some AGs are on the record supporting a conduct remedy, while others say that they will only accept a break-up of the company.
What are the chances that these differences can be ironed out so that the parties can return to the table and come up with some sort of productive resolution of this very complicated and very significant issue, both of the law and our overall economy?
Mr. KLEIN. I would say two things in that regard, Mr. Chabot.
First, let me make clear, from my part and on behalf of the Antitrust Division, we have said and believe that a good and effective settlement is always preferable to ongoing litigation. We are committed to that and I think engaged in the mediation process on that basis, and would be prepared to do so again. But, I want to emphasize. I believe it's got to be a settlement that addresses the issues in the courts' findings of fact and conclusions of law.
I would also hope that, if such a process were underway, we would continue to work with our colleagues from the States and develop, to the extent possible, a unified position. I think, obviously, that would be something that we would seek to accomplish.
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Mr. CHABOT. Thank you. The primary allegation made in any antitrust case is that the offending company has stifled competition and ultimately hurt consumers. However, just in the relatively short space of time since you filed your lawsuit against Microsoft, there has been an amazing growth in the whole high-tech industry accompanied by intense competition.
Lynux, the new, free-operating system, for example, is the second most widely used system with 25 percent of the server market. Palm, the company that makes the Palm Pilot, holds over 70 percent of the new and rapidly growing hand-held computer market, including devices that access the Internet. We can also now access the Internet from our cell phones. In fact, one only has to look at this room and many of the other committee rooms that we now have here in the Rayburn Building to see how prevalent these new technologies have become.
Now, Mr. Klein, this all looks like rather amazing innovation and competition to me and other members of the panel, I am sure. So, I ask is the high-tech industry dynamic and competitive or not, and has the consumer really been irreparably harmed by Microsoft, in your view?
Mr. KLEIN. I would answer your question in this way, Mr. Chabot.
There is no question that the high-tech industry—and, indeed, the computing industry, generally—is enormously dynamic. But, what one needs to do, I think, with a rather careful surgical intervention, is to make sure that there are not bottlenecks even in a dynamic, general industry, bottlenecks that can hurt consumers.
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The very issues you are talking about were litigated for 78 days in Federal Court—all the facts that you just raised and many, many others. The Federal judge, in his ruling, actually detailed the harm to consumers.
For example, he references pressuring Intel to drop the development of a product and otherwise to cut back Intel, a major company—to cut back on software development. Microsoft, the court found, deprived consumers of software innovation that they may well have found valuable. He goes through page after page detailing these specifics, having considered and analyzed the facts. Then, he says—and this, to me, is the core of the case—the Federal court concludes——
His last finding, most harmful of all, is the message that Microsoft's actions have conveyed. To every enterprise with the potential to innovate in the computer industry, through its conduct against Netscape, IBM, Compaq, Intel, and others, Microsoft has demonstrated that it will use its prodigious market power and immense profits to harm any firm that insists on pursuing initiatives that could intensify competition against one of Microsoft's core products.
Here is the concluding point. Microsoft's past success in hurting such companies and stifling innovation deters investment in technologies and businesses that exhibit the potential to threaten Microsoft. The ultimate result is that some innovations that would truly benefit consumers never occur for the sole reason that they do not coincide with Microsoft's self interest.
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That is what the case was about, and the fact that innovations haven't occurred, even in a highly significant innovative market, is terribly critical, not just to yesterday's, as someone suggests, but tomorrow's problems, as well.
Now, that is what the court found after, I want to assure you, all the issues of Lynux, of hand-held devices, all of this were fully discussed during the trial.
Mr. HYDE. The gentleman's time has expired. The gentlelady from California, Ms. Lofgren.
Ms. LOFGREN. Thank you, Mr. Chairman. First, thanks for this hearing, which I think is very important.
Also, I wanted to comment on the article that you included with your opening statement, that was printed in the American Bar Association. There are certainly issues on which you and I disagree, but I really would commend your article to all observers of antitrust law.
I think you just hit every good point, and I just think it is an excellent article, and thank you for it.
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64737a.eps
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Mr. HYDE. I thank the gentlelady. Thank you.
Ms. LOFGREN. Secondarily, I have carefully refrained from commenting on the Microsoft decision, because I think it is very troublesome when there is a matter that is in court and the legislative branch inserts itself into that judicial proceeding.
I note that the chairman has suggested that that should continue to be the case. I think it is good practice. However, I do think it is important to note that, in this case, the Justice Department, the Antitrust Division, did its job. Certainly, the judge, a Reagan appointee, is not known as someone who is a wild flaming liberal out to destroy the free-market system.
No one has suggested that the defendant lacked the resources to provide a defense to the government's action. So, I would just like to say I think it is important that we allow the judicial process to proceed and not attempt, any of us, to deter officers of the court from doing the job that they have been assigned to do. I think it is important that you, Mr. Klein, hear that, and I think you are hearing that from both sides of the aisle today.
Now, as to my question on the new economy, some have suggested that, because the barriers to entry into the market are so low, especially in the Internet-based businesses, that the ability to monopolize is really equally limited.
I guess the contrary view is that, because the Internet time moves so much quicker, that the ability to raise barriers actually can accelerate the ability of monopolies to exert unlawful market power. I am wondering, if you did not think about any one case but just in terms of the new economy itself, if you have a viewpoint as to how this unfolds and interrelates to the traditional antitrust laws, Mr. Klein?
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Mr. KLEIN. I think it is a very important question, Ms. Lofgren.
I think, as a general matter, there are two tendencies that we need to be observing. They are very fact-intensive tendencies. One is the dynamism and rapidity of the new economy. The metronome of this economy is really unprecedented, Moore's Law, the power of the chip doubling every 18 months, and so forth. On the other hand, the costs of what's called network effects, you may well see some real bottlenecks.
I suspect there won't be huge numbers, but I think we will see some, where essentially the imagery you want to think of is people who are interconnected and locked into a technology in a way that it will make innovative change quite difficult. I think our job and the Federal Trade Commission's job is to look at these new technologies, do the careful, factual analyses, determine whether the bottleneck is transient or permanent, or, indeed, whether there is one at all. That is going to depend on things like the strength of the network effects, the particular technologies, and so forth.
In the end, that is what trials are for, and reasonable people will have different views. But, you certainly want to go through the process of fact-finding and legal analysis in any specific case to get to the right result.
Ms. LOFGREN. I have an additional question, and I understand my colleague, Mr. Berman, pursued the issue of the interplay of patent law and antitrust enforcement.
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I do think that, given the underfunding of the Patent Office because of the diversion of fees and the absolute explosion of filings, especially in the technology area and business practice areas, that there has been concern about some patents issued and whether the utility standard has been appropriately applied. I am not talking about a fraud issue necessarily, but more of an error issue.
How is your office able to deal with patents and their interplay with monopoly power when those patents are not fraudulently issued but there's certainly question as to the applicability and how high the bar was on utility? How do you deal with that, and what is your interplay with the PTO on that subject?
Mr. KLEIN. I do believe, as Chairman Pitofsky said that, it is probably as critical and difficult an issue as we are looking at. It is not simply an antitrust issue. It is a patent issue. Indeed, it is a matter of policy. I suspect, ultimately, there will be discussions before the House and Senate on those issues. Patents or intellectually property, in general, are very important to stimulate innovation, because, in the absence of some form of intellectual property protection, you may not be able to stimulate innovation.
On the other hand, conferring such protection when it is unnecessary or it overcompensates where the innovative incentives can have a real impact—and it has been, as you say, in the business practice areas—it is very different when you think about if somebody finds a cure for a major illness. There is a different kind of set of incentives there. I think it is going to have to be looked at carefully.
We are doing an intensive study, and I expect—Inside the Division, I expect to speak on these issues after we do some more careful analysis, because it is critical that we get it right. There are legitimate competing claims that need to be sorted through.
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Mr. HYDE. The gentlelady's time has expired. The gentleman from Georgia, Mr. Barr.
Mr. BARR. Thank you, Mr. Chairman. Chairman Pitofsky, with regard to the Smith & Wesson settlement with the government, I have a few questions that I would appreciate your views on.
First, according to the settlement agreement, the marketing and sales restrictions that Smith & Wesson agreed to affect a lot more people than just Smith & Wesson. The agreement, for example, states that, if you are a downstream distributor or retailer, then you have to agree to live by the terms of the settlement as well, even though you are not a party to the bargaining or to the agreement itself.
If you don't waive your rights and agree to be bound by all of the restrictions and the prohibitions in the agreement, then you cannot sell Smith & Wesson's products. By attempting to bind downstream sellers to its terms, does not this agreement equate to an unlawful conspiracy in restraint of trade under Federal law?
Mr. PITOFSKY. Mr. Barr, I can only answer by saying that this is a matter that has only come to the attention of the enforcement authorities very recently. I simply don't want to try to predict, before we have taken a look at it, as to what the consequences of that are. It would be premature.
Mr. BARR. Are you looking at the government being in restrain of trade in that case, or are you ruling that out?
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Mr. PITOFSKY. I wouldn't rule it out, but there is a line of authority in antitrust that agreements entered into with the government are not challengeable except under very limited circumstances under the antitrust laws.
In response to your question, I wouldn't rule anything out. It is too early to rule anything out in an investigation that started so recently.
Mr. BARR. With regard to—and this follows to some extent although in an opposite direction from questions by Mr. Conyers earlier—with regard to decisions possibly being made, that have already been made, or which may be made by other firearms distributors other than Smith & Wesson, if, because, in order to purchase Smith & Wesson products, they would, under this agreement, even though they weren't party to it, have to be bound by all of the restrictions contained in the agreement between Smith & Wesson and various government entities including the Department of the Treasury and HUD, if those other distributors refused to deal with or purchase Smith & Wesson products because they simply do not want to be bound by all of the restrictions that they necessarily would be, if they did that, there is nothing in and of itself there that would constitute a violation of any Federal law; simply a purchaser of a product looking out for its self interest and not wishing to be bound by restrictions that the seller would impose on them.
Mr. PITOFSKY. I would like to answer that in a more general way, rather than discuss the facts in this particular investigation.
I think you raised a reasonable issue here. Generally speaking, in boycott matters, if each firm makes a decision in its own independent judgment as to what is best for it, which is the way you put it, typically that is not actionable behavior. That is unilateral behavior without an agreement. But, as I say, these matters are very fact-intensive. In other product areas we have inquired whether the conduct really was independent or whether the parties in some way got together and agreed upon a uniform course of conduct. In that situation, it is not necessarily illegal, either.
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The Supreme Court has backed away from automatic rules in this area, but it would raise serious issues as to whether or not this is a boycott that is anticompetitive.
Mr. BARR. And your office, I presume, would look at whether or not there is such an agreement, whether it is contained within the four corners of an agreement or outside of it.
In other words, those parties that reach an agreement, and they may have an understanding off the record that they are going to get together and pool what might be very significant purchasing power to bring pressure to bear, that would be looked at as well, would it not?
Mr. PITOFSKY. Mr. Barr, again, it is too early to rule anything out. So, if we start looking into this and it turns out that there are problems in that direction, of course we are going to look at that as well.
Mr. BARR. Shifting your attention, Mr. Chairman, briefly to another aspect of this case that is very troubling. That is government contracting and government procurement.
Would this be something that would interest either the FTC or possibly, Mr. Attorney General, the Antitrust Division, or perhaps some other component of the Department of Justice, if, in fact, the government were found to be favoring one supplier over another outside of the confines of the Competition in Contracting Act or other Federal laws that provide for free, full, open, and fair competition in government procurement?
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Mr. KLEIN. It is not a question I have thought about specifically, Mr. Barr, but I would say this. Other than in the context of debarment proceedings by a particular agency, the Justice Department has not gotten involved in procurement decisions by any agency.
Mr. BARR. Who would prosecute a violation of the Competition in Contracting Act, for example?
Mr. KLEIN. I expect it would be another part of the Justice Department, but it would not be the Antitrust Division.
Mr. BARR. And, if, in fact, there is evidence that a high government official, for example, boasted that the government maintains a very significant market position in terms of its purchase of certain items and, therefore, is going to favor certain suppliers for some reasons for noncompetitive contracting for some reason other than the exceptions in the Competition in Contracting Act, would evidence of that be looked at by the Department of Justice?
Mr. KLEIN. It is not a statute I enforce or am particularly familiar with. So, I don't think I ought to talk about what would trigger an investigation or not.
Mr. HYDE. The gentleman's time has expired. Does the gentleman need additional time?
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Mr. BARR. I would ask unanimous consent just for one additional minute, Mr. Chairman.
Mr. HYDE. Without objection.
Mr. BARR. Would that sort of issue be addressed—fall within the jurisdiction of the Department of Justice?
Mr. KLEIN. It could. I just am not sufficiently familiar. It is not an antitrust statute. We don't enforce it in my Division, so I just don't know what the triggering events, the parameters are of the statute.
But, it could well be if there were evidence, certainly, that that statute were violated. Then, I think it would be appropriate, but I just don't know what the statute requires in that regard, Mr. Barr.
Mr. BARR. Chairman Pitofsky, is that something that your Commission would look into at all, or does that fall within your jurisdiction?
Mr. PITOFSKY. We have not looked at that before. I doubt very much that that would fall within our jurisdiction.
Mr. BARR. It would probably be some component of the Department of Justice. There would have to be some enforcement mechanism.
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Mr. KLEIN. Yes.
Mr. BARR. Thank you. Thank you, Mr. Chairman.
Mr. HYDE. Thank you. The gentleman from Massachusetts, Mr. Frank.
Mr. FRANK. Thank you, Mr. Chairman. I apologize for not being at your presentation. I was wasting my time on the floor of the House dealing with this silly proposed Constitutional amendment to require a two-thirds to increase taxes, which this committee, at least, had the good sense not to deal with, so I went right back to the floor to kind of kill time, and I regret this.
My questions have to do with antitrust enforcement, particularly the role of the States. That is of some concern to me. Obviously, if we are talking about price-fixing, if we are talking about specific actions by a particular company or group of companies that have an immediate observable effect on consumers, the State role becomes clear. I worry about the role of the States from two perspectives when we are dealing with questions where it is not a more simple and straightforward case of price-fixing but cases that have an overall economic—particularly a national economic affect.
Obviously, the Justice Department is particularly well suited, and the Federal Trade Commission, to deal with issues where there is a national economic impact, because they have national economic responsibilities. The attorneys general do not. Each attorney general has jurisdiction within his or her own State.
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In particular, the Microsoft case is an example when we are dealing with a company of national impact but one which has very differential impacts State to State. In some States, there are, in fact, competitors of Microsoft and no Microsoft presence. That disturbs me. Some of my best friends have been attorneys general at the State level.
I think there are some things they do very well. It has not been my experience that attorneys general are elected primarily on their economic expertise. I have seen very few elections in which various sophisticated views of how competition affects the economy had been major issues. They have, perhaps, been sub-issues, and I, therefore, am inclined to feel that, in a situation like this, the national perspective ought to be the important one. That is compounded by what appears to be the difficulty of getting in the Microsoft case—is it 19—attorneys general to agree.
My own view is that, absent some arguments I haven't heard, I am skeptical that the attorneys general should have a major role in determining. Bringing the suit is an easier one if you can find repetitive violations. But, when we get into the remedies and when we get into the others, I worry about this, both from the practical standpoint. There is obviously real transaction costs, and judicial efficiency gets damaged if we've got to wait for 19 attorneys general to come together.
Secondly, I do feel that there is a problem when we talk about something where the fundamental issue is innovation and it is of national economic significance, and it is seen through 19 different prisms which will have, by definition, 19 different views of this.
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How do you deal with that, Mr. Attorney General?
Mr. KLEIN. Let me say—I think answer it in this way, Mr. Frank.
I think we have had a constructive good relationship with the States in this particular litigation. I think they have engaged in it professionally and constructively.
The points you raise, I think, is an important point that goes to an issue that I think is kind of beyond the enforcement of the antitrust laws and the whole question of the relationship of State and Federal enforcement efforts. So, our Federalism, as Justice Hugo Black used to call it, this raises some kind of delicate issues about State/Federal relations that go beyond strict antitrust enforcement. For our part, obviously, we are mindful of the global and national implications. We are prepared to engage both in terms of law enforcement and in terms of remediation from that perspective.
Mr. FRANK. I appreciate that. My own view is that, when we deal with the Microsoft case and similar cases where the questions are the effect—and we are going to be dealing more and more with technology and the international effects—that this clearly is a case where it seems to me that the national economic effects is important. We are all elected officials, myself and most of the attorneys general.
I would say that, if you looked at people's comments on, I would say, Microsoft, and if you tried to correlate the presence in the individual's district or State of either Microsoft or Microsoft competitor, the correlation would not be zero. That doesn't mean that we only look at that, but it is a factor. At the national level, it at least might be a factor, and I would urge this, because there are other concerns I have.
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That is, I have read about the suggestion—not just the suggestion, the fact of private lawsuits. I think, once there is the finding by the judge—I would ask for one more minute, Mr. Chairman.
Mr. HYDE. Without objection.
Mr. FRANK. Thank you. I think there obviously is a very important role for private lawsuits to enforce antitrust, where, in particular, we haven't been able——
Neither of you can do everything and even divide it up. You can't each do half of everything. So, there is a role for that. My problem is, in this case where there has been a policy finding, that Microsoft violated antitrust. I worry about private class actions where the recovery from individuals will be minimal. The rationale that we need private antitrust suits to enforce the law would seem to be unnecessary.
I mean, it is a little bit like the old Murray Kempton line, that the function of editorial writers is to come down from the hills after the battle is over and shoot the wounded. I am now skeptical as to the value of private antitrust suits now that you have through your Department already established the principle that there were antitrust violations. You are dealing with the remedies that are behavioral or structural, however that works out, and a lot of antitrust suits in which the average recovery for an individual will be $14.37.
I am somewhat skeptical. Is there any way that we can have an influence on that?
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Mr. PITOFSKY. You raise very important questions of the interplay between Federal enforcement and private antitrust. There can be problems such as the one that you described. There have also been some studies, one by Georgetown University about 10 years, that found that the kind of problem that you raise, while it does happen——
Mr. FRANK. The third part or the second one? The private antitrust or the State issue?
Mr. PITOFSKY. Private antitrust. Private enforcement is not out of control. The judges are aware of the possibility——
Mr. FRANK. Let me say I don't suggest that it is. I think it has a very important function. I only wonder, in those cases where the damage to individuals——
I mean, when I talk about price-fixing, in the Microsoft case, no one seemed to be arguing that individuals were badly gouged, that there were broader structural anti-competitive innovation issues. In that sort of a situation, I worry about private antitrust lawsuits where individuals are harmed and dismiss such cases. Obviously, they are very important.
Mr. PITOFSKY. And I think we have to rely on judges to recognize situations in which the individuals were not harmed and dismiss such cases.
Mr. FRANK. One last question. The study at Georgetown, did you do that study at Georgetown?
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Mr. PITOFSKY. I had a lot to do with it, yes. [Laughter.]
Mr. FRANK. I give credit where credit is due.
Mr. PITOFSKY. It was a very thorough and comprehensive study. [Laughter.]
Mr. HYDE. The gentleman from California, with the permission of the gentleman from Arkansas. We'll go to him. Mr. Rogan.
Mr. ROGAN. Mr. Chairman, thank you. I thank my friend and colleague from Arkansas for his courtesy.
Mr. Chairman, thank you very much for calling this hearing. I also appreciate very much the testimony of the members of our distinguished panel. Mr. Chairman, a statement, if I may. Antitrust enforcement is on the minds of policymakers for many reasons, not the least of which is the rapid growth that we are seeing now in our economy.
Today, more and more companies that employ tens of thousands of Americans find themselves under the jurisdiction of antitrust enforcement agencies. As my colleagues and the distinguished members of our panel are well aware, corporate mergers are more prevalent than ever before. Established companies are worth significantly more in terms of assets and sales than they were just a decade ago.
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One of the areas our committee will focus upon deals with key legislation that was drafted more than two decades ago, created for an economy of a far different sort than what we are dealing with today. This legislation is known as the Hart-Scott-Rodino Act. It was enacted to ensure that the government's independent antitrust department carefully scrutinized the impact of proposed mergers on the market and on consumers. With changes in our economy comes the need for policy changes.
Perhaps the clearest example of these dramatic economic changes in our country over the last 20 years can be illustrated by a review of some of the key economic indicators. In terms of inflation, $15 million in 1976 when Hart-Scott-Rodino was adopted is now worth almost $50 million. The Dow Jones average has swelled up to 11 times its 1976 value, while the Standard & Poors average has grown to 13 times its previous value. These figures make clear the need for Congressional revision respecting the Hart-Scott-Rodino Act.
Just as we adjust for changes in government spending based on economic growth or economic decline, so must we make changes for regulation fees and costs associated with mergers and acquisitions. One way to achieve this, Mr. Chairman, is to increase the threshold on minimum asset in sales value, which qualify a company for antitrust regulation. I have joined with our committee colleagues, Chairman Hyde and also Mr. Delahunt, in introducing H.R. 4194, Small Business Merger and Fee Reduction Act of 2000.
Simply put, this bill will update the criteria the government uses when considering regulation of a company involved in a merger. The legislation will raise the so-called size of asset tests to $50 million. We recommend this action, because companies today are worth more than they were when Hart-Scott-Rodino was originally drafted. The change will reflect inflationary pressures over the past quarter century.
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What is more, the last significant changes to this bill were made in the midst of an economic recession, 1989, when the government faced record deficits. H.R. 4194 will have a beneficial impact on both corporations and consumers. Under the bill, filing fees for transactions involving companies worth $50 to $100 million would be adjusted and set at $45,000. For companies worth $100 to $200 million, the fee would rise to $100,000.
Finally, for companies worth in excess of $200 million, the fee paid to the government Antitrust Divisions would be set at $225,000. In particular, these changes will allow government agencies to review some transactions that they now miss. For example, there are many companies that have few current sales and, therefore, lower value, but still have great sales potential. The Small Business Merger Fee Reduction Act takes a common-sense approach and enjoys broad bipartisan support. The bill will guarantee a necessary scope of government review while giving business an incentive to continue their growth.
Mr. Chairman, if I have any time left, I would like to just simply ask our distinguished members of the panel if they have had an opportunity to review it and to share any comments or suggestions that they might like to.
Mr. PITOFSKY. Briefly, Mr. Rogan, I have reviewed the Bill that the chairman and you and Mr. Delahunt have introduced. I think you are on the right track. I completely agree that the threshold should be raised. I think the number that you have fastened upon, 50 million, makes sense. Finally, I think a sliding scale for fees, which will allow the agencies to have sufficient funds to carry out their mission, makes sense. So, as far as I am concerned, I think you are on the right track, and I support what you are trying to achieve here.
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Mr. ROGAN. Thank you.
Mr. KLEIN. I share that view, Mr. Chairman. I think you—I'm sorry, Mr. Rogan. I think you, the chairman, and Mr. Delahunt deserve a great deal of credit.
Mr. ROGAN. You notice I didn't bother to step in and correct you. I was just enjoying the sound of it.
Mr. KLEIN. Twice today, I was called Mr. Attorney General, and I didn't correct anyone either, Mr. Rogan, so I understand that.
I think it is a sound piece of legislation, and I hope we will be able to get it enacted into law.
Mr. ROGAN. Mr. Klein, Mr. Pitofsky, I am afraid nobody in the audience will believe we did not script the question and answer.
I thank you for that. Mr. Chairman, I yield back.
Mr. HYDE. Thank you. The distinguished gentleman from New York, Mr. Nadler.
Mr. NADLER. Thank you. I have two questions for the Attorney General. [Laughter.]
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Sir, in your testimony, you mentioned the success of the Telecommunications Act of 1996 in certain respects. You say bringing in competition to segments of an industry in which regulated monopolies have long held sway will not be fully accomplished overnight.
My question is the following. It is the first of two, so please be somewhat brief. Is the Department at all concerned with the increasing concentration of ownership in media, newspapers, television, and radio in plenty of markets. In increasing numbers of markets, you have one entity owning the TV and the radio station, or perhaps the TV and the newspaper.
Generally, across the country today, ownership is increasingly concentrated where the larger and larger newspaper chains, television chains, and all major media will be owned by three or four people if this keeps going on.
Mr. KLEIN. The short answer, Mr. Nadler, is, yes, we are concerned. I think this raises some important enforcement issues. In any particular transaction, you really do have to look at it.
Mr. NADLER. Do you think the Telecommunications Act of '96 made the trend worse or better?
Mr. KLEIN. I don't think it made the trend worse. For example, there was such a lock-down on radio stations that it really was causing inefficiencies by the few numbers. I do think that the antitrust enforcement, coupled with, I think, some sound enforcement decisions by the FCC, is the preferable way to go.
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Mr. NADLER. Thank you. My second question is a somewhat different area, and it is railroads.
There have been an increasing number of railroad mergers in recent years. There are only four major railroads left in the United States and two that come into the United States from Canada. There is another railroad merger that has been announced that will not be considered now. If that is done, most of the people think that we will end up with two railroad systems—two railroad companies in the United States, period. Right now, the Surface Transportation Board has exclusive jurisdiction. The Department of Justice can comment on competitive aspects of these mergers but only can comment. It can't do anything. In recent mergers, almost uniformly, there have been tremendous service disruptions. Most observers would think that those mergers caused tremendous disruptions and harm. In fact, I don't think anybody would deny that they caused harm to the economy.
The question you might get argument over is how, long-term, whether they are outweighed by greater benefits, if any. The Surface Transportation Board ignored the comments of the Department of Justice in some of those mergers and of some other government departments. Now, in the bank merger field, the Department of Justice cannot only review the merger that is being judged by the regulatory agency, but, if it doesn't approve it and the agency does, you can go to court to challenge the merger on anti-competitive grounds.
Do you think that the Department of Justice should have similar authority with respect to railroads as it does with respect to banks? More authority or less? In other words, do you think the present regulatory authority—regulatory set-up is adequate with respect to antitrust in railroad mergers and other anti-competitive——
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Not only not just mergers but competitive challenges. For instance, when a shipper might challenge lack of service on a route or monopoly pricing, what role do you think the Department of Justice ought to have in those things, if any?
Mr. KLEIN. I don't think the current structure is satisfactory, Mr. Nadler. I do think there should be an opportunity for the Justice Department to have full enforcement authority with respect to rail mergers.
Mr. NADLER. When you say full enforcement authority, do you mean that you should be a regulatory agency for that purpose, or, like the banks, you should be able to challenge the decision in court?
Mr. KLEIN. I would say certainly this much, that we should be free to challenge any merger anti-competitive behavior. Whether there is room for dual authority I don't have a position on. But, we should be free to block a merger or challenge anti-competitive behavior.
We don't have that power now. In Union Pacific/Southern Pacific, which you referenced, we were strong in our concerns. Those concerns were not implemented, and I think that was a mistake. Had we had individual enforcement authority, we would have pursued it.
So, I would agree with your concerns and hope that the Congress sees fit to give us that enforcement authority.
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Mr. HYDE. The gentleman's time has expired. The gentleman from Arkansas, Mr. Hutchinson.
Mr. HUTCHINSON. Thank you, Mr. Chairman. I want to express my appreciation to you for holding this hearing and thank Mr. Klein and Mr. Pitofsky for their participation.
I reviewed the testimony last night and wanted to come in here just to make a couple of comments, and perhaps ask a question. I want to commend Mr. Klein for the work that he has done in the Antitrust Division. We have had a very difficult year, one that was not without controversy.
As an attorney, I compliment you on the success that you have achieved. I believe that the appropriate question was asked in Federalist Number 15 by Alexander Hamilton. Why has government been instituted at all?
The answer was: Because the passions of men will not conform to the dictates of reason and justice without constraint. I think that really paints a picture as to why there is an appropriate use of the antitrust laws, why it is necessary to protect a free-market economy. We have rules that have to be followed in order for the free-market system to work. Antitrust laws reflect those rules, and we have to have a vigorous antitrust enforcement division in the Department of Justice to create and to protect the free-market system. That is not to prejudge anything. I believe the judicial process has to work, and everybody has a right to an appeal. But, I just wanted to commend you. I think that what you have done is appropriate.
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I know a lot of people objected and were concerned about, in this new economy, whether the antiquated antitrust laws moved sufficiently quickly in the court system to deal with the changing economy. Quite frankly, I think it has been a little over a year from the time the lawsuit was filed until you received a decision on liability. I have been in a lot of fender-bender accident cases that took longer than that.
So, I think that the system worked fairly well. Again, you are going to have an appeal process. But, from my standpoint as a Member of Congress, I don't think I should interfere. I don't think we in Congress should interfere. I think it is important that you do your work and that you represent the Justice Department to the best of your ability as you have been. The justice system, I have confidence, will work. One question I do want to ask is in reference to the timeframe and how the court system works in complex antitrust cases.
Do you believe there is any merit to have a special division of the court in order to deal and have some specialty in antitrust cases? Or, should you just go with the luck of the draw? Are you happy with the present circumstances?
Mr. KLEIN. First, let me say thank you for your comments, Mr. Hutchinson. I agree with everything you said, including the importance of appeal rights in ongoing litigation. I actually think the current system is strengthened by its common-law approach and non-specialization.
I had the good fortune to clerk for the greatest common-law Justice in the modern era, Lewis Powell. He recognized that the legitimacy of the rule of law is enhanced and strengthened by the openness of our judicial system. Specialization, I think, can undermine that, and I think my experience has been that the Federal courts respond effectively, thoughtfully, and efficiently to these matters and that they do move them with appropriate speed, making sure, of course, that the rights of the parties are protected. So, I think the current situation is actually a very good one.
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Mr. HUTCHINSON. Do you have any idea as to the average length of time for the resolution of an antitrust case when it is in litigation, at least through the initial trial phase?
Mr. KLEIN. Generally, today, it depends. If it is a merger case, the courts are moving them. We had several key merger cases that move very quickly—3 or 4 or 5 months after we file them. But, non-merger cases, Microsoft and American Airlines, we are tending to look at a year and a half, 2 year resolution process.
Mr. HUTCHINSON. Thank you, Mr. Klein. I want to move to Chairman Pitofsky. I wanted to make a comment and thank you for your work on slotting fees. I know you have initiated some actions and some studies to review that. I wanted to thank you for that. If you had any comment as to where that is going, I will let you finish with that.
Mr. PITOFSKY. One very brief comment. We did bring a case where we thought the use of discriminatory slotting fees was extreme. We settled that case. More important to me is that, at the end of May, the beginning of June, we are going to have a workshop in which we will examine the question of whether there are some situations in which slotting fees are efficient and sensible and other situations where they are anti-competitive, especially to small business and anti-consumer.
I look forward to this workshop and these hearings so we can achieve a fuller understanding of the way these slotting fees work, which I know are on the increase in distribution in this country—the impact that they have on the marketplace.
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Mr. HYDE. The gentleman's time is expired. I thank the gentleman. The gentlelady from Texas, Ms. Sheila Jackson Lee.
Ms. JACKSON LEE. Thank you very much, Mr. Chairman. To both the chairman as well, the Attorney General for this area.
Although the word ''consumer'' is not in the definition of your respective areas, I would applaud you for being advocates for consumerism as well as competition. I thank the chairman and the ranking member for holding this hearing.
This is a key element of the House Judiciary Committee's responsibility. Keeping that in mind, I have some questions that will probe probably along the lines of some of my colleagues, but an oversight question to you, Mr. Chairman, with respect to funding.
There has been an explosion of mergers just a while back. We were looking at Exxon/Mobil, many others. They cross the gamut in terms of disciplines, and so you may be looking at the oil and gas industry in one instance, or in telecommunications in another instance. I am understanding that two-thirds of your competition resources are used for merger enforcement.
My question to you is do you have the available resources, if that is a larger number than you might utilize. My concern is whether or not the resources you have to provide the oversight or the review or the enforcement is sufficient. Where are you in that with respect to staffing and other resources?
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Mr. PITOFSKY. Each year it becomes more difficult. Almost every year for a decade we set a record in this country for merger filings. As I mentioned earlier, in the present year, merger filings are up another 20 percent.
My view is that we have managed to stay up with the merger wave effectively, but we have only done so by taking people who ought to be working in other areas of antitrust—boycotts, distribution, monopoly work, joint ventures—and assigned them to merger work, because we have fixed statutory deadlines with respect to mergers. I worry about whether, in our efforts to keep up with the merger wave, we are not shorting inappropriately other important areas of antitrust enforcement.
I think we need a substantial increase in our budget if that is not to continue in the future.
Ms. JACKSON LEE. I appreciate that. Are you suggesting that you are strained at this juncture because of this increase?
Mr. PITOFSKY. Very much so.
Ms. JACKSON LEE. So the funding resources are needed in order to make sure that you are covering other areas other than mergers, so other areas are equally important, in your estimation, in response to the American peoples' needs?
Mr. PITOFSKY. Absolutely. I think they are important. Even in the merger area, I worry sometimes that we are forced to make decisions too early in our review process, because we are so swamped with the number of filings that we see. I think we have managed in the merger area, but it is the other areas that are of concern.
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Ms. JACKSON LEE. I thank the chairman. Mr. Klein, you——
I agree that your existence—and, when I say that, the Antitrust Division of the Department of Justice—when I say I agree, I am not putting words in your mouth—for me, is a preventative tool. Your very existence says to our economy that we must play fair. I think that is right. In this new day of e-commerce and information technology, you have probably been asked the hard questions already by my colleagues, the questions of the oldness of our antitrust laws since they got their momentum during the early 1900's, the late 1800's, and they are still here. The difficulty I see is the fact that we do have a global economy.
Some of the issues we deal with are how we are treated internationally. Of course, people view that as trade, but it certainly offends me when I hear that some citizen in a particular country is punished because they are attempting to do business or to have an open attitude about business with the United States. How can your main focus of legal enforcement—the enforcement of laws—work complementary to the idea of a global economy and this new information technology?
Let me, since I see the time runs out or is running out——
The idea that I may not have heard the answer that you had given——
But, the idea that a company that deals with information technology—and, again, I will qualify that you can't comment on the recent case of Microsoft—needs a different look-see, if you will, that its research or that its technology doesn't lend itself to how we handle antitrust laws at this point in time.
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Mr. KLEIN. I think, actually, the genius of the antitrust laws has been, for over a hundred years, that working with the courts, they have shown the flexibility to adapt to this fundamental point, which is the acquisition of market power. Its uses and abuses are every bit as true today as they were 100 years ago.
Indeed, what is remarkable, Ms. Jackson Lee, is that Adam Smith actually understood these principles 200 years ago today—the greatest purveyor of free markets. You are right about foreign markets. They are not as open to competition. The sad thing is that those countries are hurting their own consumers by protecting domestic producers.
We have done a lot of work with our colleagues in Europe and now in Asia to try to persuade them that the role of imports is critical in strengthening their economies. If you look at the United States and the role of imports, the impact on the auto industry, and the very positive impact it ultimately had on our auto industry, these are the countries that don't fully enforce their antitrust laws. They are making a mistake.
Ms. JACKSON LEE. Thank you, Mr. Chairman. I would just conclude——
I see the red light. I just want to thank Mr. Klein. I don't want to put words in his mouth or suggest that the newspapers are quoting the Department of Justice correctly but being open to remedies that may ultimately resolve the present case before you dealing with information technology, that the remedies should be creative, and that hopefully the Department of Justice and those who engage in this matter will resolve it such that the economy and the industry and the technology continue to be preserved.
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I thank the chairman.
Mr. HYDE. I thank the gentlelady. The gentleman from Florida, Mr. Scarborough.
Mr. SCARBOROUGH. Thank you, Mr. Chairman. Thank you for holding this hearing. I thank both of you gentleman for coming in. Mr. Klein, I do not agree with everybody else that is engaging in this lovefest. I do congratulate you, though, for becoming Attorney General.
Actually, I might support you in that position if you would go after illegal Chinese fundraising as aggressively as you have gone after Microsoft. I have read the complaint and there is a line out of it that is confusing to me. The government's complaint claims Microsoft tried to distort innovation to protect its operating system monopoly. You claim this will continue to harm consumers.
Today we have heard people congratulate you for being a great friend of the consumers. But, the thing that I don't understand is that if you look at the polls—and I am sure you are painfully aware of the polls—the majority of consumers in America disagree with you. They believe that Microsoft is in the right here. A majority of consumers in America will tell pollsters over and over again, through this entire process, that their life is better today than it was 10 years ago before Microsoft came onto the landscape. So the argument that Microsoft has harmed competition, again, just doesn't add up.
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If you go back to 1990, there were 20,000 software companies. Today, there are about 60,000 software companies. In 1990, there were about 250,000 jobs in the software industry. This year, there will be over a million jobs in the software industry. In fact, later on today, the Subcommittee on Immigration is going to have to look at raising the level of H1B visas, because we don't have enough workers to work in the software industry.
I guess I am missing something. But, again, I just don't understand how you make the argument that Microsoft is so harmful for consumers and the industry when the industry has exploded since Microsoft came onto the scene. I am sure you are aware, and a lot of people here are aware, of a book that was written in 1989 called The Japan That Can Say No. The premise of the book was that since Japan cornered the computer chip industry and software industry they could do whatever they wanted to do to the United States. A lot has changed since '89, and a lot of that has been because of Microsoft.
So, again, your argument that innovation has been crushed just doesn't square up. You look at AOL. They have their own operating system for browsing. You look at Palm. You look at cell phones now. Technology is just exploding. I guess my concern is that, when you are going after Microsoft this way, and seeing what impact that has had on the markets, I worry about your next target.
Is it AOL next? Is it Web TV? They have their own operating system. I don't think they have any competition in that field. Palm? What are your plans for future actions in the industry with regard to antitrust enforcement? Are there other large technology companies that you and your Division are looking at at present?
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Obviously you've got your hands full, but I am sure there are other lawyers at Justice considering other tech companies. Are there others that are up on your radar screen right now, like, for instance, AOL?
Mr. KLEIN. I don't think I should comment on any pending investigations. But, as a general matter, I should tell you there are not a lot of these investigations. Some people have tried to portray it that way. Let me also say I agree with you that a great deal of dynamism has taken place in the high-tech industry.
I commend the players in that industry, but the issues you raised really were the issues that were tried for 78 days in Federal Court, that is, in a world of true dynamism where there are bottlenecks and illegal behaviors. It's the illegal behaviors. For example, you mentioned Intel. The court has extensive findings here about Microsoft, and these are based on Microsoft documents, Microsoft saying to the computer manufacturers that they shouldn't carry Intel software, that Microsoft didn't want to see Intel develop.
Now, it is true. Consumers don't know whether that software would have been terrific or not, because the computer manufacturers basically balked and said. Okay, we're afraid of Microsoft. We don't want to carry the Intel product. So, I agree with you. It is very hard for me to say to people. You don't know what you didn't get, and it would have been terrific for you. In certain respects, that is, I think, what the problem is that is at the heart of what you are alluding to here.
Innovation has been high in this industry, but what the court found, and I think is right, is, because of the specific business practices that we challenged, there has been a real deterrent to certain kinds of innovation that really could have brought value to consumers. I think the basic principle, which I really do think this committee generally has supported, is competitive markets work best. That is what I think this is about.
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Mr. SCARBOROUGH. Mr. Chairman, my time is up. Could I have a few more minutes for one other question?
Mr. HYDE. The gentleman is recognized for two additional minutes.
Mr. SCARBOROUGH. Is your premise that consumers don't know how badly they have it? And do you agree those who are saying that you are a front-man for disgruntled rivals instead of consumers? Look at your complaint and see the number of times Netscape comes up.
The New York Times reported last week that Apple and Sun got regular updates on your negotiations with Microsoft. The New York Times reported that Microsoft rivals were getting inside information at the very time the Federal Judge was saying that negotiations were to be confidential. Do you really think that going to their chief rivals, be it Netscape or Sun or whomever else—Apple—do you really think Steven Jobs was going to sit there and argue that Microsoft was really helping the economy?
You've gone to competitors. So let me ask you first how did the settlement updates get in the hands of Microsoft's chief competitors?
Mr. KLEIN. Let me assure you they did not get in the hands of anybody through the Department of Justice. I will tell you that the Department of Justice is willing to have its behavior scrutinized fully, because we observe the confidentiality of that process. I told everybody on our staff that, if there were any leakage, there would be accountability. It didn't happen that way.
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Mr. SCARBOROUGH. Where could they have gotten it? Microsoft obviously didn't give it to them.
Mr. KLEIN. I don't know where they got it and what they got.
Mr. SCARBOROUGH. Who else would have had control of those documents?
Mr. KLEIN. The information in the process was accessed by my team, the team from Microsoft, and the team from the States. All I can speak for is my team, and you raise an important point.
Mr. SCARBOROUGH. It is either your team, the Microsoft team, or the team from the States.
Mr. KLEIN. That is true. And, the second thing I would note, it is true that you do have events affecting competitors, but that is not what drives what we do. Lots of competitors are in to complain to us. Some we credit. Some we don't based on the facts. Our concern is with consumers, not competitors.
You mentioned Web TV. Microsoft acquired Web TV on my watch. Six or seven competitors were in complaining about it. We passed that merger. This is all based on the specific facts of the investigation and the facts of the case. That is what the trial is about and what the appeal is about.
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Mr. SCARBOROUGH. Final question. Did you get a significant number of complaints from consumers on Microsoft?
Mr. KLEIN. We did get complaints from consumers—often large consumers—of products, but we did not——
I don't want to count them up, but we did not get, if you will, a lot of small, individual consumer complaints.
Mr. SCARBOROUGH. Thank you. Thank you, Mr. Chairman.
Mr. HYDE. Thank you. The gentleman from Massachusetts, Mr. Delahunt.
Mr. DELAHUNT. Thank you, Mr. Chairman. Welcome back Mr. Klein and Chairman Pitofsky. Congratulations, Mr. Klein, and thank you for the fine work you are doing.
Every year, I seem to ask the same questions. Do you feel you both have adequate resources to continue to execute your respective missions?
Mr. KLEIN. Mr. Delahunt, I think that, from the Division's point of view, we are underfunded at this point, and I would hope that the funding does improve next year.
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Mr. DELAHUNT. What kind of a strain did the Microsoft case put on you in terms of resources?
Mr. KLEIN. It is not uniquely Microsoft. The Microsoft litigation is a small part of our budget.
You know, last year we did the most aggressive international cartel enforcement in the history of the United States. We had a budget last year of just over $100 million, and we brought into the U.S. Treasury over $1.2 billion. So, you are talking about, even on its financial terms——
Mr. DELAHUNT. A good investment.
Mr. KLEIN. To say nothing of what we saved America's businesses. You will find business after business saying that these cartel cases have brought real savings to the American economy.
Mr. DELAHUNT. I think that is an important point that you make, and I apologize for the interruption. But, I think most of us see your role and your effort to protect the consumer, which I think is the primary raison d'etre for both of your agencies. The reality is you are really doing a service to the business community in many respects. You are creating a level playing field, as the cliche indicates, and that is often lost. I would hope that the business community would acknowledge that and understand that.
I heard my friend talk about, you know, the beautiful world of Microsoft. Well, I don't think Microsoft is solely responsible for the prosperity that we are enjoying right now. I think it is the result of competition. But, I daresay, if we didn't have antitrust statutes and we didn't adequately fund their operation, I would have significant concerns about that. In fact, I have introduced bipartisan legislation with Mr. Rogan in terms of the fees. I am hopeful this committee will take action soon, and we can get that piece of legislation onto the President's desk. Without strong antitrust enforcement, I think the business community would suffer. We wouldn't have the prosperity that we enjoy right now. But you people have to have the resources to do the job.
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I am glad that you were forthright in saying that you need more. Chairman Pitofsky?
Mr. PITOFSKY. We certainly do. We are pressed to the extreme right now because of the merger wave and other matters. Let me pick up on something that you said, because I think you are exactly on the right track. We brought and settled a case with Intel. Some people criticized our case saying. Oh, you're diminishing the incentives of Intel to innovate; and Intel is one of the great companies in this country, and they have done a fantastic job. But, the point is you want to preserve the incentives to innovate Intel, but also the incentive of the competitors of Intel?
What about the smaller players? You have to preserve their incentives to innovate as well, and, if you have behavior that coerces or intimidates or somehow suppresses that innovation, then I think consumers and the competitive system is not well served.
Mr. DELAHUNT. I am surprised NFIB is not here to testify in support of your efforts, but that is for another day.
I have a concern. As the economy further globalizes—and I know that recently there was a report that your agencies commissioned—ICPAC—but I don't want to get into those kind of details, but give us a quick education in terms of international antitrust enforcement. What is the status? How do we deal with those issues at an international level? If you could do it just briefly, I would appreciate it. Just give us a basic 101 course.
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Mr. KLEIN. I think, essentially, we do two things. We cooperate at great length with our colleagues throughout the world, particularly with respect to our major trading partners, the Europeans and some of the key Asians. We have had very good success with the Europeans in cooperating, for example, on big merger reviews. Both agencies work very closely with the Europeans, the Canadians, and so forth.
Second, we have begun to refer cases to them of market access where U.S. companies were shut out of their markets through what appeared to be or may be anti-competitive restraints. At least with respect to the Europeans, they have done a significant piece of work on airline computer reservations, where they found some violations barring U.S. access. This is the story that is a work in progress, Mr. Delahunt. It is complicated work, but it's work in the right direction.
The other point, then, goes to a point you have made. You know, for over a hundred years, antitrust was thought of as largely an American thing. Now, the rest of the world is desperately trying to catch up, because they understand something that their national champions are not the way to compete in a global economy. Robust domestic competition is the way to compete, and everybody else is now trying to model that which we do. The U.K. has done a 180-degree flip on this in the last 6 months.
Mr. HYDE. The gentleman's time has expired. I hate to leave Mr. Wexler to the very end, but we have run out of Republicans. So, I will use this time for my question period. Then, we'll go to you, but certainly not because of any other reason other than logistics.
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I will not ask questions unless something piques your response nerve endings, because we have many more witnesses. This has been a terribly long morning in terms of time, but it is an indicator of the significance of what we are talking about—how important it is—and that we are all interested in it. You both have been excellent witnesses who can authoritatively respond to our questions. So, that has made this a long morning, but we will persist.
I read an article by R. C. Longworth in last Sunday's Chicago Tribune that piqued my interest enormously in the subjects we are talking about. I would like to read just a part of that article to you.
Well, one thing, that Klein and the Justice Department are going to have a very hard time making any judgments stick against Microsoft.
Microsoft is a global company, not really an American company. The U.S. antitrust law and Klein's ability to wield it stop at the water's edge.
The Sherman Antitrust Act is a relic of an earlier era. Through most of the 19th century, the power to regulate the economy rested with the States.
By 1890, a national economy was taking shape. State laws couldn't regulate it, so this power passed to Washington, a process as revolutionary and formless as the globalization of today.
The courts can break up Microsoft, but can they make it stick? Can something as big as Microsoft and as mobile as technology be controlled any longer by national laws?
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If Microsoft shatters into lots of little Microsofts, how long will they be independent before they merge again or are swallowed by other bigger global companies.
Antitrust laws are, therefore, a reason monopoly is bad, if only because it gives one person or one company too much power over our lives.
Is there a need, then, for global antitrust laws? Do we understand enough about this new global economy to devise laws that will work?
If so, what parliament will pass them, and what court will enforce them?
These are interesting questions and would provide the grist for a seminar, I'm sure, and I don't propose that we answer them today. But I am thinking about them, and I know you are, too.
[The information referred to follows:]
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Mr. HYDE: I had dinner with a gentleman last night who informed me that the FCC conducts an antitrust analysis, which is redundant with what you folks do. Their test is ''in the public interest,'' which is hopelessly vague and depends on the vagaries of the young person analyzing the license transfers between telecommunications companies. But, you were speaking of your resource situation. Maybe some of the many antitrust analyses being done by various agencies could be consolidated into one with more precise standards.
Another problem that I think maybe you folks can help with is prescription drugs, the fact that you can buy one particular drug at $4.00 in Mexico and $30.00 in Canada and at $80.00 here. These pharmaceutical companies get the protection of American patents, and yet they have this differential to the great detriment of American citizens who need the medication. I don't see any easy solution to that, but I hope it is something you are thinking about, because we are going to have to confront that problem. I know the other prices are controlled by their governments, but the companies evidently still will sell in those countries and make a profit even under those controlled circumstances. So, it is worrisome, it is real, and it is impacting on people.
Lastly, I am not one who criticizes you for the Microsoft situation, suggesting that you design your prosecutions on the basis of complaints you get from the public. The law is there to be enforced. Your job is to enforce the law. If the law is no longer relevant, if the law is imperfect, then we should change the law. That is our responsibility. Perhaps you could bring it to our attention what changes can be made, so the law is capable of coping with today's economy and the intergalactic, someday I am sure, economy.
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But, those are just my comments. I think you both do a fine job in a very stressful and important area.
The gentleman from Florida, Mr. Wexler.
Mr. WEXLER. Thank you, Mr. Chairman. First of all, I thank both gentlemen for having the patience to stick around.
I very much want to echo the chairman's comments with respect to prescription drugs and urge your consideration if there is any appropriate action to be taken. I would like to address, if I could with my time, the railroad industry and do it from a perspective, I think, that is a bit different than what was expressed by Mr. Nadler earlier in the day.
If my understanding is correct, the Surface Transportation Board recently refused to accept a merger application by two railroads, Burlington Northern, Santa Fe, and Canadian National and, at the same time, or just before that, declared a 15-month moratorium on their proposed merger and on any other merger applications from any major railroads.
The two railroads involved argued, of course, that their merger would benefit consumers and would benefit railroad shippers by providing a variety of transportation and efficiency improvements while preserving competition, because I think they described their merger as an end-to-end merger rather than a merger of overlapping railroads. It seems to me that the moratorium seems to have been prompted by some of the competing railroad interests, which may or may not be something that should be considered, but that problems from the previous railroad mergers, whether they be meritorious or not, seem to have affected a governmental decision, which now prevents all companies from merging for a period of time. If my understanding is correct, Secretary Slater opposed the moratorium in his testimony before the Transportation Board.
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I simply have three questions, if I could, of the two of you.
First, did Chairwoman Linda Morgan or either of the members of the Surface Transportation Board consult with the FTC or the Department of Justice Antitrust Division about the ramifications of the moratorium plan before the decision was rendered?
Two, are you at all concerned that a Federal Agency should impose this kind of blanket moratorium on a merger in any particular industry upon the entire industry to the point where an application won't even be considered, even if, in theory, it was a perfect application?
It seems to be saying that all mergers, therefore, would violate antitrust law. Therefore, none can be considered. Does that concern you? And, three, with respect to Mr. Klein, has the Department of Justice been asked by the Surface Transportation Board to defend the moratorium in court, now that I understand there is a formal challenge? If it has been asked, has there been a response, or what would you anticipate the response to be? Thank you.
Mr. KLEIN. I was not consulted by the Surface Transportation Board with respect to this. I can't say whether anyone on our staff was, but I was never advised of it.
The second and third questions you ask are interrelated, Mr. Wexler, because I don't think we should comment on the specifics of the moratorium. We have been asked—and, as you know, there are Federal agencies on both sides, Agriculture, the Department of Transportation, and the Surf Board—and we are in the process of determining our position. But, I think the point you make is correct as a process matter.
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This is stuff that should be before the Justice Department. These merger determinations ought to be our determinations. I do think we have both the tools and, frankly, as shown by some of the discussion today, I think the political independence to act on a case-by-case sensible basis.
Mr. WEXLER. Is there a precedent for this that you are aware of?
Mr. KLEIN. There are, at least, in some statutes, the Telecomm Act, for example. Cable-telco mergers were barred except in specific situations. I don't recall anything exactly like this.
Mr. WEXLER. Thank you. If I may just ask of the chairman, was he consulted?
Mr. PITOFSKY. I was not, but it would be unlikely we would be consulted. To the extent that our two agencies have been involved in this area at all, historically, these matters have been handled in the Department of Justice.
Mr. WEXLER. Thank you very much, Mr. Chairman. Thank you, gentlemen.
Mr. HYDE. Thank you, sir. I want to thank the panel for enduring the morning and the questioning. Meanwhile, we thank you very much. Our second panel consists of eight private sector witnesses who will address four topics of current interest——
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The FTC's authority to seek disgorgement;
The international aspects of antitrust;
The antitrust authorities of the Surface Transportation Board; and
The role of antitrust in the new economy.
On the disgorgement issue, we have Mr. Bert Rein and Mr. Andy Strenio. Mr. Rein is a partner at Wiley, Rein & Fielding. He is a graduate of Amherst College and Harvard Law School. After law school, he clerked for Justice John Harlan of the Supreme Court. He has served at the State Department and on the Reagan administration transition team. He is their founding partner of his current firm and appears here today on behalf of the Chamber of Commerce of the United States and Mylan Laboratories.
Mr. Strenio is a partner at Powell, Goldstein, Frazer & Murphy. He is a graduate of Princeton and the Harvard School of Government and the Harvard Law School. Before coming to his current firm, he worked at the Interstate Commerce Commission and the President's Council of Economic Advisors. He was a Federal Trade Commissioner from 1986 through 1991.
On the international issue, we have Mr. Jim Rill and Mr. Steven Farrar. Mr. Rill is an attorney in private practice who recently co-chaired the International Competition Policy Advisory Committee. Mr. Rill is a graduate of Dartmouth and Harvard Law School. He has chaired the Section of Antitrust Law of the American Bar Association and headed the Antitrust Division during the Bush administration. He has represented numerous clients as well as writing and speaking widely in the field of antitrust.
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Mr. Farrar is director of international business with Guardian Industries. He is a graduate of Bowdoin College and the Georgetown School of Foreign Service. He has an extensive career in government serving at the Department of Commerce, the Office of Management and Budget, the United States Trade Representative's Office, and the Reagan and Bush White Houses. At Guardian, he is the point man for its efforts to enter the Japanese market.
On the Surface Transportation Board issue, we have Mr. Bob Voltmann and Mr. Ed Hamberger. Mr. Voltmann is the executive director and chief executive officer of the Transportation Intermediaries Association. Mr. Voltmann has served on the staff of the Texas House of Representatives and the Interstate Commerce Commission. He also has been director of policy for the National Industrial Transportation League and took his current position in June, 1997.
Mr. Hamberger is president and CEO of the Association of American Railroads. He is a graduate of Georgetown University, its school of foreign service, and its law school. He has served in Congress with Senator Hugh Scott and the House Republican Policy Committee. He has also served as an Assistant Secretary of Transportation and as the managing partner of the law firm of Baker, Donelson, Bearman & Caldwell. In 1999, he was named as one of the top ten association leaders in Washington.
On the new economy issue, we have Mr. James DeLong and Professor Jonathan Baker. Mr. DeLong is the vice president and general counsel of the National Legal Center for the Public Interest. He is a graduate of Harvard and its Law School. He has served in government with the Federal Trade Commission, the Bureau of the Budget, and the Administrative Conference of the United States. He is also a contributing editor for Reason Magazine and is frequently published on antitrust topics.
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Professor Jonathan Baker is an associate professor at the Washington College of Law at American University. He is a graduate of Harvard and its law school as well as having a Ph.D. in economics from Stanford. He has served with the Antitrust Division, the Federal Trade Commission, and the Council of Economic Advisors before taking his current position. He has also taught at Georgetown and at Duke University Law School.
Mr. Rein, we'll start with you.
Mr. NADLER. Mr. Chairman, would it be possible to take up the railroad question first—to hear those two witnesses first?
Mr. HYDE. Well, I don't have any serious objection. Mr. Voltmann and Mr. Hamberger, then?
We are going to hear all the statements. We won't start the questioning until all the statements are done.
Mr. NADLER. I understand that.
Mr. HYDE. So, let's hear the statements.
Mr. NADLER. I just asked if we could hear those two first.
Mr. HYDE. Those two statements first? Okay. Mr. Voltmann, you are first. Mr. Hamberger, you are second. No offense to the rest of you.
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STATEMENT OF ROBERT VOLTMANN, EXECUTIVE DIRECTOR AND CEO, TRANSPORTATION INTERMEDIARIES ASSOCIATION
Mr. VOLTMANN. Thank you, Mr. Chairman, Mr. Nadler. Mr. Chairman, members, the members of TIA are fiercely independent businesses. They believe in competitive markets. They applaud your looking at this issue, and they applaud you especially to look at this archaic grant of antitrust immunity that dates back to an era of heavy-handed government regulation.
We urge you to look at this issue and to remove those broad grants of antitrust immunity, so that the markets are free and that we can fully appreciate and realize the benefits of deregulation.
Mr. Chairman, Mr. Nadler, this session of the hearing focuses on railroads. But, I would be remiss if I didn't mention the antitrust abuses of ocean carriers. With the continued broad grant of antitrust immunity given to those carriers, the discriminatory treatment of ocean carrier intermediaries in the Ocean Shipping Reform Act and the inability of the Federal Maritime Commission to do anything about carrier abuses, our members and the thousands of shippers they serve across this country are being harmed. We need your FAIR Act, Mr. Chairman, and we need it now.
Now, to railroads and mergers. Rail mergers in recent years have concentrated power in the hands of a few very large railroads. The prospect of continuing that consolidation down to what could conceivably be two humongous rail systems serving all of North America is very concerning to the industry. That concentration of power is made worse by the Surface Transportation Board's inability to do anything to foster more competition and by the inability of shippers to avail themselves of antitrust laws, the same antitrust laws that provide remedies in every other business in the United States. Both the Bush administration and the Clinton administration Justice Departments have called for more Justice Department and antitrust enforcement in the rail industry.
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Mr. Nadler, you pointed out Justice called UP/SP merger the most anti-competitive merger in rail history. The Surface Transportation Board summarily ignored the Department of Justice. As you pointed out earlier, the laws affecting bank mergers may offer an opportunity of keeping a regulatory agency with expertise involved, but getting the Department of Justice direct input into the merger and the ability to directly challenge that merger——
While they said the UP/SP merger was the most anti-competitive in history, the Department of Justice was forced, when the STB order was issued, to go to the Court of Appeals for the D.C. Circuit and argue that the Board made a material error, not that antitrust laws were damaged or that competition would be harmed. Exacerbating the problem of railroad mergers and the concentration of market power is that the railroads are exempt from antitrust laws. So, shippers don't have the remedies that they would otherwise normally have. They can't seek injunctive relief.
Now, these broad grants go back to days when the railroads were heavily regulated by the STB or the ICC. But, the Congress has passed several pieces of legislation that have diminished that regulation and diminished the effectiveness of the Agency in enforcing or regulating competition. The passages of those laws make it even more important today that shippers have the availability of antitrust laws to bring about competition and to protect themselves from market abuses by monopolistic carriers. The effects of this can be seen in the intermodal industry.
My members involved in rail are intermodal marketing companies. We have some of the largest, and we have some of the smallest IMCs in the industry. These companies serve hundreds or thousands of shippers across the country. The railroads have engaged in a concerted effort to consolidate the IMC industry to go along with the consolidation of their industry. They have adopted the pricing barriers, bonding barriers. They have adopted penalties for companies that don't meet those requirements. They have adopted discriminatory pricing, and they have adopted discriminatory equipment practices. The STB is unable to do anything about it, and we are unable to access the antitrust laws.
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Mr. HYDE. Mr. Voltmann, could you conclude reasonably soon, because we try to hold——
Mr. VOLTMANN. I understand. What we are looking for, Mr. Chairman, is just what Mr. Klein, Mr. Pitofsky, and several members of the committee called for, and you in your own article, the application of antitrust laws in railroads and the application of antitrust laws in rail mergers.
[The prepared statement of Mr. Voltmann follows:]
PREPARED STATEMENT OF ROBERT VOLTMANN, EXECUTIVE DIRECTOR AND CEO, TRANSPORTATION INTERMEDIARIES ASSOCIATION
INTRODUCTION
TIA is the only organization representing transportation intermediaries of all disciplines operating in domestic and international commerce. The over 700 member companies of TIA include: intermodal marketing companies (IMCs), property brokers, international forwarders, NVOCCs, domestic freight forwarders, air forwarders, perishable commodity brokers, and logistics management companies. TIA also provides management services for the American International Freight Association (AIFA), a leading organization of NVOCCs. AIFA is the U.S. representative of FIATA, an international organization representing more than 40,000 freight forwarders worldwide.
The members of TIA appreciate the opportunity to present their views and concerns regarding transportation antitrust issues. Our members are fiercely independent businesses that fully support deregulation and competitive markets.
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TIA applauds the Committee's leadership in examining antitrust administration as it relates to transportation. Our comments focus mainly on railroads, but also address ocean and motor carrier antitrust concerns as well.
RAILROAD ANTITRUST CONCERNS
1. Mergers
Since 1980, TIA members and other rail customers have seen the rail industry merge from more than 40 Class I railroads in the United States to four mega-railroads. Today, we are faced with the prospect of another round of mergers that could result in only two continental rail systems serving all of North America. While TIA is not concerned about rail mergers per se, we are concerned because rail mergers have concentrated power in the hands of a few service providers, without corresponding changes in rail transportation policy to ensure that vigorous competition is preserved. These problems are themselves exacerbated by the inability of the Surface Transportation Board to prevent abuses of this market power, and the inability of shippers to avail themselves of antitrust remedies available in every other business.
While each merger promised improved efficiency and service, rail customers have yet to see these improvements occur. In the intermodal industry, railroads have promised an increased ability to handle intermodal freight. Once again, this has proven not to be the case. For example, in the Conrail acquisition, both CSX and Norfolk Southern promised to take one million trucks off the road annually. This goal was admirable for environmental and public policy reasons. Unfortunately, as a result of the merger, the opposite appears to be true. Today, more trucks are on the road than ever before and trucking is capturing a larger percentage of our domestic freight bill than ever before.
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After experiencing these past mergers, the members of TIA and many other rail customers are hesitant about future rail mergers unless the standards and procedures by which they are created are changed and that the preservation and enhancement of fair and open competition—both intermodal as well as intramodal—is made the foundation of rail policy.
While rail mergers are generally similar to mergers in other industries, there are some dissimilarities. Most rail customers are served by only one railroad. These customers are captive and should be protected from anticompetitive market conditions. For example, in the Exxon-Mobil merger, consumers will still be able to drive to another service station to buy gas. In addition, the Department of Justice required specific actions to maintain a competitive marketplace. Rail customers, however, can only use the railroad that comes to their facility. The recommendations of DOJ in recent rail proceedings were summarily ignored. At the same time, the Surface Transportation Board (STB) maintains regulatory authority over all rail matters that minimize rail-to-rail competition.
TIA believes that the concentration of the industry combined with policies adopted by the Interstate Commerce Commission (ICC) and STB have allowed the railroads to limit competitive routing freedoms, lessen competition, and even limit access to the rail network itself. The ICC, and now the STB, has approved policies that have eliminated shippers' ability to route freight over a competing railroad. Even where competition could be brought to bear, the agency has adopted policies that eliminate the ability to effectively challenge bottleneck rates. The agency has also implemented standards that make it virtually impossible to obtain competitive switching at terminals and terminal areas. At the same time, the agency has allowed mergers to consolidate the industry.
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The Department of Justice (DOJ) and antitrust policy must be given a larger role in rail matters. DOJ called the Union Pacific—Southern Pacific (UPSP) merger ''the most anticompetitive rail merger in history.'' In that merger, the STB ignored not only the concerns expressed by DOJ, but also the concerns of the Department of Agriculture, organized labor, other railroads, and rail customers. The laws affecting bank mergers may offer the best alternative to our current rail merger system. In bank mergers (12 U.S.C. 1828(c)) the regulatory agency has authority over the merger, but the DOJ is given specific authority to review the merger and, if the regulatory agency does not adequately address the anticompetitive aspects of the merger, DOJ is given 30 days in which it may challenge the merger in court on anticompetitive grounds.
Under the current Interstate Commerce Act, DOJ may file comments like any other party on the rail merger and the STB can choose whether or not to incorporate those comments. If the agency approves the merger without addressing the anticompetitive concerns of DOJ as occurred in the UPSP merger, DOJ can only challenge the decision on the grounds that a material error was made; they cannot challenge the merger on antitrust grounds.
2. Antitrust Laws and Railroads
At the present time, railroads are only partially subject to the antitrust laws of the United States.
In some cases, railroads are exempt from the substance of the antitrust laws because of explicit statutory exclusions. See, e.g., 49 U.S.C. §1132(a) (approval by the Surface Transportation Board of a rail consolidation exempts the carrier from the antitrust laws for all actions necessary to carry out the transaction). In other cases, because of explicit statuary exclusions, the remedies generally provided in the antitrust laws are not available to potential plaintiffs in suits against railroads. See, e.g., 15 U.S.C. §26 (injunctive relief under the antitrust laws is not available in an action against any common carrier subject to the jurisdiction of the STB). Finally, statutory language giving the STB exclusive jurisdiction in matters concerning rail transportation (See, e.g., 49 U.S.C. §10501) appears to create uncertainty as to the application of other statuary requirements such as the antitrust laws.
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In addition to explicit statutory exclusions, judicial doctrines or decisions have created zones of uncertain scope within which the antitrust laws or the remedies thereunder, do not apply to certain activities of railroads. Sometimes these judicial decisions deal specifically with rail carriers formerly subject to ICC jurisdiction (and now subject to STB jurisdiction). See, Keogh v. Chicago and N.W. Ry. Co., 260 U.S. 156 (1922) (Keogh doctrine bars private treble damage actions arising from injury allegedly incurred because of rail rates filed in tariffs with the regulatory agency); Square D Co. v. Niagara Frontier Tariff Bureau, Inc., 476 U.S. 409 (1986) (Keogh doctrine reaffirmed despite statutory changes since the doctrine was first promulgated). In other cases, general judicial doctrines such as the doctrine of ''implied immunity,'' in which the very existence of regulatory remedies precludes application of the antitrust laws in order for the regulatory provisions to work, might render the effectiveness of the antitrust laws to railroads at least doubtful or uncertain.
Whatever the past reasons for these exclusions, railroads should now be fully subject to the substance of the antitrust laws. There is no public policy reason to justify the industry's special treatment. This is particularly true in view of the partial deregulation of the industry in the Staggers Act and the ICC Termination Act. Indeed, the passage of those laws, which reduced the scope and effectiveness of the regulatory agency, makes it more necessary than ever for shippers to have the full panoply of remedies available against monopolistic activities. Finally, the wave of mergers that has swept the railroad industry in the last twenty years has increased the market power of rail carriers and thus increased the potential for monopoly abuse.
There are four general changes necessary to the laws of the United States in order to make railroads fully subject to the substance of the antitrust laws:
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A. Clarification of the Scope of STB Jurisdiction: Section 10501 of the ICC Termination Act gives the STB ''exclusive'' jurisdiction over transportation by a rail carrier. Clarification is needed to insure that this language does not oust remedies under the antitrust laws.
B. Legislation Overruling the Keogh Decision: In the Keogh decision, the Supreme Court ruled that private treble damage actions arising from injury allegedly incurred because of rail rates filed in tariffs with the regulatory agency are barred. The decision was reaffirmed by the Supreme Court in Square D Co. v. Niagara Frontier Tariff Bureau, Inc., 476 U.S. 409 (1986), a decision which indicated that the doctrine of implied immunity still lives even in the face of the changes made to the regulatory statutes in 1980. Congress needs to act affirmatively to eliminate the doctrine. Congress also needs to ensure that the doctrine of implied immunity does not restrict the application of the antitrust laws to rail carriers.
C. Repeal of the Bar to Injunctive Relief in Section 16 of the Clayton Act: Section 16 of the Clayton Act now bars suits for injunctive relief ''against any common carrier subject to the jurisdiction . . .'' of the STB. This preclusion, on relief otherwise available to businesses generally for unlawful activity under the antitrust laws, should be eliminated.
D. Revisions to the Standard for Mergers and Consolidations: Under the current statute, the STB evaluates mergers and consolidations under a broad ''public interest'' standard. Utilization of this standard has led to an industry with four major railroads in the United States. The Department of Justice must be given a more prominent and independent role to play in rail mergers similar to the role it plays in bank mergers. See 12 U.S.C. 1828(c).
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It should be noted that one exemption, for carrier collective rate agreements under 49 U.S.C. §10706, is not proposed to be changed. Since the Staggers Act, the role of such agreements in the rail industry has declined tremendously. Moreover, the current statute very narrowly circumscribes the lawful activities of such agreements, and forbids such collective rate agreements from acting to reduce competition in the most competitively sensitive areas. Indeed, the areas in which collective rate agreements still operate are generally considered to be beneficial to both shippers and carriers.
3. The Intermodal Industry
A serious issue has arisen in the intermodal industry as railroads have been allowed to increase their market power unchecked by the STB or antitrust laws. Under policies adopted by some of the major carriers, small to medium sized intermodal marketing companies (IMCs) have been hindered in their ability to serve the marketplace. Some of the rail carriers have erected artificial barriers against IMCs. These IMCs serve America's small businesses and provide them the ability to get their goods to market at an affordable price.
A. Artificial Volume Commitments: In October 1998, one of the two western railroads, for example, decided it was working with too many intermodal marketing companies. The Burlington Northern Santa Fe (BNSF) unilaterally raised its contract minimum from $500,000 to $5 million annually thus forcing many small and mid-size IMCs to form consortiums in order to stay in business. They also raised the level of their required surety bond from $20,000 to $250,000 and increased the penalty for not meeting the volume minimum from $100 per shipment to 25 percent of the annual shortfall. This was not a consumer or the market place decision; it was the decision of the supplier of a service. The result of BNSF's policy change was that 45 IMCs lost their contracts with the railroad.
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Recently, BNSF lowered their volume commitment to $2.5 million annually, but did not reduce the bond requirement or the volume penalty. This is a lot of capital for small to mid-sized IMCs to keep tied up on a bond, while at the same time, the railroad drafts their account for payment at seven days.
Recently, Norfolk Southern (NS) announced that it was raising its volume minimum for IMCs from 250 units per year to 1,000 units per year. NS chose to take this action even after we met with their Intermodal Department and expressed our industry's commitment to help them grow their intermodal business while allowing full access to those IMCs who service small business America.
TIA was not surprised at NS's action. On November 10, 1997, the BNSF sent a memo to Norfolk Southern (Attachment 1) stating that they were raising IMC volume minimums. The memo listed the affected contract holders. This action by one railroad announcing major market changes directly to another railroad might lead a reasonable person to conclude that both railroads were colluding to limit rail system access for smaller customers.
When we talked to the STB about this situation, we were told it was a ''contact'' issue and not within their purview to review. We doubt the DOJ would say the same thing. The actions taken by BNSF and NS could not occur in a competitive, open market that is protected from anticompetitive practices.
B. Discriminatory Pricing: Another area where railroads exhibit unchecked anticompetitive behavior is in the pricing of intermodal service. According to one TIA member who has worked for both a large and small IMC, the railroads offer different pricing schemes depending on your size. Publicly, the railroads insist that the prices they offer their customers are based on market conditions and competitive factors. In surveying our membership, it appears that the railroads are instituting discriminatory differential pricing to phase out smaller IMCs. TIA fully supports the policy of differential pricing adopted by the Staggers Act. TIA objects, however, to two identically situated IMCs not having access to the same rate sheet for the same move.
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For example, larger IMCs are permitted to use open pricing guides and contract incentives, which allow them to offer better rates in a shorter period of time. Small IMCs, even if their volume on a specific route is the same as the larger IMC or if they are serving the same customer as the larger IMCs, is not given access to open pricing guides and contract incentives. Instead this smaller IMC is charged tariff rates as if it was a single movement. If the smaller IMC looses the freight to a larger IMC, it may face a contract shortfall penalty.
For many years, the railroads operated under a policy of equal treatment towards the beneficial owner of the cargo, without regard to the third party representing that shipper. The railroads priced their service based on market conditions and competitive factors. Today, the railroad policies have changed to focus solely on the third party. This change in policy has had an adverse affect on IMCs ability to grow market share and decreased their ability to meet the volume commitments imposed by the railroads.
The change in policy seems to be an attempt by the railroads to consolidate the IMC marketplace whether shippers want such consolidation or not. These actions are occurring because of the lack of antitrust enforcement and applicability.
TIA has some of the largest IMCs as members. The other IMC members of TIA do not mind competing with these larger IMCs. However, they believe the Staggers Act gives them the right to compete on a level playing field. The marketplace should consolidate naturally, not through unilaterally imposed pricing schemes. The lack of antitrust applicability to the railroads and the lack of protection from the STB leave these IMCs at the mercy of the railroads.
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C. Equipment Discrimination: In much the same way as with pricing, the railroads discriminate against similarly situated IMCs with regard to equipment. Again, even if two IMCs are similarly situated, our members report that railroads discriminate between them by supplying equipment to the largest IMCs first even if the smaller IMC is the larger volume company on that particular lane. If an IMC cannot get equipment, they cannot move the freight, and they will loose the business, again subjecting the IMC to a shortfall penalty.
D. Lack of Competition: The lack of antitrust relief is compounded by a lack of regulatory protection from the STB. Since 1980, the ICC and now the STB has adopted policies to protect railroads from competition, thereby further concentrating railroad market power. The following is offered as a summary of the ways the agency has reduced market forces that would otherwise serve to constrain anticompetitive behavior by the railroads.
(1) Competition in Terminal Areas: See Midtec Paper Corp. v. Chicago and North Western Transp. Co., 857 F.2d 1487 (D.C. Cir. 1988), aff'd 1 I.C.C. 2d 362, 364 (1985) and 1986 ICC Lexis 214, July 22, 1986. Under this decision, the ICC required a shipper to show competitive abuse as a prerequisite to obtaining terminal trackage rights or reciprocal switching in a terminal area. Current law does not contain a requirement for showing competitive abuse, requiring only that the rights requested be pro-competitive and in the public interest. It is worth noting that the STB does not require a railroad to make a similar showing before gaining terminal trackage rights in a merger, acquisition or control proceeding. It would appear that the STB has determined that mergers are in the public interest, but that providing terminal trackage rights or reciprocal switching to a shipper for the purposes of promoting competitive options is not so important. The hurtle established under the Midtec decision was raised in the ICC's February 6, 1989 decision in Vista Chemical Company v. The Atchison, Topeka and Santa Fe Railway Company. In addition to finding no existence or likelihood of future anti-competitive conduct, the ICC also raised the standard of proof by noting the existence of ''vigorous geographic competition,'' and the railroad's pursuit of rate negotiations and offers of rate reductions and reduced rate contracts as further reasons for denying the request.
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(2) Bottlenecks: See STB Decision, December 31, 1996. The STB ruled that it does not have authority to require railroads to quote rates only over a ''bottleneck'' segment of a transportation movement, that is, over the portion where there is no competition. Because of the statutory requirement that rates for the entire movement exceed the costs of the entire movement by a substantial amount, the effect of the ruling is to require the shipper to subsidize a railroad over the entire movement, and thus to lose the benefit of competition over the ''bottleneck'' segment. Stated differently, with a ''bottleneck'' rate, a shipper could rely on competition to determine its rate for the remainder of the movement.
For further explanatory purposes, in a bottleneck situation, there is a potential for competition between two railroads over a major portion of a movement. However, that competition is eliminated because the remaining portion of that movement is controlled by only one of those two railroads.
A schematic of a bottleneck scenario looks like this:
64737g.eps
In this example, Railroad 1 and Railroad 2 both serve the origin and both are physically able to transport the goods over much of the movement. However, only Railroad 1 serves the destination, and it is this monopoly section of the movement, which is the bottleneck (noted in bold). By refusing to quote the shipper a rate to move the goods over the bottleneck, Railroad 1 can effectively eliminate any competition that Railroad 2 could offer over the vast majority of this movement because there is no way to get the goods from the interchange to the final destination.
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In addition, the ICC and now the STB have made a number of regulatory policy decisions affecting remedies.
(1) General Concerns: Some of the regulatory problems resulting in railroad pricing and service deficiencies are fairly obvious to rail-dependent customers. Maximum rate proceedings tend to go on for many years and are enormously costly and time consuming. The railroad revenue-adequacy determination has little, if any credibility as both debt and equity capital is readily available to allegedly revenue-inadequate railroads. Also such measures as stand-alone costs, the Uniform Rail Costing System, and the cost of capital are laden with complexities, judgments, and questionable data. In short, there is no effective regulatory backstop for most rail-dependent customers. This is supported by the outcome of the General Accounting Office (GAO) analysis completed in February 1999. According to the GAO's extensive surveying of rail customers, more than 70 percent noted that time, complexity and costs of filing complaints with the STB were such a barrier to regulatory intervention that they generally did not even consider it to be an option.
(2) Rate Case Guidelines: The ICC prescribed rate guidelines for large-volume shippers in Ex Parte No. 347 (Sub-No. 1), Coal Rate Guidelines—Nationwide, 1 I.C.C. 2d 520 (1985), aff'd sub nom. Conrail v. U.S., 812 F.2d 1444 (3d Cir. 1987). While the Coal Rate Guidelines are workable for the few large shippers whose traffic cycles between the same origin and destination, such as a coal-burning utility, the guidelines do not work well—or at all—for shippers with multiple origin-destination pairs, such as chemical shippers. For small shippers, they do not work at all.
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The STB did adopt small shipment guidelines in Ex Parte No 347 (Sub-No 2), but they have conceptual problems. It is almost certain that a prescribed rate under the small shipment guidelines would lead to a higher prescribed rate than under the Coal Rate Guidelines decisions (where rates at the level of 180 percent of variable costs have typically been prescribed). Moreover, it is not even possible to obtain access to data needed to determine if a small shipper complaint should be brought, until after a complaint is filed. Finally, shipper counsel are not entirely confident that a decision in favor of shippers under the small shipment guidelines would survive judicial review. (The Association of American Railroads challenged the small shipment guidelines, but also suggested that the challenge was not ripe for judicial review, and the D.C. Circuit agreed, so the guidelines may be challenged if a shipper ever files under them and prevails—yet another reason to discourage shippers from pursuing relief.)
These actions by the regulatory agency to protect the carrier from competition have resulted in increased costs for shippers and consumers by increasing rates and decreasing efficiency.
OCEAN CARRIER ANTITRUST CONCERNS
Last month, this committee held a hearing regarding the continued grant of antitrust immunity for ocean carriers. TIA submitted comments in support of H.R. 3138, The Free Market Antitrust Immunity Reform Act of 1999. TIA's comments also outlined the problems this unnecessary grant of antitrust immunity is causing the marketplace.
Passage of the Ocean Shipping Reform Act of 1998 was a step in the right direction toward deregulation. Unfortunately, the Act expanded the antitrust exemption enjoyed by carriers to adopt so-called ''voluntary'' guidelines regarding individual service contracts. The Department of Justice, in its testimony to this committee, stated that, ''conference[s] can use, [these guidelines] along with [their] already significant influence over [their] members, to signal them as to expected behavior. At a minimum, this can be used to discourage vigorous competition with respect to individual service contracts.''
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DOJ further stated that:
These and other provisions of the 1998 Act perpetuate the conference system, either by facilitating intercarrier agreements that would be unlawful in the absence of an exemption or by restricting the ways in which conference members can meaningfully compete on an individual basis for the business of large and small shippers alike. Surely it is appropriate to ask whether such an exemption makes sense, especially at a time when countries all over the world are turning to competition, rather than regulation, as the best hope for economic prosperity.
TIA agrees with and endorses that assessment.
Furthermore, many ocean carriers recently have announced that they are offering confidential service contracts that include fully integrated intermodal logistics services along with rate discounts. The senior managers of several large carriers have stated publicly in recent weeks that the key to increasing their profitability and return on equity is to transform the ocean carriers into full service logistics providers that can assist customers in managing the supply chain. For example, in a speech on March 22 to the Containerization International Global 2000 Conference in London, C.C. Tung, Chairman of Orient Overseas Container Line (OOCL) stated:
On the revenue side, we believe we can generate more volume by providing value-added services supported by our information technology and through our well-known China network. . . . Through our subsidiary Cargo Systems, we also provide customers creative supply chain management and logistics solutions using Internet technology and electronic commerce. . . . We have positioned ourselves to be a wired partner in the customer's supply chain so that transportation will be part of the increasingly electronic interface between our customers, their manufacturers, third party vendors and financial institutions.
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A March 27 Journal of Commerce report on the conference, headlined ''Ship Lines Pin Future Growth on Logistics'' the same ''theme was echoed by Ken Bloch Sorenson, president of APL Ltd.'s Europe region'' who expressed the view that ocean carriers should move from ''basic transportation to comprehensive logistics solutions, from single trade lanes to multilane global contracts, and from lowest price to best value.''
In other words, using all the competitive tools at their disposal, including confidential contracting and antitrust immunity, ocean carriers now are beginning to compete head to head with transportation intermediaries, both on the ocean side and in market sectors such as logistics and supply chain management, that reach far beyond providing the transportation of goods by sea.
The European Commission has recognized the unfair advantage this gives ocean carriers in competing with intermediaries, and the Commission has restricted the block exemption (antitrust immunity) of ocean carriers exclusively to the ocean transport segment of intermodal movements. TIA urges the Committee to consider adopting a similar approach in the United States. Otherwise, transportation intermediaries—forwarders and non-vessel-operating common carriers (NVOCCs)—fear that the ocean carriers will use both their antitrust immunity and their confidential contracting authority to seize business from them. Intermediaries have no such immunity and must publish all their rates and charges in public tariffs where they can be seen by the same ocean carriers who now are targeting their marketing efforts at the traditional business of the freight intermediary.
Antitrust immunity for ocean carriers must be reduced only to what is necessary for interlining. The members of TIA urge the committee to take action on Chairman Hyde's bill, and to examine closely being adopted by the EU to limit antitrust immunity to those areas where it can yield carrier efficiencies without distorting the marketplace and fostering unfair competitive advantages.
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The Federal Maritime Commission (FMC), which is charged with overseeing the ocean carrier industry, is failing at its task. Repeatedly, the agency has looked at carrier activity. Repeatedly the agency has found problems, but decided not to take action. Instead, the agency has concentrated its efforts on prosecuting small business transportation intermediaries heavily for tariff transgressions, often where no consumer has even lodged a complaint.
MOTOR CARRIER ANTITRUST CONCERNS
The Congress has eliminated most grants of antitrust immunity in the motor carrier industry. While some collective rate making authority exists, in most instances, the competitive marketplace has reduced the effectiveness of any rate bureau activity.
The motor carriers operate a National Classification Committee (NCC), however, as part of the American Trucking Associations. The NCC functions as a ratemaking body through the re-classification of freight. Almost all motor carriers use the classification for rate setting purposes. Instead of this body functioning as an open standard setting organization, only motor carriers have a vote on the re-classifications.
The Surface Transportation Board has oversight authority over the NCC. Only recently has the STB taken steps to open-up the NCC process more to shippers. We urge the Committee to review the agency's actions.
CONCLUSION
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Beyond interlining, antitrust immunity has no place in transportation. It serves to distort competitive markets and leads to abuse.
Antitrust immunity in transportation only serves to protect carriers from competition. When that fact is added to the inability of regulatory agencies to take action against carriers, it is shippers and ultimately consumers who bear the burden of artificially high prices. Economists have often found that a ''regulated'' cartel yields the worst of both worlds—high prices and low profitability—as companies lose the incentive to innovate and operate efficiently.
A competitive marketplace protected by antitrust laws will do more than the most carefully construed regulatory scheme to allow competitive forces in transportation to benefit consumers, shippers, the economy, and ultimately the carriers themselves.
We urge the committee to:
1. Give rail shippers access to antitrust remedies against abusive railroads.
2. Give the Department of Justice a larger role in rail mergers as they have in bank mergers.
3. Eliminate ocean carrier antitrust immunity except for interlining and efficiency enhancing joint ventures that do not reduce price competition.
4. Review the STB's handling of rail abuses of market power.
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5. Review the STB's handling of the motor carrier's National Classification Committee.
Mr. HYDE. Thank you very much. Mr. Hamberger.
STATEMENT OF ED HAMBERGER, PRESIDENT AND CEO, ASSOCIATION OF AMERICAN RAILROADS
Mr. HAMBERGER. Mr. Chairman, members of the committee. The Association of American Railroads appreciates the opportunity to present our members' views on the jurisdiction of the STB over antitrust matters involving railroad mergers and consolidations.
I must point out at the outset that the AAR this morning is not speaking for the Canadian National Railway Company. More than 40 percent of all freight transportation in the U.S. moves by rail. We move everything from orange juice to lumber to vegetables to coal to automobiles to grain. In addition, our intermodal business, the movement of trailers and containers by train in cooperation with steamship lines and trucking companies, has almost tripled since railroads were partially deregulated in 1980. We exceeded nine million trailers and containers last year.
On average, it costs 26 percent less to move freight by rail now than it did in 1981, 57 percent less in inflation-adjusted dollars. These reductions, according to many independent studies, have resulted in American consumers saving tens of billions of dollars over the past decade. The ability of U.S. railroads to continue to play this vital role in our economy depends in large part on the nature of the regulations to which we are subject. It has been well documented that a pervasive, intrusive scheme of economic regulation almost destroyed the private U.S. rail freight industry prior to 1980.
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Congress, in its wisdom, passed the Staggers Rail Act of 1980 and supplemented it with the ICC Termination Act of 1995 and set the stage for the railroads' recovery and ability to serve the U.S. shipping public. Consequently, AAR supports the current economic regulatory structure for railroads. Consistent with that, we believe that the STB's current jurisdiction over merger-related matters should be retained.
Our membership does not agree on the question of whether rail mergers should be considered by the STB right now. For that reason, I will not be able to discuss the issues relating to the pending litigation over the STB's authority to impose a moratorium on new rail mergers involving Class 1 carriers. This disagreement does not, however, diminish the support of our members for retaining a strong, independent STB that has authority to review and approve mergers and consolidations involving Class 1 railroads.
The primary reason for our position is that Congress has created a separate regulatory structure for the railroad industry applicable to most aspects of railroad rate-making and service activities. The economic regulation, therefore, of railroad mergers is interdependent with the economic regulation of other areas of railroad operations, such as maximum rates and rail abandonments. Given the current integrated regulatory structure, it makes sense to have one Agency, the STB, retain authority over all areas subject to economic regulation, including mergers. The present system carefully balances the public interest benefits of a merger in terms of improved efficiency, lower costs, and better service against any potential harms such as loss of competition or service.
Since 1920, Congress has consistently upheld this public standard which recognizes that mergers are a way to arrive at an industry that is strong, efficient, and revenue-adequate while still serving the public interest. In cases where potential mergers have endangered competition, the STB or the Interstate Commerce Commission, its predecessor Agency, has either rejected transactions outright or, by imposing conditions, attempted to preserve rail-to-rail competition where otherwise it might have been eliminated. Because of these conditions, no rail customer has gone from two-carrier service to one-carrier service as a result of any major post-Staggers Act merger. Indeed, in some cases, the number of carriers serving a customer actually increased because of agreements the combining carriers voluntarily reached in structuring the transaction.
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Finally, the STB retains oversight authority over rail mergers which it has approved to ensure compliance with the conditions it imposes. If the proceeding is still open, it also retains the right to adjust those conditions if necessary. The present system, with its set of checks and balances, works. The United States has the finest rail freight system in the world, the most efficient, and the most economical. Without a compelling reason for change, it makes no sense to gamble with the future of an industry that is so important to the Nation.
With my final few seconds, Mr. Chairman, I would like to respond very quickly to the statement of Mr. Voltmann. His statement fails to mention that intermodal traffic is exempt from STB regulation. When the ICC made that decision in 1981, it said specifically that it declined to continue antitrust immunity for the setting of rates on intermodal traffic, so that Mr. Voltmann's members, in fact, have access to the antitrust laws.
Thank you very much.
[The prepared statement of Mr. Hamberger follows:]
PREPARED STATEMENT OF ED HAMBERGER, PRESIDENT AND CEO, ASSOCIATION OF AMERICAN RAILROADS
Mr. Chairman, my name is Edward R. Hamberger and I am President and Chief Executive Officer of the Association of American Railroads. The AAR is a trade association representing major freight and passenger railroads. Its freight railroad members account for 93 percent of the freight revenue of all railroads in the United States and employ 91 percent of the nation's freight railroad workers. The AAR appreciates the opportunity to present its members' views(see footnote 44) on the jurisdiction of the Surface Transportation Board over antitrust related matters involving rail mergers and consolidations.
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At the outset, I would like to talk for a moment about how the U.S. rail industry fits into today's economy. Freight railroads move just about everything—from lumber to vegetables, from coal to orange juice, from grain to automobiles, from chemicals to scrap iron—and connect businesses with each other across the country and with markets overseas. They carry 40 percent of the nation's intercity freight; 70 percent of vehicles from domestic manufacturers; 64 percent of the nation's coal; and 40 percent of the nation's grain. In 1998, railroads hauled over 18 million carloads of freight, plus 9 million trailers and containers, nearly tripling the intermodal volume of 1980. On average, it costs 26 percent less to move freight by rail now than it did in 1981, and 57 percent less in inflation-adjusted dollars. These reductions have saved American consumers tens of billions of dollars. Moreover, the U.S. freight railroads directly contribute $13 billion a year to the U.S. economy in wages and benefits to more than 200,000 employees and billions of dollars more in purchases. U.S. rail employees are among the very best compensated and most productive in all of U.S. industry. All of these facts are evidence of how integral the railroads are to the continued vitality of the U.S. economy.
The ability of the U.S. railroads to continue to provide the transportation services that the country needs has been and remains, in large part, dependent upon the nature of the economic regulation to which it is subject. I will not belabor the Committee with the history of how a pervasive, intrusive scheme of economic regulation almost destroyed the private sector U.S. freight rail industry prior to 1980. The troubles of the rail industry at that time, where railroads owning almost one-quarter of the nation's rail trackage were in bankruptcy and many others were teetering on the edge, are well documented. It suffices to say that it is the current regulatory structure as established by the Staggers Act of 1980 and supplemented by the ICC Termination Act of 1995, that has set the stage for the railroads' recovery and ability to serve the U.S. shipping public.
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Consequently, the AAR supports the current economic regulatory structure applicable to the railroads. Consistent with the AAR's belief that the current regulatory structure should remain in place, we also believe that the STB's present jurisdiction and authority over antitrust related matters should be retained, including the provisions of 49 U.S.C. §11321 et. seq., where the STB has exclusive authority to review and approve railroad mergers and control transactions.
Our membership does not agree on the question of whether new rail mergers should be considered by the STB right now. For that reason, I will not be able to discuss the issues related to the pending litigation over the STB's authority to impose a moratorium on new rail mergers involving Class I rail carriers. Some Class I railroads believe that the STB should accept rail merger applications and process them in the maximum sixteen month period in the statute. Other railroads believe that a temporary suspension of current merger activity is appropriate at this time, and these railroads support the STB's fifteen month moratorium. This disagreement does not diminish the support of our membership for retaining a strong, independent STB that has authority to review and approve proposals for mergers and consolidations involving Class I railroads in accordance with Congressional intent as expressed in the Railroad Transportation Policy and elselwhere in the statutes administered by the STB.
A primary reason for our position is that Congress has created a separate regulatory structure for the railroad industry applicable to most aspects of rail rate making and service activities. The economic regulation of railroad mergers is essentially interdependent with the economic regulation of other areas of railroad operations, such as STB regulation of maximum rates, abandonments of rail operations and grants of trackage rights. Given the current integrated regulatory structure, it makes the most sense to have one agency, the STB, regulating all areas subject to economic regulation, including mergers.
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The system has worked and there is no need to change it. The present Interstate Commerce Act merger standards call for a public interest balancing, which takes account of both the public benefits of the merger (in terms of increased efficiency, lower costs and better service) and any harms (in terms of reduction in competition and loss of essential services). Since 1920, Congress has consistently found that the public interest standard is the most appropriate test by which to judge rail mergers. This is so because strength and efficiency of the rail industry is vital to the entire economy, and mergers are a way to arrive at an industry that is strong, efficient and revenue adequate while serving the public interest.
The statutory power of the STB to impose conditions on rail mergers is essential to allowing the efficiency benefits to be attained while also preserving competition. The STB is experienced in considering and deciding upon appropriate conditions. This expertise is developed not only in merger cases, but through administering other regulatory provisions, such as maximum rate regulation, abandonment regulation, and new construction regulation. The STB also retains oversight authority over rail mergers which it has approved to ensure compliance with the conditions it imposes.
In cases where proposed mergers have endangered competition, the STB or its predecessor, the Interstate Commerce Commission, either has rejected transactions outright or imposed conditions to address the issues. Regulatory policy has carefully attempted to preserve rail-to-rail competition where it might otherwise be eliminated in mergers. As a result of regulatory and commercial conditions, there has not been any customer rendered captive to a single rail carrier in any major post-Staggers railroad merger transaction, and in some cases the rail-to-rail competition available to customers has increased through the voluntary acts of the combining carriers to structure the transaction in a pro-competitive fashion.
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To sum up, Congress has historically recognized the uniqueness and importance of the rail industry. Congress crafted a merger process for railroads that takes into account the effects on competition—yet requires that these concerns be addressed along with other important public interest matters. This is a well thought-out and long-standing national railroad merger policy system that has worked for the past 75 years. It makes no sense to abandon it now without a compelling reason for change and to gamble with the future of an industry that is so important to our nation.
Mr. HYDE. Thank you, sir. Mr. Rein.
STATEMENT OF BERT REIN, PARTNER, WILEY, REIN & FIELDING
Mr. REIN. Thank you, Mr. Chairman, Mr. Conyers, members of the committee. I am pleased and honored to be here today to testify on behalf of the U.S. Chamber of Commerce. I am a former member of the board of directors of the U.S. Chamber of Commerce and a current board member of the Chamber's public policy law firm, the National Chamber Litigation Center.
The U.S. Chamber is the world's largest business federation representing more than three million businesses and organizations of every size, sector, and region. One of those companies, Mylan Laboratories, for whom we also speak today, is the subject of an action by the Federal Trade Commission which seeks so-called disgorgement of supposedly unlawful gains arising from Mylan's use of methods of competition which are alleged to be unfair within the meaning of the Federal Trade Commission Act. My firm filed a brief for the Chamber in that case contesting, independent of the underlying merits, the authority and wisdom of the FTC's decision to pursue a disgorgement remedy in Federal Court rather than to challenge Mylan in the administrative arena where the Congress has instructed the FTC to play its legitimate role in antitrust enforcement. That brief, I would add, is included in my written testimony.
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My purpose today is to explain why the Chamber believes that the FTC has overstepped its enforcement boundaries in the Mylan case and in its threats to bring other cases of this type in the future. The committee should recognize that the FTC has seized upon a sliver of unrelated legislative authority to aggrandize its antitrust enforcement powers in a manner never contemplated by the Congress and alien to the FTC's own historical mandate.
The FTC's new enforcement posture threatens to over-deter the innovative and aggressive business conduct, which, particularly for small- and medium-sized businesses which form the bulk of the Chamber's membership, is the key to survival in an increasingly global and competitive environment. Thus, the Chamber urges this committee to use its good offices and, if necessary, its legislative authority to properly contract what Chairman Pitofsky labeled a stretch of the FTC's enforcement boundaries.
In the Mylan case, the FTC challenges certain supply contracts which it believes permitted Mylan to foreclose generic drug competition in two anti-anxiety products, and thus to expand its profit margin. These contracts were abandoned before the litigation commenced and were never claimed to be per se violations of the antitrust laws prosecutable criminally by the Antitrust Division. The Commission ordinarily would have challenged these contracts in an administrative cease-and-desist proceeding. That proceeding would have permitted the use of the FTC's expertise to test the alleged unfairness of Mylan's conduct and would have afforded Mylan, and the business community generally, fair warning of how the sometimes amorphous line between aggressive and unfair methods of competition would be drawn in this area before penalties were imposed. By so proceeding, the Commission would have played the unique and somewhat non-duplicative antitrust enforcement role Congress envisioned in its creation.
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The Commission's decision to avoid any administrative proceeding and to seek the limelight of a high-profile judicial proceeding required it to build a large enforcement superstructure on a minuscule legislative foundation. The Commission seized upon a fragment of language in section 13[b] of its statute to assert the power to seek injunctive relief in court whenever it believed the standards of the Federal Trade Commission Act have been violated. It ignored the history of section 13[b], which Congress had enacted only to afford judicial relief in a specialized class of non-antitrust consumer protection cases and to permit preserving the status quo ante pending the administrative resolution of unfair methods' cases like mergers, where effective relief could be foreclosed by unchecked intervening private activity. It translated the grant of injunctive remedial powers into equitable remedial powers, and thus bootstrappen prohibitory power into the affirmative power to mandate disgorgement. It shifted the task of determining unfairness to the court and transformed itself from an adjudicatory to a prosecutorial agency, the capacity formerly and properly reserved to the Antitrust Division of the Department of Justice.
The Chamber believes that this legal maneuver, however artful, breaches faith with the Congress. A fundamental change in the Commission's antitrust enforcement role should not be premised on a serendipitous ambiguity in legislative language addressing an unrelated issue. Congress could have given the FTC the express authority to bring unfair methods' cases in court, but it has not. Congress could have prescribed a disgorgement remedy, but it has not. Indeed, there is not a shred of evidence that Congress ever considered, let alone condoned, the exercise of this prosecutorial authority by the FTC.
The conclusion is, we believe, self-evident. Rather than stretch the law, the Commission should have extended itself toward the Congress and directly sought the authority it now wishes to exert. The Chamber is concerned by the practical as well as process problems arising in the Mylan case. Following the Commission's lead, 31 State attorneys general brought parallel charges seeking multiple damages under Federal and State law. Thirty [30] separate private class-action antitrust lawsuits are also pending, each seeking trouble damages without regard to the proposed disgorgement.
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Mr. HUTCHINSON [presiding]. Mr. Rein, would you go ahead and conclude?
Mr. REIN. Yes. What might have been handled as a reasonable challenge to a complex business practice with possibly significant competitive consequences had turned out into an all-out legal assault of a type where the magnitude of risk itself becomes a constraint on the ability to defend—a form of piling on, which is regrettably all too familiar to the business community.
The Chamber urges the committee to give serious consideration to limiting the power of the FTC to seek permanent injunctive relief to consumer protection cases, and would also ask further consideration of the piling-on issue.
Thank you very much. I would be pleased to respond to any questions.
[The prepared statement of Mr. Bert Rein follows:]
PREPARED STATEMENT OF BERT REIN, PARTNER, WILEY, REIN & FIELDING
Good afternoon, Chairman Hyde, Mr. Conyers, and Members of the Committee. I am Bert Rein, a partner in the law firm of Wiley, Rein & Fielding. I am a former member of the Board of Directors of the U.S. Chamber of Commerce and a current board member of the Chamber's public policy law firm, the National Chamber Litigation Center.
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I am pleased and honored to be here today to testify on behalf of the U.S. Chamber of Commerce. The U.S. Chamber of Commerce is the world's largest business federation, representing more than three million businesses and organizations of every size, sector and region. One of those companies, Mylan Laboratories, is the subject of an action by the Federal Trade Commission which seeks ''disgorgement'' of supposedly unlawful gains arising from Mylan's use of methods of competition alleged to be unfair within the meaning of the Federal Trade Commission Act. My firm filed a brief for the Chamber in that case contesting, independent of the underlying merits, the authority and wisdom of the FTC's decision to pursue a disgorgement remedy in federal court rather than to challenge Mylan in the administrative arena where the Congress has instructed the FTC to play its legitimate role in antitrust enforcement. That brief is included in my written testimony.
I would like to explain why the Chamber believes that the FTC has overstepped its enforcement boundaries in the Mylan case and in its threats to bring other cases of this type in the future. The Committee should recognize that the FTC has seized upon a sliver of unrelated legislative authority to aggrandize its antitrust enforcement powers in a manner never contemplated by the Congress and alien to its own historic mandate. The FTC's new enforcement posture threatens to overdeter the innovative and aggressive business conduct which, particularly for the small and medium size businesses which form the bulk of the Chamber's membership, is the key to survival in an increasingly global, competitive environment. Thus, the Chamber urges this Committee to use its good offices and, if necessary, its legislating authority to properly contract what Chairman Pitofsky labelled a stretch of the FTC's enforcement boundaries.
In the Mylan case, the FTC challenges certain supply contracts which it believes permitted Mylan to foreclose generic drug competition in two anti-anxiety products and thus to expand its profit margins. These contracts were abandoned before the litigation commenced and were never claimed to be per se violations of the antitrust laws prosecutable criminally by the Antitrust Division. The Commission ordinarily would have challenged these contracts in an administrative cease and desist proceeding. That proceeding would have permitted the use of the FTC's expertise to test the alleged ''unfairness'' of Mylan's conduct and would have afforded Mylan and the business community generally fair warning of how the sometimes amorphous line between aggressive and ''unfair'' methods of competition would be drawn in this area before penalties were imposed. By so proceeding, the Commission would have played the unique, and somewhat non-duplicative, antitrust enforcement role Congress envisaged in its creation.
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The Commission's decision to avoid any administrative proceeding and to seek the limelight of a high profile judicial proceeding required it to build a large enforcement superstructure on a minuscule legislative foundation. The Commission seized upon a fragment of language in Section 13(b) of its statute to assert the power to seek injunctive relief in court whenever it believes the standards of the Federal Trade Commission Act have been violated. It ignored the history of Section 13(b) which Congress had enacted only to afford judicial relief in a specialized class of non-antitrust, consumer protection cases and to permit preserving the status quo ante pending the administrative resolution of unfair methods cases like mergers where effective relief could be foreclosed by unchecked, intervening private activity. It translated the grant of injunctive remedial powers into equitable remedial powers and thus bootstrapped prohibitory power into the affirmative power to mandate disgorgement. It shifted the task of determining ''unfairness'' to the court and transformed itself from an adjudicatory to a prosecutorial agency—a capacity formerly and properly reserved to the Antitrust Division of the Department of Justice.
The Chamber believes that this legal maneuver, however artful, breaches faith with the Congress. A fundamental change in the Commission's antitrust enforcement role should not be premised on a serendipitous ambiguity in legislative language addressing an unrelated issue. Congress could have given the FTC the express authority to bring unfair methods cases in court but it has not. Congress could have prescribed a disgorgement remedy but it has not. Indeed, there is not a shred of evidence that Congress ever considered, let alone condoned, the exercise of this prosecutorial authority by the FTC. The conclusion is, we believe, self-evident. Rather than ''stretch'' the law, the Commission should have extended itself toward the Congress and directly sought the authority it now wishes to exert.
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The Chamber is concerned by the practical, as well as process, problems arising in the Mylan case. Following the Commission's lead, thirty-one state attorneys general brought parallel charges seeking multiple damages under federal and state law. Thirty separate private class-action antitrust law suits are also pending, each seeking treble damages without regard to the proposed disgorgement. What might have been handled as a reasonable challenge to a complex business practice with possibly significant competitive consequences, has turned into an all-out legal assault of a type where the magnitude of risk itself becomes a constraint on the ability to defend. This form of piling on has regrettably become an all-too-common problem for the American business community.
The Chamber believes that this Committee should give serious and urgent consideration to restoring Congress' original understanding of Section 13(b) by limiting permanent injunctive relief to consumer protection cases. The Chamber also would urge this Committee to give additional attention to the ''piling on'' issue illustrated by the Mylan case and to consider means by which adequate deterrence and appropriate redress can be preserved without effectively foreclosing the ability of businesses to defend the legitimacy of their competitive conduct.
I would like to submit for the record the amicus brief filed by the U.S. Chamber of Commerce in the Mylan case challenging the legality and wisdom of the Commission's assertion to seek disgorgement.
Thank you. I would be pleased to respond to any questions you may have.
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Attachment:
UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA
FEDERAL TRADE COMMISSION,
Plaintiff,
Civ. No. 1:98 CV 03114 (TFH)
v.
MYLAN LABORATORIES, INC., ET AL.
Defendants.
BRIEF OF AMICUS CURIAE THE CHAMBER OF COMMERCE OF THE UNITED STATES IN SUPPORT OF DEFENDANTS' MOTION TO DISMISS PURSUANT TO FED. R. CIV. P. 12(B)(1)
The Chamber believes that systemic ill effects will follow from accepting the Federal Trade Commission's (''FTC's'') efforts to exponentially enlarge its role in antitrust enforcement. The U.S. business community has an important interest in the sound administration of the antitrust laws. Properly enforced, the antitrust laws safeguard free markets, enhance economic performance, and bolster public confidence in the free enterprise system. On the other hand, excesses in antitrust enforcement, including onerous remedial threats, can unduly deter lawful business behavior, retard economic progress, and restrain initiatives—particularly from smaller businesses, with limited resources to contest with government agencies.
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The FTC's unprecedented claim that Section 13(b) of the Federal Trade Commission Act (''FTCA'') gives it discretion to seek permanent injunctive relief and ''disgorgement'' of Defendants' allegedly illegal profits in ''unfair methods of competition'' cases constitutes precisely such an unwarranted excess in enforcement. In the Chamber's view, the FTC seeks in this case to extrapolate from Section 13(b)—a carefully delineated and limited provision permitting the FTC to preclude possibly irreversible changes in the competitive status quo pending administrative action—a general grant of equitable jurisdiction that would permit the Commission to act as a prosecutorial and damage recovery agency.
This brief will argue that the FTC, under its organic statute, has an important, but discrete and specialized, supplementary role in the administration of the antitrust laws. As the history of the FTCA clearly shows, the Commission is neither a criminal prosecutorial agency nor a parens patriae representative of potentially injured persons. Rather, the FTC has a special capability to apply its administrative expertise and processes to analyze novel issues involving the reasonableness or ''unfairness'' of untested ''methods of competition.'' The cease and desist remedy applicable to FTC administrative actions gives the business community fair warning of the resolution of these complex issues before penalties are imposed. In contrast, according the Commission a purely prosecutorial role in the courts would raise the specter that business people will be penalized for engaging in conduct that they believed was permissible, discourage many lawful and socially beneficial relationships, and improperly put the courts into the business of defining unfair methods of competition and inventing remedial rules.
In addition to the fundamental change in the FTC's antitrust enforcement role threatened in this case, the Chamber also believes that allowing the FTC to seek millions of dollars in monetary payments from alleged antitrust violators will pose serious administrative problems for the courts, the agency, or both. The FTC clearly cannot simply keep the money that it seeks to force Defendants to ''disgorge.'' At same time, however, no mechanism or standards—whether administrative or judicial—exist for dispensing those enormous sums to anyone else. In the view of the Chamber's members, this fundamental problem arises from the fact that Congress has not authorized the FTC to seek monetary relief in unfair methods cases.
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For these reasons, as set forth in greater detail below, this Court should reject the Commission's efforts in this case to turn Section 13(b) from a limited adjunct to traditional cease and desist relief into a free-form grant of ''equitable'' enforcement power.
THE HISTORY OF THE FTCA DEMONSTRATES THAT THE COMMISSION'S PROPER ROLE IN ANTITRUST ENFORCEMENT IS A SPECIALIZED AND LIMITED ONE.
A. The Passage of the FTCA
To understand the role that Congress authorized the FTC to play in antitrust enforcement, it is necessary to examine the origins of the agency, and the evolution of its congressional mandate.(see footnote 45) The Commission was initially proposed by President Wilson as an ''interstate trade commission'' that would be ''indispensable instrument of information and publicity.''(see footnote 46) Despite Republican criticism that such an agency would lack ''teeth'' unless it also had the power to ''prevent unfair competition,''(see footnote 47) the House passed a trade commission measure that would have conferred only information gathering and reporting duties on the new Commission.(see footnote 48)
The Senate Committee on Interstate Commerce addressed the Republican concerns, however, by adding to the original bill a prohibition on ''unfair competition.''(see footnote 49) The Committee's bill also authorized the Commission to issue orders ''restraining and prohibiting'' practices found to constitute ''unfair competition.''(see footnote 50) Notably, however, the FTC was to have no independent enforcement power; if a respondent did not obey an order of the agency, its authority was limited to seeking a court order requiring compliance.(see footnote 51)
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After the Senate bill was reported out of Committee, debate focused largely on the proposed Commission's inability to order a remedy for victims of unfair competition. Proponents of a provision supplying a private cause of action for anyone injured by reason of ''unfair competition'' argued that a cease and desist order entered at the conclusion of an administrative proceeding would provide neither an effective deterrent, nor just recompense for victims.(see footnote 52) Significantly, however, the senators arguing against a private remedy prevailed. They maintained that the breadth and vagueness of the prohibition against ''unfair competition''—which required the FTC to define the contours of that term through case-by-case administrative adjudication—made it unfair to penalize business people for engaging in conduct that they may have had no reason to believe was unlawful at the time.(see footnote 53) Indeed, according to one of the Senate sponsors of the bill that became the FTCA, the fundamental purpose of the new law was ''educational and corrective in character, and we wish through it to establish administrative law upon the subject so that every man engaged in trade in the country can have a proper understanding of what the law allows and what the law forbids.''(see footnote 54)
Thus, at the time of the FTCA's enactment, it was clear that the role of the FTC was to provide guidance to the marketplace by exercising its expertise through administrative proceedings, and that its remedial authority was limited to issuing cease and desist orders. The Commission had no authority to seek judicial relief directly, and certainly no authority to seek monetary relief. Although subsequent amendments to the FTCA have authorized the Commission to apply for the judicial equivalent of cease and desist relief in discrete circumstances, those amendments have not granted the agency the sweeping and discretionary power to seek permanent injunctions and monetary relief that the FTC now claims.
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B. Relevant Amendments to the FTCA
In 1938, Congress amended the FTCA to prohibit ''unfair or deceptive acts or practices'' in addition to ''unfair methods of competition.''(see footnote 55) Although this expansion of the FTC's role to include ''consumer protection'' cases as well as ''unfair methods of competition'' cases may at first appear unrelated to the present controversy, it is actually highly relevant to interpreting later amendments to the FTCA, including §13(b) of the Act, upon which the Commission relies here. In particular, it is significant that—in contrast to the FTC's specialized role in a congressionally designed, comprehensive antitrust regime (also including DOJ criminal and civil enforcement and private, federally created remedies)—the FTC is the sole federal agency dealing with unfair acts and practices.
Indeed, §13(b) owes its existence to the FTC's role in unfair acts and practices cases. The language that eventually became §13(b) was originally considered by Congress in 1971, as part of proposed consumer protection legislation that eventually became the Magnuson-Moss Warranty-Act of 1975. See Pub. L. No. 93–637, 88 Stat. 2183 (1975). The relevant language in that bill authorized the Commission to seek temporary relief only in consumer protection cases, see S. 986, 92d Cong. §208 (1971); the bill did not apply to unfair methods cases at all, nor did it authorize any permanent judicial relief.
Two years later, a similar bill was reintroduced, but this time with the current proviso permitting the FTC to seek permanent relief ''in proper cases.''(see footnote 56) The accompanying Senate committee report explained that the purpose of this proviso was ''to permit the Commission to bring an immediate halt to unfair or deceptive acts or practices when to do so would be in the public interest.''(see footnote 57) The Committee observed that ''[a]t the present time [unfair or deceptive practices] might continue for several years until agency action is completed,'' and that ''[v]ictimization of American consumers should not be so shielded.''(see footnote 58) More specifically, the Committee noted that under the proviso, ''the Commission will have the ability, in the routine fraud case, to merely seek a permanent injunction in those situations in which it does not desire to further expand upon the prohibitions of the Federal Trade Commission Act through the issuance of a cease and desist order.''(see footnote 59) The Senate report thus indicated that ''proper cases'' for permanent injunctive relief would involve clear consumer protection violations, such as ''routine fraud case[s],'' in which the Commission's application of its administrative expertise would not be necessary, and in which strengthening the Commission's singular federal enforcement role was essential.(see footnote 60)
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Later in 1973, Senator Jackson lifted the proposed §13(b) from S. 356, and offered it as a floor amendment to the Trans-Alaska Pipeline Act. At that time, Senator Jackson broadened the preliminary injunction part of the provision to allow the Commission to seek such relief (but not permanent injunctions) in unfair methods cases as well as consumer protection matters, in response to a specific request from the FTC. Specifically, the Commission's General Counsel urged that the agency's enforcement authority was hampered because it was not able to obtain preliminary injunctive relief during the pendency of FTC administrative action.(see footnote 61) He elaborated:
[P]roposed legislation [S. 356] . . . contain[s] language which would give the Commission power to seek preliminary injunctions in deceptive practice situations. But [it] do[es] not include the corresponding power to restrain the continuance of anticompetitive conduct. The power to seek such preliminary injunctions should . . . be available in both deceptive practices and in anticompetitive conduct situations.(see footnote 62)
Notably, the Commission did not ask that the proviso regarding permanent injunctive relief be expanded to extend to unfair methods cases, presumably because the rationale supporting that provision—that application of the Commission's expertise is unnecessary in ''routine'' consumer protection cases—does not apply to unfair methods cases.(see footnote 63)
This brief history of the adoption of the FTCA and relevant amendments clearly illustrates that, in stark contrast to the sweeping powers asserted by the FTC in this litigation, the role that Congress has designed for the Commission in antitrust enforcement is a specialized—albeit important—one. From the outset, the Commission's basic role has been to apply its administrative expertise and processes to the difficult policy questions that arise from the practical need to construe the FTCA's vague prohibition on ''unfair methods of competition,'' 15 U.S.C. §45(a)(1), so as to provide concrete guidance to the business community. To permit the FTC to accomplish this core function, Congress has also granted it the correlative power to seek preliminary injunctive relief to maintain the status quo while it considered the propriety of particular methods of competition. See 15 U.S.C. §53(b). Finally, upon a finding of impropriety, the agency may issue cease and desist orders, which give the business community fair warning of the resolution of complex competition policy issues before penalties are imposed. See 15 U.S.C. §45(a). That is the full extent of the Commission's congressionally-approved authority in the antitrust arena.
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II. PERMITTING THE FTC TO AGGRANDIZE ITS CONGRESSIONALLY LIMITED ROLE IN UNFAIR METHODS CASES WILL HAVE SERIOUS ADVERSE CONSEQUENCES FOR THE BUSINESS COMMUNITY AND THE COURTS.
In this case, the FTC attempts to enlarge dramatically the specialized role that Congress has prescribed for the agency. This proposed expansion—including the Commission's efforts to obtain permanent injunctive and monetary relief—is flatly inconsistent with the FTCA. Moreover, in the Chamber's view, allowing the FTC to extrapolate this extreme relief from a sliver of legislative language passed (without serious legislative debate) in an unrelated, omnibus bill will have concrete, negative effects on the Chamber's membership, by deterring lawful business behavior, restraining legitimate commercial initiatives, and retarding economic growth. Finally, allowing the FTC to force defendants to ''disgorge'' vast sums into the Commission's coffers will pose serious administrative problems for this Court, the agency, or both.
A. Permitting the FTC To Obtain Permanent Injunctive Relief In Unfair Methods Cases Is Inconsistent With The FTCA And Will Harm The Business Community.
The Commission's effort to obtain permanent injunctive relief in this case flouts the most basic purpose of the FTCA: ''to establish administrative law upon the subject [of 'unfair methods of competition'] so that every man engaged in trade in the country can have a proper understanding of what the law allows and what the law forbids.''(see footnote 64) Specifically, the FTCA confers upon the Commission the responsibility to give concrete definition—capable of guiding the behavior of the business community—to the statute's vague prohibition on ''unfair methods of competition.'' Here, however, the FTC has made no pretense of performing its ''educational and corrective'' function by applying its administrative expertise to the novel antitrust issues presented.(see footnote 65) In fact, the Commission has not held any administrative proceedings in this case, nor are any intended. It is therefore clear that the FTC does not seek to act in this case as an antitrust policy-maker, but rather as a prosecutorial agency, in direct contravention of its congressional mandate.
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The Commission makes the surprising claim that the ''plain meaning'' of §13(b) somehow authorizes the unprecedented expansion of unfair methods enforcement authority that the agency seeks here. According to the FTC, ''The statute provides that, whenever the Commission has reason to believe that any person 'is violating or is about to violate any provision of law enforced' by the Commission,'' the FTC may bring a suit for a permanent injunction under the permanent injunction proviso of §13(b), because ''a 'proper' case [under §13(b)] is any case that involves a violation of law enforced by the Commission, subject only to the Commission's discretion.'' See FTC Mem. at 5–6 (emphasis in original). In fact, however, the statute provides no such thing. The Commission's argument ignores both the text and structure of §13(b).(see footnote 66)
(b) Temporary restraining orders; preliminary injunctions
Whenever the Commission has reason to believe—
(1) that any person, partnership, or corporation is violating, or is about to violate, any provision of law enforced by the Federal Trade Commission, and
(2) that the enjoining thereof pending the issuance of a complaint by the Commission and until such complaint is dismissed by the Commission or set aside by the court on review, or until the order of the Commission made thereon has become final; would be in the interest of the public——
the Commission by any of its attorneys designated by it for such purpose may bring suit in a district court of the United states to enjoin any such act or practice. . . .; Provided, however, That if a complaint is not filed within such period (not exceeding 20 days) as may be specified by the court after issuance of the temporary restraining order or preliminary injunction, the order or injunction shall be dissolved by the court and be of no further force and effect: Provided further, That in proper cases the Commission may seek, and after proper proof, the court may issue, a permanent injunction. . . .
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15 U.S.C. §53(b) (emphasis added).
Section 13(b) comprises two parts: the first (beginning ''Whenever the Commission . . .) sets forth two prerequisites to the Commission bringing a suit for an injunction in district court; the second (beginning ''the Commission by any of its attorneys . . .) contains the jurisdictional grant providing for preliminary and, in ''proper cases,'' permanent injunctive relief. Thus, under the statute as actually enacted by Congress—in contrast to the Commission's selective quotations—two requirements must be satisfied before a district court has jurisdiction to entertain any FTC request for injunctive relief: (1) the Commission must have ''reason to believe'' that an entity ''is violating, or is about to violate'' a provision of law enforced by the FTC; and (2) the Commission must have ''reason to believe'' that ''the enjoining [of unlawful action] pending the issuance of a complaint by the Commission and until such complaint is dismissed by the Commission'' would be in the interest of the public. Neither prerequisite to jurisdiction is satisfied here.
First, the Commission in this case does not ''believe'' that any entity ''is violating or is about to violate'' the antitrust laws. In fact, it is undisputed that the licensing agreements that the FTC claims to have constituted ''unfair methods of competition'' are no longer in force. Thus, there is no longer any alleged ''violation'' to ''enjoin.'' Second, and still more important, the Commission here has not ''issu[ed],'' nor does it intend to issue, any administrative ''complaint'' whatsoever. Instead, the FTC seeks to rely on §13(b)—which was enacted to permit the Commission to better fulfill its administrative function by allowing the agency to preserve the status quo during the pendancy of FTC administrative action—to justify the agency's failure to perform its administrative function at all. That simply makes no sense.
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Thus, in the Chamber's view, the plain language of §13(b) does not ''establish[ ] that the Court has jurisdiction over the subject matter of this action,'' contrary to the Commission's claims. See FTC Mem. at 5. In fact, §13(b) sets forth two prerequisites to jurisdiction, neither of which is satisfied here. The statutory text alone thus provides ample authority in this case for rejecting the FTC's efforts to fundamentally alter its role in antitrust enforcement.
The structure of §13(b) reinforces that conclusion. As noted above, the statute contains a single grant of jurisdiction authorizing—when the statutory prerequisites are satisfied—both preliminary and, in ''proper cases,'' permanent injunctive relief. The fact that Congress chose to include a proviso pertaining to permanent injunctive relief in a statutory provision entitled ''Temporary restraining orders; preliminary injunctions'' clearly indicates that the two kinds of injunctive relief are intended to apply to a single class of cases. Significantly, the legislative history of the permanent injunction proviso of §13(b) explains that relationship. Specifically, the Senate Report accompanying the bill from which Senator Jackson took the permanent injunction proviso observed that the proviso would ''allow the Commission to seek a permanent injunction when a court is reluctant to grant a temporary injunction because it cannot be assured of an early hearing on the merits.''(see footnote 67) Thus, as the structure of §13(b) itself suggests, a ''proper case'' case for permanent injunctive relief must, at a minimum, be one in which preliminary relief—which is the fundamental subject of §13(b)—would be appropriate. This, of course, is not such a case, since there is no longer any alleged violation to enjoin, and thus no possible ''irreparable harm'' to be avoided.
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Significantly, as discussed in Part I, supra, the legislative history of the permanent injunction provision also suggests that Congress had quite specific consumer protection circumstances in mind when it chose the statutory term ''proper cases.'' Congress noted that under the §13(b) proviso, ''the Commission will have the ability, in the routine fraud case, to merely seek a permanent injunction in those situations in which it does not desire to further expand upon the prohibitions of the Federal Trade Commission Act through the issuance of a cease and desist order.''(see footnote 68) The Senate report thus indicates that a ''proper case'' for permanent injunctive relief would be a straightforward consumer protection case, such as ''routine fraud case,'' in which immediate intervention is essential and applying the Commission's policy-making expertise is unnecessary. Clearly, a complicated unfair methods case arising from past and terminated conduct to be evaluated under the rule of reason, like the present matter, is not remotely analogous to the ''proper'' circumstances that Congress had in mind. Rather, this case lies at the heart of the FTC's fundamental responsibility to apply its administrative expertise and processes to provide guidance to the business community on the meaning of the vague statutory term ''unfair methods of competition.''
It bears emphasis that accepting the FTC's construction of ''proper cases'' would read that jurisdictional requirement out of the statute. As noted above, the Commission argues that a ''proper case'' is simply ''any case that involves a violation of law enforced by the Commission, subject to the Commission's discretion to determine whether the circumstances are appropriate ('proper') to seek permanent injunctive relief rather than an administrative remedy.''(see footnote 69) FTC Mem. at 14 (emphasis added). Thus, under the Commission's construction of §13(b), the FTC would have discretion in every case to decide whether to initiate administrative proceedings, or go directly to court for a permanent injunction. Even putting aside the textual, structural, and historical objections set forth above, the Chamber believes that it simply makes no sense to think that Congress intended to work such a fundamental change in the FTC's role in antitrust cases by including a one-sentence proviso on permanent injunctions at the end of a statutory section governing ''[t]emporary restraining orders [and] preliminary injunctions,'' which was enacted as part of the Trans-Alaska Pipeline Act.
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Finally, the Commission's effort to transform its antitrust role from that of expert agency to that of prosecutor is not only inconsistent with the FTCA and common sense, but also with clearly established case law. As the Supreme Court held in FTC v. Sperry & Hutchinson Co., 405 U.S. 233, 249 (1972), ''[a] court cannot label a practice 'unfair' under [Section 5(a)(1)]. It can only affirm or vacate an agency's judgment to that effect'' (emphasis added). See also FTC v. Food Town Stores, Inc., 539 F.2d 1339, 1342 (4th Cir. 1976) (''The district court is not authorized to determine whether the antitrust laws have been or are about to be violated. That adjudicatory function is vested in the FTC in the first instance.'') In this case, however, as noted above, the agency has abdicated its responsibility to determine through the administrative process whether the defendants' conduct falls within the vague contours of ''unfair methods of competition.'' Instead, it invites this Court to address that issue in the absence of an administrative record. The Chamber believes that, consistent with the cited cases, the Court should decline the Commission's dubious invitation.(see footnote 70)
Permitting the Commission to circumvent its administrative duty to define the contours of ''unfair methods of competition'' by proceeding directly to court for a permanent injunction will have concrete, adverse effects on Chamber's members. As the Congress that originally adopted the FTCA understood—see Part 1, supra—the statutory ban on ''unfair methods of competition'' is a vague prohibition, which does not provide the kind of clear antitrust standards that the business community needs to guide its behavior. That is why the FTC's role must be ''educational and corrective in character,'' so that it may ''establish administrative law'' to clarify ''what the [statute] allows and what the [statute] forbids.''(see footnote 71) Allowing the Commission to abdicate that role in favor of a prosecutorial one, as it seeks to do here, raises the very real prospect of an unseemly contest between the FTC and DOJ's Antitrust Division for prosecutorial glory, and a skewing of the remedial balance Congress built into the antitrust laws. This Court should thus require the FTC to return to agency proceedings as the proper vehicle for dealing with allegedly unfair methods of competition.
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B. Permitting the FTC To Seek Monetary Relief In Unfair Methods Cases Is Inconsistent With The Statutory Scheme And Will Harm The Business Community.
Because there is no longer any allegedly unlawful behavior here to ''enjoin,'' the FTC's suit against defendants is, in reality, one for monetary relief. Such relief, however, is plainly inconsistent with the statutory scheme. Indeed, no Court has ever permitted the FTC—or any other agency, for that matter—to seek disgorgement to redress alleged antitrust injury in a civil case. This Court should not be the first.
Notably, the FTC does not even pretend that the plain language of §13(b) supports its position. Rather, the Commission claims that because §13(b) specifically authorizes one form of equitable remedy (injunctive relief ), it implicitly authorizes all forms of equitable relief. FTC Mem. at 18. The Commission also argues that because other antitrust statutes, including the Sherman and Clayton Acts, have been construed to permit flexible, non-monetary equitable relief—such as dissolution and divestiture—§13(b) should be interpreted to authorize ''disgorgement.'' Both arguments are fundamentally unsound.
First, the fact that §13(b) supplies the Commission no textual basis for seeking monetary relief cannot simply be dismissed. The statute's grant of authority is a narrow one: it allows the FTC to seek a ''temporary restraining order or preliminary injunction'' (but not a permanent injunction) in both consumer protection and antitrust cases, and it allows the agency to seek a ''permanent injunction'' in ''proper cases.'' The statute does not, however, permit the FTC to seek broader equitable relief, nor does it specifically authorize any form of monetary relief. This is particularly significant in light of the fact that the later-enacted §19 of the FTCA does expressly grant the Commission the authority to redress past injuries to victims in consumer protection matters, including ''but . . . not . . . limited to . . . the refund of money or return of property, [and] the payment of damages.'' 15 U.S.C. §57b(b).(see footnote 72) Even apart from the fact that §19 would have been unnecessary given the Commission's current interpretation of §13(b), reading §19 and §13(b) together, it is crystal-clear that the former was intended to authorize monetary remedies, while the latter was not.(see footnote 73)
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Even if the language of §13(b) could be read to leave doubt on this score—which it cannot—the legislative history of the FTCA discussed above would lay any uncertainty to rest. At the time the statute was first enacted, the Senate carefully considered and rejected a monetary remedy for victims of unfair competition. Senators arguing against a private remedy correctly pointed out that the breadth and vagueness of the prohibition against ''unfair competition''—which required the FTC to define the contours of that term through case-by-case administrative adjudication—made it unfair to penalize business people for engaging in conduct that they may have had no reason to believe was unlawful at the time.(see footnote 74) Permitting the FTC to pursue a monetary remedy here would thus run counter to the clear intent of Congress.(see footnote 75)
The Commission's argument that §13(b) should be construed to authorize disgorgement because the Sherman and Clayton Acts have been construed to permit other forms of equitable relief is equally flawed. Indeed, the more salient point is that while the Sherman and Clayton Acts have been construed to permit certain equitable remedies in addition to injunctions, neither has ever been interpreted to permit the government to seek ''disgorgement'' in a civil antitrust suit.(see footnote 76) Even the Department of Justice, with its central role in antitrust enforcement, has never been given the authority to seek disgorgement in a civil antitrust action. DOJ is empowered only in a criminal suits to obtain fines or disgorgement of wrongfully-obtained gains. See 18 U.S.C. §3571 & 15 U.S.C. §1.
That does not mean, however, that federal law makes no provision for the recovery of ill-gotten gains from antitrust violators. Far from it. In fact, §4 of the Clayton Act provides private parties a cause of action for treble damages to redress injuries caused or threatened by antitrust violations. See 15 U.S.C. §15(a). In Illinois Brick v. Illinois, 431 U.S. 720 (1977), the Supreme Court held that only direct purchasers had standing to sue under §4. The Court reasoned that Congress clearly intended for antitrust violators to be subject to treble damages, but no more. The Court therefore declined to ''open the door to [the]duplicative recoveries,'' id. at 731, that it feared would flow from allowing multiple parties to ''assert conflicting claims to a common fund.'' Id. at 737.(see footnote 77)
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Permitting the FTC to obtain the monetary relief that it seeks here would alter these structures of federal antitrust law in two fundamental ways. First, allowing the Commission to seek monetary relief would represent a dramatic judicial alteration of the roles that the Department of Justice and the FTC play in antitrust enforcement. In particular, by permitting the Commission to pursue enormous monetary recoveries—which the Department clearly cannot do—this Court would elevate a vastly aggrandized FTC to the DOJ's present role as the primary enforcer of the federal antitrust laws. Just as significantly, such a ruling would also thoroughly undermine the Supreme Court's holding in Illinois Brick, by opening the door to the duplicative recoveries that the Court sought to avoid in that case. This Court should refuse to become the instrument of the FTC's efforts to implement this wholesale revision of the federal antitrust enforcement scheme.
Indeed, the Chamber believes that this is a case where it is particularly important not to lose sight of the forest for the trees. Taking a step back and looking at the big picture underscores the extraordinary nature of the FTC's position in this case. Based solely on the one-sentence proviso of §13(b), the agency claims that it may properly go directly to court for permanent injunctive relief—rather than initiate administrative proceedings—in any case involving a provision of law enforced by the Commission. Based on the same single sentence, the FTC maintains that it may seek ''disgorgement'' as an ''ancillary'' equitable remedy any time it seeks an injunction. Thus, putting the two halves of the agency's case together, the Commission believes that it may seek potentially enormous monetary relief in any unfair methods or unfair acts case, at its sole discretion—again, all because of a seemingly innocuous permanent injunction proviso at the end of a statutory provision (of previously minor significance) authorizing the Commission to obtain preliminary injunctions to preserve the status quo during the pendancy of FTC administrative proceedings. In the Chamber's view, accepting the FTC's arguments would amount to a wholesale re-writing of the FTCA, and would place an inordinate and unjustifiable weight on the permanent injunction proviso of §13(b).
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Finally, it bears emphasis that, even more than the FTC's efforts to obtain permanent injunctive relief, the Commission's pursuit of monetary remedies in civil antitrust cases will dramatically affect the Chamber's members. While permitting the agency to circumvent the agency process by proceeding directly to court for an injunction will deny the business community the administrative guidance that Congress intended for the FTC to provide, authorizing monetary remedies will threaten unfair penalties for business people who had no reason to believe that certain methods of competition were unlawful at the time they were engaged in. See supra at 4–5. This will almost surely deter lawful competitive behavior, retard economic progress, and restrain business initiatives—particularly from smaller companies, who cannot afford to dispute with government agencies.
C. Because Congress Has Not Authorized The FTC To Obtain Monetary Relief In Unfair Methods Cases, Granting Such Relief Will Pose Serious Administrative Problems For The Courts, The Agency, Or Both.
In addition to the fundamental change in the FTC's antitrust enforcement role threatened by this case—and the accompanying adverse affects on the business community—the Chamber believes that allowing the FTC to seek enormous monetary recoveries from alleged antitrust violators will pose serious administrative problems for the agency, the courts, or both. On the one hand, the Commission now maintains that its claim for ''disgorgement is brought in the Commission's own behalf''—that is, not on behalf of indirect purchasers, which the Commission concedes would violate Illinois Brick, see FTC Mem. at 27–28. On the other hand, the agency cannot seriously maintain that it may simply keep the money it wishes to collect from defendants for itself, and it has previously suggested that it will ''try to provide restitution to those harmed.'' Rob Rossi, Deals and Suits, Legal Times, Jan 11, 1999, at 15. Unfortunately, no mechanism or standards exist for providing such ''restitution.'' Does the agency contemplate implementing an administrative process for providing ''restitution''? If so, pursuant to what authority? Or is it up to this Court to determine what will happen to the ''disgorged'' sums? In the view of the Chamber's members, these difficult questions arise from the simple fact that Congress has never intended to permit the FTC to seek monetary relief in cases such as this. This Court therefore should not authorize such a remedy.
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CONCLUSION
For the reasons stated above, the Chamber believes that this Court should grant the Defendants' Motion to Dismiss pursuant to Fed. R. Civ. P. 12(b)(1).
Mr. HUTCHINSON. Thank you, Mr. Rein. Mr. Strenio.
STATEMENT OF ANDY STRENIO, PARTNER, POWELL, GOLDSTEIN, FRAZER & MURPHY
Mr. STRENIO. Thank you, Mr. Chairman. This now places you in the distinguished company of all those that have received promotions during the course of this hearing.
Mr. Chairman, Mr. Conyers, and members of the committee, thank you very much for this opportunity to offer my views on the authority of the FTC to seek the remedy of disgorgement of profits obtained by conduct that violates the antitrust laws.
At the outset, I wish to emphasize two points. First, the opinions I offer are solely my own. Second, as Chairman Hyde requested, my comments do not address the propriety or equities of any particular enforcement action already begun by the Commission. The initial question of whether the Commission has the power to seek a disgorgement of profits remedy in an antitrust case is answered by section 13[b] of the FTC Act and the cases that have interpreted this section. Section 13[b] gives the Commission authority to pursue injunctive relief in Federal District Court and broadly grants this power pursuant to any provision of law enforced by the Commission. In this context, the FTC's ability to seek equitable remedies such as injunctive relief encompasses all ancillary equitable remedies, including disgorgement.
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Further, the FTC clearly has the authority to enforce the antitrust laws under its unfair methods of competition jurisdiction. This leads me to the legal conclusion that the FTC, indeed, has the authority to seek disgorgement for violations of the antitrust law. I am hardly alone in holding this view. The U.S. District Court for the District of Columbia, on two separate occasions, has analyzed the FTC's authority under 13[b] to seek the remedy of restitution or disgorgement in an antitrust case.
The first such case was FTC v. Abbott Laboratories, in which Judge Gesell issued a pretrial memorandum on the general authority of the Commission to pursue injunctive relief, including restitution. The Court's pretrial decision in Abbott implicitly acknowledged that the remedy of restitution was available to the Commission. More recently, the U.S. District Court for the District of Columbia addressed the issue in FTC v. Mylan Laboratories, Inc. In this antitrust case, Judge Hogan held that the Commission could seek a disgorgement remedy under section 13[b]. Judge Hogan noted that five Courts of Appeals and numerous District Courts have permitted the FTC to pursue various forms of monetary relief under 13[b]. In denying the defendant's motion to dismiss the FTC's amended complaint, the Court added that the defendant had cited no relevant case law that prohibits disgorgement or any other form of ancillary equitable relief.
I turn now to the policy question of whether the Commission should have such authority. My answer is an emphatic yes. An antitrust enforcement regime that prevented the Commission from ever seeking restitution of ill-gotten gains would not promote the public interest. After all, over time, a number of economic actors will find themselves in circumstances whereby the gains to be obtained by conduct that violates the antitrust laws would dwarf the relatively modest sanctions that the Commission can seek to impose. In such circumstances, the ability of the Commission to bring an action for restitution of the illegally obtained gains provides a useful, additional deterrent to the illegal activity.
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This brings us to the third and final question of under what circumstances the Commission should use its authority to seek disgorgement of illegally obtained profits. I think that the disgorgement remedy should be limited to cases of willful and severe violations, which include traditional per se violations and some non-per se cases where the willfulness and severity of the violations are comparable to that encountered in per se cases. Not all cases fitting these criteria should necessarily prompt the Commission to invoke the remedy. In determining whether to exercise its discretion to seek disgorgement, the Agency should weigh several additional factors, including the size of the gains reaped from the illegal conduct and the likelihood that defendants otherwise would escape appropriate penalties.
As with any governmental power, even that of the FTC—which I hold in the highest regard—the Commission's authority to seek disgorgement could be abused. Accordingly, it is incumbent upon the Agency to exercise restraint and only seek disgorgement in compelling circumstances. Again, without commenting in any way upon the merits of the FTC's decisions to seek disgorgement in specific cases, the Agency has sought to exercise this authority in competition cases only six times in the interval from 1983 to the present, an average of roughly once every 3 years during this period. This track record, on the face of it, does not suggest that the Agency seeks antitrust disgorgement with excessive frequency.
In conclusion, let me note that the Federal Courts provide an additional important check against the possibility of Commission abuse of its authority to seek disgorgement. After all, the FTC can only request a court order disgorgement. By considering such requests with the utmost seriousness and with the active review of any Appeals Courts involved, the Federal judiciary has the power to discipline any over-zealousness on the part of the Commission.
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Last, and surely not least, Congressional Committees such as this one with oversight authority can and should monitor the pattern of the FTC's use of its authority to seek disgorgement to ensure that the Agency does not stray into routinely invoking this power.
Thank you.
[The prepared statement of Mr. Andy Strenio follows:]
PREPARED STATEMENT OF ANDY STRENIO, PARTNER, POWELL, GOLDSTEIN, FRAZER & MURPHY
Mr. Chairman and Members of the Committee:
Thank you very much for this opportunity to appear today to offer my views on the authority of the Federal Trade Commission (''FTC'' or ''Commission'' or ''agency'') to seek the remedy of disgorgement of profits obtained by conduct that violates the antitrust laws. At the outset, I wish to emphasize two points. First, I appear in a purely personal capacity. The opinions I offer are solely my own, and not the views of any other attorney at my firm or any client or party who is potentially affected by the subject matter. I alone am responsible for these views which reflect my years of experience both as an attorney practicing in the areas of antitrust and consumer protection, and my previous tenure as a staff member and later as a Commissioner at the FTC. Second, my comments are limited to answering three questions:
(1) Does the Commission have the authority under current law to seek disgorgement of illicit profits in an antitrust case?;
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(2) Is it appropriate policy for the Commission to have such authority?; and,
(3) Under what circumstances should this authority be exercised, consistent with the law and sound policy?
My comments do not address the propriety or equities of any particular enforcement action already begun by the Commission.
The initial question of whether the Commission has the power to seek a disgorgement of profits remedy in an antitrust case must be answered by reference to the statutory authority under which the Commission operates. The answer, thus, can be found in §13(b) of the Federal Trade Commission Act(see footnote 78) (''FTC Act''), and the cases that have interpreted this section. Section 13(b) gives the Commission authority to pursue injunctive relief in federal district court, and broadly grants this power pursuant to ''any provision of law enforced by the Federal Trade Commission'' (emphasis added).(see footnote 79) As I discuss subsequently, in this context the FTC's ability to seek equitable remedies such as injunctive relief encompasses all ancillary equitable remedies, including disgorgement. Further, the FTC clearly has the authority to enforce the antitrust laws under its ''unfair methods of competition'' jurisdiction.(see footnote 80)
(b) Temporary restraining orders; preliminary injunctions
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Whenever the Commission has reason to believe—
(1) that any person, partnership, or corporation is violating, or is about to violate, any provision of law enforced by the Federal Trade Commission, and
(2) that the enjoining thereof pending the issuance of a complaint by the Commission and until such complaint is dismissed by the Commission or set aside by the court on review, or until the order of the Commission made thereon has become final, would be in the interest of the public—
the Commission by any of its attorneys designated by it for such purpose may bring suit in a district court of the United States to enjoin any such act or practice. Upon a proper showing that, weighing the equities and considering the Commission's likelihood of ultimate success, such action would be in the public interest, and after notice to the defendant, a temporary restraining order or a preliminary injunction may be granted without bond: Provided, however, That if a complaint is not filed within such period (not exceeding 20 days) as may be specified by the court after issuance of the temporary restraining order or preliminary injunction, the order or injunction shall be dissolved by the court and be of no further force and effect: Provided further, That in proper cases the Commission may seek, and after proper proof, the court may issue, a permanent injunction. Any suit may be brought where such person, partnership, or corporation resides or transacts business, or wherever venue is proper under section 1391 of Title 28. . . .
15 U.S.C. §53(b).
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This leads me to the legal conclusion that the FTC indeed has the authority to seek disgorgement for violations of the antitrust law. I am hardly alone in holding this view. The U.S. District Court for the District of Columbia on two separate occasions has analyzed the FTC's authority under §13(b) to seek the remedy of restitution or disgorgement in an antitrust case. The first such case was FTC v. Abbott Laboratories,(see footnote 81) where the FTC sought restitution of millions of dollars paid by the U.S. to a firm that allegedly engaged in a form of bid rigging and price fixing. Judge Gesell issued a memorandum opinion in response to the defendant's motion to dismiss the Commission's complaint. This pretrial memorandum addressed the general authority of the Commission to pursue injunctive relief including restitution of overpayments caused by the alleged violation.
The court's pre-trial decision in Abbott implicitly acknowledged that the remedy of restitution was available to the Commission. The defendant argued that under §13(b) the FTC did not have the requisite authority to pursue injunctive relief, but the court rejected this argument, saying that it was premised on ''a misreading of the complaint and applicable statutes.''(see footnote 82) The court found that ''[t]he proviso [§13(b)] leaves discretion with the Commission in any proper case to proceed directly for relief in a U.S. District Court.''(see footnote 83) The court added that the alleged price fixing conspiracy ''falls squarely within the jurisdiction of the Commission's law enforcement responsibilities under 15 U.S.C. §45(a), and resulting civil actions are often filed in District Courts to protect consumers.''(see footnote 84) Finally, the court said: ''Whether or not the Court should issue a permanent injunction and/or restitution must await trial.''(see footnote 85) Clearly, no evidence developed at trial could possibly have justified imposition of this remedy if the Commission lacked the statutory authority to seek it in the first place.
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More recently, the U.S. District Court for the District of Columbia addressed the issue of the availability of the disgorgement remedy to the Commission in FTC v. Mylan Laboratories, Inc.(see footnote 86) In this antitrust case, Judge Hogan held that the Commission could seek a disgorgement remedy under §13(b) of the FTC Act. While noting that §13(b) does not explicitly provide for monetary remedies, the court relied on U.S. Supreme Court authority to find such remedies are available under the statute.(see footnote 87) The court found that the power granted to the FTC to seek equitable remedies expressly provided in §13(b) necessarily embodied the power to invoke all equitable remedies of the courts. Judge Hogan noted that five courts of appeals and numerous district courts have permitted the FTC to pursue various forms of monetary relief under section §13(b).(see footnote 88) In denying the defendant's motion to dismiss the FTC's amended complaint, the court added that the defendant had cited no relevant case law that prohibits disgorgement or any other form of ancillary equitable relief. While the five court of appeals cases cited by the Mylan court all relate to consumer protection actions, this distinction does not change the analysis. Section 13(b) refers to ''any'' provision of law enforced by the Federal Trade Commission, a construction that appears broad enough to encompass both consumer protection and antitrust matters.
Although courts are generally disinclined to find remedies beyond those that Congress has expressly granted, the equitable jurisdiction of a federal agency such as the FTC must be read in light of the principles articulated in Porter v. Warner Holding Co., 328 U.S. 395 (1946). In that case, the Supreme Court upheld the district court's authority to refund the illegal rent overcharges pursuant to s 205(a) of the Emergency Price Control Act of 1942, which expressly granted only the power to enjoin illegal practices. The Court wrote:
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''[u]nless otherwise provided by statute, all the inherent equitable powers of the District Court are available for the proper and complete exercise of that jurisdiction. And since the public interest is involved in a proceeding of this nature, those equitable powers assume an even broader and more flexible character than when only a private controversy is at stake. Power is thereby resident in the District Court, in exercising this jurisdiction, 'to do equity and to mould each decree to the necessities of the particular case.' ''
Id. at 36 (quoting Porter v. Warner Holding Co., 328 U.S. 395, 398 (1946) (internal citations omitted)).
Having answered in the affirmative the question of whether the Commission has authority to seek disgorgement of profits obtained by conduct that violates the antitrust laws, I turn to the policy question of whether the Commission should have such authority. My answer to this second question is an emphatic ''yes.'' An antitrust enforcement regime that prevented the Commission from ever seeking restitution of ill-gotten gains would not promote the public interest. After all, over time a number of economic actors will find themselves in circumstances whereby the gains to be obtained from conduct that violates the antitrust laws would dwarf the relatively modest fines that the Commission can seek to impose. In such circumstances, the ability of the Commission to bring an action for restitution of the illegally-obtained gains provides a useful additional deterrent to the illegal activity. In the absence of the possibility of such relief, would-be violators may find it worth their while to engage in the illegal conduct, especially in circumstances where they believe that private plaintiffs either will not or cannot succeed in bringing treble damages actions. The availability of the remedy of disgorgement of the illegally-obtained gains changes this calculus, and introduces the deterrent effect that careful antitrust enforcement requires if anticompetitive harm is to be minimized.
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This brings us to the third and final question of under what circumstances the Commission should use its authority to seek disgorgement of illegally-obtained profits. To be sure, the remedy of disgorgement of profits is an exceptional remedy, which I believe should be used only in exceptional cases. The following points are relevant to delineating when it might be appropriate for the Commission to exercise its discretion to seek this remedy.
In my previous work on this topic, I said and wrote that the Commission should pursue disgorgement actions only in areas of traditional per se illegality.(see footnote 89) My rationale for this guidepost was that remedies should be proportional to the offense,(see footnote 90) and that the per se standard was a useful proxy for the type of willful and severe antitrust violation that warrants disgorgement. I continue to think that the disgorgement remedy should be limited to cases of willful and severe violations, which include traditional per se violations. However, I also think now that the disgorgement remedy appropriately could be applied to some non-per se cases where the willfulness and severity of the violations are comparable to that encountered in per se cases. This defines the outer boundary of cases where I would consider disgorgement to be appropriate, but not all cases fitting these criteria should necessarily prompt the Commission to invoke the remedy. In determining whether to exercise its discretion to seek disgorgement, the agency should weigh several additional factors including the size of the gains reaped from the illegal conduct and the likelihood the defendant(s) otherwise would escape appropriate penalties.
As with any governmental power, even that of the FTC which I hold in the highest regard, the Commission's authority to seek disgorgement could be abused. Accordingly, it is incumbent upon the agency to exercise restraint and only seek disgorgement in compelling circumstances. Again, without commenting in any way upon the merits of the FTC's decisions to seek disgorgement in specific cases, the agency has sought to exercise this authority in competition cases only six times in the interval from 1983 to the present, an average of roughly once every three years during this period.(see footnote 91) This track record on the face of it does not suggest that the agency seeks antitrust disgorgement with excessive frequency.
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It also is worth noting that the courts provide an important check against the possibility of Commission abuse of its authority to seek disgorgement. After all, the FTC can only request that a court order disgorgement. By considering such requests with the utmost seriousness, and with the active review of any appeals courts involved, the federal judiciary has the power to discipline any overzealousness on the part of the Commission. Last, and surely not least, Congressional committees such as this one with oversight authority can and should monitor the pattern of the FTC's use of its authority to seek disgorgement to ensure that the agency does not stray into routinely invoking this power.
In sum, please note that the relevant judicial authorities uniformly hold that the remedy of disgorgement is available to the Commission to combat and deter all violations of law enforced by the FTC. In my view, this is a tool that the Commission should possess to deter willful violations of the law and to protect consumers from egregious offenses. Of course, this authority should only be exercised by the FTC in exceptional cases where the circumstances warrant. Removing this authority from the Commission would risk reducing the agency's ability to enforce the law effectively and thereby open the door to additional future violations and the accompanying harm that would be inflicted upon consumers.
[NOTE: A copy of the following article was submitted with this prepared statement but was not printed here: Andrew J. Strenio, Jr., Why Thirteen Should Be a Lucky Number for Victims of Price-Fixing, 57 ANTITRUST L. J. 149, 154 (1988).]
Mr. HUTCHINSON. Thank you. Now Mr. Jim Rill.
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STATEMENT OF JIM RILL, CO-CHAIR, INTERNATIONAL COMPETITION POLICY ADVISORY COMMITTEE
Mr. RILL. Thank you very much, Mr. Chairman. It is good to be back.
The remarks today I am going to be making are my own. I did serve as co-chair of the International Competition Policy Advisory Committee, acronym ICPAC, which was appointed by the Attorney General and Assistant Attorney General Klein in November 1997. I hope the descriptive comments are an accurate reflection of the report. Any sidebar comments I make cannot be assigned to my colleagues on the committee but are strictly my own.
I do have a prepared statement and ask that it be included in the record of the hearings. Thank you, Mr. Chairman.
The International Competition Policy Advisory Committee, as I indicated, was appointed in November 1997, actually in light of the increasing globalization of trade and of merger and joint venture transactions. The mission of the committee was to study and make recommendations in three areas.
Those areas were global mergers, trade and competition, and cooperative cartel enforcement. The fact of the matter is that, in the area of mergers, cross-border mergers in 1999 accounted for a total value of $34 trillion. According to the testimony and the addresses of Chairman Pitofsky, more than 50 percent of the mergers that get a close review by the Federal Trade Commission have an international dimension to them. With this in mind, we heard testimony from numerous sources—from academia, from law enforcement officials, from legal scholars, and from the business community—and submitted our report on February 28th of this year.
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I want to review for the committee the key components of that report. In the area of trade and competition, we support the concept of positive comity, where the United States would refer to a foreign enforcement agency, a request to take antitrust action against restraints of trade being fomented in that country to inhibit U.S. export opportunities, U.S. trade opportunities, request that they take action, at least to investigate, and then take appropriate remedial action that may arise. We view that as, probably at least in the first instance, an effective tool to open world markets.
There has been one formal request under a positive comity agreement between the United States and the European Commission, which produced generally satisfactory results over a period of time, although we suggest that improvements are needed in this process. In fact, as Assistant Attorney General Klein indicated this morning, positive comity has to be considered as work in progress. We should be sure—we, as the United States, should be sure that the foreign agency has the ability and the will to take appropriate enforcement action in the case of such a referral.
We should seek increased transparency from the agency, and they from us, as to the progress of any action, or any processing of that request that might take place. Timeframes should be firmly established. The majority of the committee in the ICPAC report has suggested that the United States be less modest in making requests. Requests for positive comity action should be considered under the growing number of agreements that we have with our foreign counterparts. Referrals should be more forthcoming and the U.S. should take a more aggressive stance, and use the tool of positive comity more frequently. We recommend that, in the absence of success of cooperative arrangements, the United States retain the right to take unilateral enforcement actions where it has personal jurisdiction and where overseas antitrust violations do inhibit the foreign commerce of the United States.
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We do not, however, think that the World Trade Organization is an appropriate vehicle for the resolution of private antitrust restraints or private antitrust issues.
Let me just, in one or 2 seconds, touch on our recommendations with respect to merger activity. We do think there has been great cooperation—effective cooperation—between the FTC and the Department of Justice and overseas agencies to deal with the proliferating magnitude of global merger, joint venture transactions. One of the concerns that has been raised by the business community is the extent to which confidentiality may be jeopardized in such reviews. That requires some careful analysis. In fact, in this committee's report of the IAEAA, the International Antitrust Enforcement Assistance Act of 1994, confidentiality was endorsed in that act, and we endorsed approach.
Finally, we do propose a global initiative for antitrust review, where, modeled after the G7, the antitrust officials and the business community of the world can convene to develop greater transparency, greater understanding, and greater convergence of antitrust information and enforcement-sharing throughout the world. We think this is a positive step and one that the committee should review in its oversight function.
Thank you very much, Mr. Chairman.
[The prepared statement of Mr. Rill follows:]
PREPARED STATEMENT OF JIM RILL, CO-CHAIR, INTERNATIONAL COMPETITION POLICY ADVISORY COMMITTEE
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Mr. Chairman and members of the Committee, my name is James F. Rill, and I am testifying this morning in my capacity as Co-Chair of the International Competition Policy Advisory Committee (ICPAC). I welcome the opportunity to participate in these hearings and offer some thoughts as to how the recommendations of the International Competition Policy Advisory Committee might evoke response from the antitrust agencies. The views expressed are my own, however, and do not necessarily reflect those of any other members of the Committee.
BACKGROUND
ICPAC was appointed in November 1997 by Attorney General Janet Reno and Assistant Attorney General Joel I. Klein to undertake an analysis and make recommendations to the Department of Justice in connection with the enormously increasing importance of competition policy in the global economy. The timeliness of this assignment is evidenced not only by the dramatic growth of global commerce and transborder mergers and joint ventures, but by the proliferation of antitrust laws throughout the world, which are now present in more than 80 nations. The 12 ICPAC members represent a multidisciplinary group with experience in business, academics, law, and government. The Committee conducted hearings and otherwise elicited views from a broad cross-section of the public and non-governmental global community. Its report was presented to the Attorney General on February 28, consisting of more than 300 pages and a multiplicity of recommendations, to the Department of Justice and the Federal Trade Commission, and to competition enforcement agencies and experts worldwide. A copy of the report's summary AND background on the Committee's members are attached to this statement.
These recommendations relate to all three areas identified as the principal areas of ICPAC's mandate: trade and competition; mergers; and enforcement against cartels. In addition, the report advocates mechanisms for improved international understanding in competition policy, including technical assistance and a global initiative for the exchange of views and information among governmental bodies and business representatives around the world.
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This statement will concentrate on a few of these recommendations as they relate to the potential role of the US enforcement agencies.
TRADE AND COMPETITION
As the US and its trading partners have concentrated their efforts on the reduction and, in some cases elimination, of governmental restraints of commerce at the border, increasing attention is being accorded to private and hybrid(see footnote 92) restraints on market access. Although the Committee was unable to identify a reliable measure of the incidences of such restraints, it received sufficient examples to conclude that they occur and warrant international remedial action. Several mechanisms are considered:
Positive Comity
Formally established as government policy in the 1991 US–EC antitrust cooperation agreement, positive comity refers to the undertaking by one jurisdiction to take enforcement or other remedial action against restrictive private conduct in that jurisdiction which violates its laws and restrains commercial entry by firms from another jurisdiction, when the other jurisdiction requests such action. In the 1991 US–EC agreement, the parties undertook to respect each other's requests for action under the principle of positive comity. Other agreements entered into by the US and other nations have since incorporated this principle.
There has been but one formal positive comity referral to date.(see footnote 93) In early 1997, the Department of Justice requested the European Community to investigate and take appropriate action on complaints that the European computer reservation provider Amadeus and its owner-partners Air France, Lufthansa, and Iberia, as well as SAS, which had an affiliated relationship, had engaged in coordinated and monopolistic conduct to entrench Amadeus's dominant position. Ultimately, the Commission issued a statement of objections against one airline owner, Air France, and private settlement agreements were entered into between the complaining party Sabre and Lufthansa, SAS, and Air France. The Justice Department closed its own investigation on the basis of the EC's action.
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The question has been raised as to the efficacy of certain aspects of this process. These concerns have been detailed in testimony both to congressional committees and to ICPAC. As a result, the ICPAC report recommends certain improvements in the implementation of positive comity. These include possession of an a priori reason for confidence that the requested jurisdiction has the legal authority and the will to undertake an effective investigation and to take appropriate remedial action; transparency as to process; improved communication with the aggrieved party; and a definitive timetable within which action by the referred jurisdiction might be concluded. These steps can be implemented by the US agencies, and have been essentially endorsed by Chairman Pitofsky during Senate hearings last year.
It may be that too much has been expected of positive comity. Its use is a relatively recent phenomenon, and governments and affected parties are undergoing something of a learning process. Nevertheless, the principle may represent the most effective tool to attack international market entry barriers in circumstances where the governmental parts have antitrust sophistication and commitment. The US should actively consider the negotiation of a larger network of these types of bilateral agreements.
It must be noted that one formal referral in the time since the formal execution of positive comity agreements seems more than a little modest. The ICPAC report urges that greater use be made of this tool when circumstances warrant, especially in light of the increasing appearance of positive comity in bilateral cooperative agreements.
Unilateral Enforcement
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In 1992, the Department of Justice announced formally its rejection of a footnote in the 1982 international antitrust guidelines and asserted it would initiate action in appropriate cases against a clear violation of the US antitrust laws occurring in foreign countries where the effect is a direct, substantial, and reasonably foreseeable restraint on US foreign commerce, and where the US courts have jurisdiction over the defendant.
Although ''effects test'' jurisdiction was asserted on a number of occasions prior to 1982, there appears to be only one instance of its use by US enforcement agencies: an action, resulting in a consent decree, involving alleged exclusionary practices in a number of countries by a British developer of float glass technology, Pilkington, plc. The diplomatic fire storm arising from the 1993 US action hardly seems to have been warranted.
ICPAC has pointed out that the US right be credibly maintained to seek relief by unilateral action based on effects test jurisdiction. The government has testified that evidence is hard to come by in these cases and international political sensitivities can be aggravated. Nevertheless, there are means whereby discovery can be obtained and relief secured. Certainly the US should not be reckless in attempting to secure relief unilaterally; however, it should not unilaterally abandon the principle.
Amendment of the Antitrust Laws
The ICPAC report analyzes and declines to endorse various proposals made during its hearings. These include recommendations that a presumption of antitrust violation may be drawn from evidence of disproportionate market shares for foreign and domestic products, and that fact-finding responsibility in market access cases be vested in the US Trade Representative. The departure from traditional, accepted antitrust principles inherent in these suggestions was deemed unjustified, even though the other approaches, above outlined, do not provide easy solutions. The implementation of positive comity and the reservation of a right of ''self-help'' promise results more consistent with US policy and international obligations.
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The Role of the WTO
The ICPAC report opposes a role for the World Trade Organization as an agency for the resolution of private antitrust disputes. Recommendations for such a role made by highly-respected experts, including the European Union's then-Competition Commissioner Karel van Miert, and Competition Commissioner Konrad Von Finckenstein of Canada. Nevertheless, it was concluded by the Committee that the lack of fact-finding capacity, the absence of experience with antitrust issues, and the trade-solution orientation of WTO do not commend it for the exercise of such a role.
MERGERS
Substantial progress has been made among antitrust jurisdictions in the review of mergers, acquisitions, and joint ventures having a multinational dimension. Although much ink has been spilled on the near-trade war occasioned by the Boeing-McDonnell Douglas case, the disparate EC/US review of that transaction was the exception. Cooperation in other cases too numerous to mention have brought about consistent results in congruent time frames. The ICPAC report commends the US agencies for their efforts to achieve convergence and reduce frictions in multinational merger review. Some suggestions for improvement are made in the final report.
Cooperation
ICPAC recommends that the agencies continue and intensify their efforts to bring about convergence. When multiple enforcement agencies share an interest in the same transaction, useful methods of cooperation include joint staffing and consultation in the development of remedies. The record is replete with examples of multinational enforcement efforts in each of these respects. It also is worthy of note that close cooperation appears to promote convergence, as exemplified by the apparent growth in similarity of US and EC merger review standards.
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A concern was raised in testimony by business representatives from the US and abroad with the risk of disclosure of confidential business information that could result from intimate cooperation. This Committee has been sensitive to the apprehension in excluding Hart-Scott-Rodino materials from coverage of the International Antitrust Enforcement Assistance Act (IAEAA) and in recommending in this Committee's report that notice be given to the providing party before information is shared with a foreign jurisdiction, except where to do so would jeopardize the efficacy of an investigation. ICPAC endorses this Committee report's judgment.
The fact remains that the issue of confidentiality is a magnet for controversy. European business representatives in particular are wary of increased interagency cooperation for fear that secrets will be compromised or that aggressive US antitrust enforcement be encouraged. Nevertheless, no examples of confidentiality breaches were offered during ICPAC's proceedings. The area deserves detailed study as a means of enhancing transparency. The US government agencies could take the lead in undertaking a multinational review, possibly under the aegis of the OECD, so that the confidentiality protections available in various jurisdictions with which cooperation takes place can be generally known. The extent of information-sharing between the US and other jurisdictions in the pursuit of cooperation can then take into account downstream protection of information which merits confidential treatment.
Reducing Costs and Frictions in Merger Review
The ICPAC report contains several recommendations designed to avoid unnecessary bureaucratic interruption of transactions and costs to business firms when complying with reviews. With 60 or more national jurisdictions having some form of merger review process, the threat of balkanization is serious. The ICPAC report urges the US agencies to exercise their advocacy skills to work toward common, objective, principles of notification, and coordination of information supplied and timing of review.
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ICPAC concluded that the US would be best positioned to advocate reform in the international arena if it made significant improvements to its own system first. For example, the US should take steps to reduce costs in its own review. The HSR second request process has attracted criticism from merging parties and their legal representatives. Various authorities have participated in encouraging reform, including notably Chairman Hyde and other leaders of this Committee. The Department of Justice and FTC undertook some modifications of the second request process last week which are consistent with ICPAC's recommendation for self-imposed time limitations, senior management review, and identification of areas of concern with a transaction when a second request is issued. The agencies are to be commended for these modifications and for their acknowledgment of the interest of this Committee, its Senate counterpart, the American Bar Association, and, through a recent address by the FTC's General Counsel, of ICPAC. I am sure that the success of these reforms in streamlining the process will be closely watched by all the agencies' constituencies.
The merger-related recommendations of the ICPAC report urge that the conclusions of the Department of Justice and FTC be binding insofar as competition issues are involved in determination by sectoral regulatory agencies. Legislation addressing this issue with respect to the Federal Communications Commission is pending in Congress. However, legislation pointing in the opposite direction, which would vest coordinate antitrust jurisdiction in the Department of Agriculture, has also been introduced. While acknowledging that regulatory agencies have responsibility apart from competition, the report unanimously endorses the proposition that the competition determinations of the antitrust agencies be accorded at least presumptive effect.
Increased Overall Convergence
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The final ICPAC report offers an innovative proposal for nations to improve transparency and convergence. It recommends establishment of a Global Competition Initiative, modeled on the structure of the G–7, for all interested nations to exchange views, discuss issues, and possibly have a framework for the airing of disputes. It would be informal and would not require the establishment of a bureaucratic structure. It could make use of the excellent work of the OECD Committee on Competition Law and Policy, but would have a broader membership. Non-governmental participation by the business community could be solicited. An excellent vehicle for harmonization over time could be put in place.
CONCLUSION
This Committee has exercised responsible and effective leadership in its legislative accomplishments and oversight over the years. Enactment of the National Cooperative Research and Development Act, amendment to cover production joint ventures, legislation of the IAEAA, and, very recently, encouragement of Hart-Scott-Rodino reforms are only illustrative of its role. The work of the agencies deserves support and the response of the agencies has been bipartisan and effective. It has been an honor to be invited to present these views. Thank you.
Attachment:
EXECUTIVE SUMMARY
CHAPTER 1—GLOBALIZATION AND ITS IMPLICATIONS FOR ANTITRUST COOPERATION AND ENFORCEMENT
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In the last several decades, more and more nations have come to recognize the value of competition as a tool for spurring innovation, economic growth, and the economic well-being of countries around the world. This recognition is evident in the economic liberalization that is taking place and in the dynamic technological change that is not only made possible by liberalization, but is itself an engine for liberalization. Both of these phenomena—economic liberalization and technological development—are in turn driving economic integration.
Competition policy can help to facilitate economic liberalization. If working properly, competition policy can produce more goods and services from scarce resources and provide a set of rules and disciplines that are not based on privilege and that are conducive to and responsive to efficient marketplace behavior.
A century ago, only the United States had comprehensive antitrust laws in place. Today, more than 80 countries have adopted antitrust laws, most of which were introduced in the 1990s. Yet, the emergence of competition policy regimes has not meant a uniformity of substantive rules or institutional approaches around the world. Competition policies of nations differ within a range that is in keeping with differences in legal systems. Moreover, even within established antitrust jurisdictions such as the United States, antitrust law evolves and changes. Technological development, the drive for competitiveness in the world environment, and economic analysis all contribute to changes in competition policy.
The Mandate of the International Competition Policy Advisory Committee
What new tools, tasks, and concepts will be needed to address the competition issues that are emerging on the horizon of the global economy? To answer these questions, Attorney General Janet Reno and Assistant Attorney General for Antitrust Joel I. Klein formed the International Competition Policy Advisory Committee in November 1997. The Advisory Committee was asked specifically to give particular attention to three topics: multijurisdictional merger review; the interface of trade and competition issues; and future directions in enforcement cooperation between U.S. antitrust authorities and their counterparts around the world, particularly in their anticartel prosecution efforts. The reasons for these points of focus are quite clear. The large number of mergers being reviewed by a multitude of competition authorities, the international controversy over barriers to market access stemming from allegedly anticompetitive private barriers to trade, and the significant increase in the number of international cartel cases being prosecuted by the Antitrust Division have come to make these international matters of mainstream significance to U.S. antitrust policy. At the same time, some issues were consciously excluded from the Advisory Committee's work. For example, the Advisory Committee did not review domestic trade remedies, such as antidumping measures. In addition, the Advisory Committee did not address a variety of practices that may be reprehensible, illegal, or offensive under U.S. or foreign law or policy that can affect the nature of competition within a market or internationally. These include matters such as substandard wage and employment standards, the use of child labor, and lax environmental regulations, among others.
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For two years the Advisory Committee, seeking the views of antitrust officials, businesses, scholars, practitioners, and other interested parties, has tried to identify initiatives that the U.S. Department of Justice and the U.S. government could undertake over the short and medium term and that would contribute to achieving the integration of markets through:
Increased transparency and accountability of government actions.
Expanded and deeper cooperation between U.S. and overseas competition enforcement authorities.
Greater soft harmonization and convergence of systems.
The Global Economy and Competition Policy
In considering competition policy and the international marketplace, a key challenge stems from the recognition that law is national but markets can extend beyond national boundaries. If markets are broader than national boundaries, are national laws and their enforcement sufficient to deal with the market problems of the new century? Further, is it possible to rely upon national law, yet at the same time work toward the development of a more seamless international system that facilitates the workings of global markets?
Of all these challenges, the international community has made the most headway in increasing cooperation and networking among the competition agencies of the world. International cartel enforcement and other forms of international enforcement cooperation in merger review are notable areas of success, particularly in recent years. Furthermore, both the number of bilateral antitrust cooperation agreements between the United States and other jurisdictions, and the number of new international initiatives have increased markedly. These cooperative solutions hold great potential, but, of course, it is predictably the case that they work well only when the cooperating agencies are jointly sympathetic to an approach regarding the particular antitrust enforcement matter.
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A second challenge is now being observed: with more than 60 nations now having antitrust merger control laws that require (or provide for) antitrust notification, the overlapping regulations are at times unduly burdensome and costly to the merging parties and can cause unnecessary frictions between nations. The question arises whether the systems can be rationalized and still ensure that enforcers have the tools necessary to identify and remedy anticompetitive transactions.
A third challenge is linked to the world trading system itself and the promise of open markets: Nations may promise open markets as far as the state is concerned and undertake substantial liberalization commitments with respect to governmental practices, but at the same time allow, by action or inaction, blockage of their markets by firms' anticompetitive restraints. If there is an international interest in removing those restraints and thus freeing up the world markets, can this interest be fully satisfied by national antitrust law? Is a new approach needed that does not split the state role from the private role and that does not test the limits of national jurisdiction?
In addressing these challenges, the Advisory Committee has considered the role for competition policy in the global economy broadly and with a view to improving approaches not only within the United States but also around the world. This Report considers problems that transcend nations, problems within individual nations, and problems between particular systems. It is not possible to predict how the global economy will evolve, but this Report starts from the premise that the United States should try to provide an environment conducive to the further expansion of international commerce, tolerant of the diversity of nations with respect to their own evolving law, and hospitable to the enhancement of world welfare.
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CHAPTERS 2 AND 3—MULTIJURISDICTIONAL MERGERS
Competition issues raised by the growth of cross-border trade and investment and the simultaneous proliferation of antitrust merger control laws are at the cutting edge of economic globalization. The world currently is experiencing an unprecedented level of merger activity. In 1999 global mergers and acquisitions were at an all-time high, with approximately $3.4 trillion in activity announced worldwide. As the volume of international merger activity has increased, so too has the number of jurisdictions around the world with antitrust merger control laws. Merging parties with international business operations potentially must review their sales, assets, subsidiaries and market shares in more than 60 jurisdictions to determine whether notifications to the competition authorities in those jurisdictions are necessary or advisable. These trends make it increasingly likely that mergers involving firms doing business in several jurisdictions will be reviewed by multiple competition authorities. It is not unheard of for merging parties to file antitrust notifications with a dozen or more jurisdictions.
The spread of merger control law has the potential to create significant benefits. Merger review regimes with notification requirements give competition authorities the ability to identify and remedy potentially problematic transactions, thereby benefiting consumers and competition. At the same time, the growing tendency of nations to apply their laws to offshore mergers and the sheer volume of law that firms undertaking mergers must now consider present challenges for the merging parties and for the reviewing authorities. These challenges range from dealing with heightened uncertainty and increased transaction costs to ensuring consistent outcomes and compatible remedies.
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In Chapter 2 the Advisory Committee considers ways to bridge the differences between systems and minimize the risk that differing substantive standards will give rise to diverging evaluation on the merits of a transaction, incompatible or burdensome remedies, and international friction. The unifying theme of these recommendations is that cooperation among antitrust enforcement authorities is not only desirable, but necessary if the challenges in this arena are to be addressed effectively.
Chapter 3 examines those problematic features within merger review systems that give rise to uncertainty and unnecessary transaction costs. The Advisory Committee believes that an improved environment for mergers globally is where individual merger control regimes focus on those transactions that raise competitive concerns within their territory and refrain from unduly burdening transactions, particularly those that lack anticompetitive potential.
CHAPTER 2—STRATEGIES FOR FACILITATING SUBSTANTIVE CONVERGENCE AND MINIMIZING CONFLICT
Inconsistent outcomes and conflicting or burdensome remedies imposed by multiple jurisdictions may significantly increase transaction costs. In the worst-case scenario these burdens may result in the abandonment of transactions that are procompetitive. Although much attention has been focused on the potential for divergent outcomes when proposed transactions are reviewed by multiple agencies, multijurisdictional merger review for the most part has resulted in consistent outcomes and compatible remedies. The possibility of divergent outcomes will remain, however, as long as underlying substantive differences in merger control law exist and multiple agencies continue to review a single transaction.
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The Advisory Committee believes that these challenges can best be addressed by facilitating, where possible, substantive harmonization and convergence among merger review regimes. Complete harmonization and convergence will be achieved only in the long run, if ever. This point should not, however, deter policymakers from taking steps to support and facilitate efforts at harmonization and convergence both in the short and medium term.
There are at least three concrete areas where nations can take steps to facilitate the convergence process and further minimize transaction costs and conflicts: Facilitating greater transparency; developing disciplines to guide the review of mergers with significant transnational or spillover effects; and continuing to enhance cross-border cooperation. In addition, the Advisory Committee recommends a number of approaches to work sharing to deepen cooperation further and to develop more seamless merger review systems internationally.
Facilitate Greater Transparency
One of the first steps toward facilitating greater substantive convergence is the development of a better understanding of each jurisdiction's framework for analyzing proposed mergers. This process would highlight differences in merger control laws and could stimulate international discussion and adjustments. The Advisory Committee discusses several steps to improve transparency:
1. Greater transparency in the application of each jurisdiction's merger review principles could be enhanced by the publication of guidelines and notices explaining the manner in which mergers will be analyzed; annual reports (including case examples), statements, speeches, and articles describing changes in relevant legislation, regulations, and policy approaches; and case-specific decisions, releases, and press interviews.
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2. At a multinational level, greater transparency may be achieved by conducting a survey and compiling an explanatory report of all jurisdictions with merger regulations to identify the principles they employ.
3. Each jurisdiction also should facilitate achievement of greater transparency by articulating clearly its rationales for challenging, or refraining from challenging, significant transactions (that is, decisions that set precedent or otherwise indicate a shift in doctrine or policy).
Develop Disciplines for Merger Review
Nations should work together to develop what this Advisory Committee calls disciplines that nations could usefully agree upon to guide the review of mergers with significant transnational or spillover effects. The Advisory Committee outlines disciplines that are simple yet aspirational and may not be feasible to implement in many jurisdictions at this juncture. The Advisory Committee believes, however, that if disciplines are adopted, they should be set at a high standard. That is, these disciplines are designed to promote best practices under any system as opposed to creating rules that would bring about convergence to the ''lowest common denominator.'' What follows are intended to be illustrative and applicable to all jurisdictions with competition regimes. Other principles of law as well as disciplines can and should be developed through international discourse.
1. Nations should apply their laws in a nondiscriminatory manner and without reference to firms' nationalities.
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2. As a best practice or discipline, with limited exceptions (such as national security), noncompetition factors should not be applied in antitrust merger review. If a jurisdiction's law recognizes noncompetition factors (such as preservation of jobs, promotion of exports, or international comparative advantage), such factors should be applied transparently and in a manner narrowly tailored to achieve their ends. Further, if a jurisdiction's merger regime explicitly permits noncompetition factors to trump traditional competition analysis, those noncompetition factors should be applied after the competition analysis has been completed.
3. Competition agencies do not operate in a political vacuum, but enforcement agencies must nonetheless establish their independence, and ''parochial'' political concerns should not play a role in the merger review process.
4. Nations should recognize that the interests of competitors to the merging parties are not necessarily aligned with consumers' interests. Accordingly, authorities should minimize the problems that may arise in competitor-driven processes, including the disruption of potentially procompetitive mergers.
5. When a transaction has a significant anticompetitive effect on the local economy in any given jurisdiction, the local antitrust authority has a legitimate interest in reviewing the transaction and imposing a remedy notwithstanding the fact that the transaction's ''center of gravity'' (whether determined by reference to the nationality of the parties, location of productive assets, or preponderance of sales) lies outside its national boundaries. At the same time, in the face of a clash between jurisdictions, remedies with extraterritorial effects should be tailored to cure the domestic problem. Further, when fashioning a remedy with extraterritorial effects, the agency should take into account local practices and procedures in the foreign jurisdiction.
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Continue to Enhance Cross-Border Cooperation
To advance substantive convergence in the near term, and avoid or minimize divergent analyses and outcomes, it is important for the United States and other jurisdictions to encourage and further deepen cross-border cooperation in reviewing mergers. Cooperation among reviewing authorities could be enhanced if all jurisdictions were to establish a transparent legal framework for cooperation that contains appropriate safeguards to protect the privacy and fairness interests of private parties. This Advisory Committee has identified several key features of such a framework.
1. In the U.S. context, a framework for cooperation might entail the development of a Protocol with a combination of key features: a description of the way the federal antitrust enforcement agencies in the United States conduct cross-border coordinated merger investigations; model waivers permitting discussions otherwise prohibited by confidentiality laws and authorizing the exchange of statutorily protected information between competition authorities during a merger review; and a policy statement outlining safeguards established in a reviewing jurisdiction to protect confidential information. Other jurisdictions usefully could develop comparable protocols.
2. The idea behind the model waivers is that they would not impose on an agency any obligations beyond acting in accordance with its normal practices and confidentiality rules (as described in its policy statement). To instill further confidence, however, agencies using confidentiality waivers should affirm in the policy statement the agency's intention to refuse to disclose information except to the extent it is legally required to do so, to use best efforts to resist disclosure to third parties (including the assertion of any privilege claims or disclosure exemptions that may apply), and to provide such notice as is practicable before disclosing to a third party any confidential business information obtained pursuant to a waiver. The policy statement also should explain how concepts such as using best efforts to resist disclosure to third parties are implemented in the jurisdiction.
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3. Jurisdictions also should consider adopting a policy to provide notice to a party—either before or after the fact—when they share documents of that party with another jurisdiction. The Advisory Committee can well understand why an enforcement agency would be unwilling to agree to a blanket commitment to provide notice. However, when an agency has the authority to exchange information and adverse enforcement consequences are not present, then notice to the parties seems reasonable and proper. Alternatively, parties could provide select documents directly to other reviewing jurisdictions and waive confidentiality with respect to those documents or identify beforehand which documents or categories of documents may and may not be shared, although in certain cases this approach might limit the benefits that potentially could be realized through the cooperative process.
Develop Work-Sharing Arrangements
Looking to the future, the Advisory Committee believes that the international community should be striving to develop more nearly seamless merger review systems internationally, and particularly with those jurisdictions that have mature merger review regimes. The most integrated approach the Advisory Committee envisions is work sharing in cases in which the enforcement efforts of one agency are likely to be sufficient to remedy the antitrust concerns of other jurisdictions. Work sharing may be accomplished in incremental steps with each step reflecting a different degree of cooperation and each step built upon successful approaches to cooperation and coordination that enforcement authorities have already implemented. An important objective is to reduce duplication, while preserving the right for the United States and other jurisdictions to take their own measures, as necessary.
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Work sharing logically could begin between the United States and the European Union because of their record of cross-border cooperation and the amount of transatlantic merger activity occurring that has its main impact in the United States and Europe. Further, working toward a common position on merger review policy with the European Commission should be a priority. The Advisory Commission envisions the development of work-sharing arrangements along these lines:
1. In a first step, each jurisdiction conducts its own review of the proposed transaction and participates in the formulation, if not the negotiation and implementation, of remedies. Under this approach, some or all reviewing jurisdictions would jointly negotiate remedies with the merging parties, while each would implement its own consent decree that incorporates the jointly negotiated remedies. In some cases it may be feasible for one jurisdiction to negotiate remedies with the merging parties that will address concerns of both that jurisdiction and other interested jurisdictions. Such cooperation and coordination at the remedies phase has been successfully employed in several cases, and the Advisory Committee believes that these approaches should be emulated in future cases whenever the legal and factual situations indicate that such coordination and cooperation will be useful.
2. In appropriate cases, it may be feasible to take cooperation to the next level and limit the number of jurisdictions conducting second-stage reviews of a proposed transaction. For example, where the concerns of Country A are likely to be the same as and subsumed by the concerns of a more distinctly affected investigating jurisdiction, it may be appropriate for Country A to refrain from independent investigation. At present, such an arrangement may not always be feasible in an environment with statutorily mandated review periods if the agency could lose the right to review the transaction at all. This approach likely would preclude a jurisdiction from being able to negotiate its own remedies if it felt that the preceding jurisdiction did not adequately address its concerns or imposed a remedy that diverged from its approach. Such impediments would have to be resolved if this degree of cooperation were to become feasible in more than a handful of cases. In the meantime, this approach may be useful in situations in which there is no available remedy to the reviewing jurisdiction or there is a sufficient level of confidence in the reviewing jurisdiction.
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3. One way to safeguard against this possibility is to ensure sufficient participation in the process by the other jurisdictions. One jurisdiction would coordinate the investigation of a proposed transaction, take into account the views of each interested jurisdiction, and recommend remedies to address the concerns of all interested jurisdictions. The assessment of the coordinating agency would be binding on the coordinating agency but either could serve as a recommendation to other interested jurisdictions (with a presumption in favor of accepting the coordinating jurisdiction's recommendation) or could be binding on those jurisdictions as well.
4. The Advisory Committee considered whether, given a sufficient amount of substantive and procedural convergence among merger review regimes, an even higher level of work sharing might be feasible someday. At this advanced level of work sharing, the coordinating agency would evaluate procompetitive and anticompetitive effects of a proposed transaction on a global scale, taking into account all of the merger's costs and benefits to competition, not only the net effects within its borders. The coordinating jurisdiction could then design remedies to address the concerns of all interested jurisdictions.
This advanced level of work sharing is a distant vision. At present, it is the view of this Advisory Committee that while no agency should be obligated to take into consideration competitive harm or benefits that may be achieved outside the reviewing jurisdiction, competition authorities should consider that the transactions they review also have the potential to generate spillover effects in other jurisdictions. As the level of convergence in antitrust enforcement increases, however, agencies should consider analyzing the benefits and anticompetitive effects of a proposed transaction on a global scale.
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CHAPTER 3—RATIONALIZING THE MERGER REVIEW PROCESS THROUGH TARGETED REFORM
Many of the transaction costs imposed by merger regimes are rationally related to the efficient review of transactions that have the potential to create appreciable anticompetitive effects within the reviewing jurisdiction and therefore should be taken in stride by companies as a cost of doing business. At the same time, the Advisory Committee believes that while merger regimes have the potential to create benefits for society, those same review processes also impose significant transaction costs on international transactions. It is therefore important to focus on those unnecessary and unduly burdensome costs imposed by merger control regimes that have little or no relationship to antitrust enforcement goals.
This second category of proposed reform efforts seeks to reduce transaction costs by rationalizing the merger review process through targeted problem solving in individual merger regimes. Broadly speaking, the Advisory Committee identifies a number of best practices that fall within two major categories: ensuring that each jurisdiction's merger review regime examines only those mergers that have a nexus to and the potential to create appreciable anticompetitive effects within that jurisdiction; and ensuring that each jurisdiction refrains from unduly burdening those transactions during the course of the merger review process. At the same time, these reform efforts seek to ensure that the antitrust authorities have the tools needed to identify and remedy anticompetitive mergers.
Casting the Merger Review Net Appropriately: Notification Thresholds
The Advisory Committee has learned that one significant category of unnecessary transaction costs stems from the overly broad application of merger control law that relies on exceedingly low notification thresholds and that requires antitrust notification of transactions in the absence of any appreciable domestic effects. To complicate matters, many jurisdictions' filing requirements are vague, subjective, or difficult to interpret. The Advisory Committee recommends several best practices that jurisdictions can use, where necessary, to refine threshold tests for notification. These practices are designed to reduce unnecessary transactions costs without significantly reducing the public benefit from advance notification.
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1. In establishing its premerger notification thresholds, each jurisdiction should seek to screen out mergers that are unlikely to generate appreciable anticompetitive effects within the reviewing jurisdiction.
This screening can be achieved, first, by implementing threshold tests that require an appreciable nexus to the jurisdiction, such as transaction-related sales or target assets in the jurisdiction.
Second, jurisdictions should set notification thresholds only as broadly as necessary to ensure the reporting of potentially problematic transactions. If an indexing mechanism is not employed, the Advisory Committee recommends that jurisdictions review their notification thresholds periodically (at least every four years) to determine whether they should be adjusted.
2. Additional steps that can be taken at this stage to reduce costs for international mergers include establishing objectively based notification thresholds and ensuring their transparency.
3. To better ensure that potentially anticompetitive transactions do not escape scrutiny under merger review systems, the Advisory Committee recommends that competition authorities be given the authority to pursue potentially anticompetitive transactions even if those transactions do not satisfy notification thresholds. Although the federal antitrust agencies in the United States already possess this authority, many existing merger regimes authorize regulators to review transactions only when notification requirements are satisfied.
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4. Any efforts to revise notification thresholds also must consider filing fees, which currently constitute a significant source of revenue for numerous competition authorities, including the federal antitrust agencies in the United States. Ideally, no competition agency should be dependent on filing fees for its budget or staff salaries. To ensure that these competition authorities will be able to pursue their enforcement missions vigorously, it is imperative to provide agencies with alternative sources of funding to offset the loss of any funds that may result from revising notification thresholds or ''delinking'' filing fees from agency budgets.
Reducing Burdens on Transactions that Come within the Merger Review Net
Detailed filing requirements and long review periods may impose significant and sometimes unnecessary or unduly burdensome costs on proposed transactions, particularly those that pose no harm to competition. Further, lengthy or indefinite review periods coupled with differing events triggering when a filing may (or must) be made may complicate cooperation among reviewing authorities and heighten uncertainty with respect to transaction planning. To ensure that each jurisdiction refrains from unduly burdening transactions that trigger a notification obligation, merger review should be conducted in a two-stage process designed to enable enforcement agencies to identify and focus on transactions that raise competitive issues while allowing those that present none to proceed expeditiously.
Review Periods and Timing
1. The first stage should be conducted within a maximum review period of one month. In many jurisdictions the initial review and waiting period generally runs for either 30 days or one month following notification. By contrast, the initial review period in several other jurisdictions substantially exceeds this base line or is undefined. ICPAC hearings testimony suggests that marginal differences in the initial review periods are inconsequential since they are manageable from a transaction planning standpoint. Reform efforts should focus, therefore, on jurisdictions in which the initial review period either is undefined or substantially exceeds the 30 day-one month baseline.
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2. Jurisdictions that are unable to conclude investigations before the expiration of the initial or second-stage review periods also should be given authority to grant early termination (for example, for transactions that raise no substantive issues or in which the parties are willing to resolve concerns through consent decrees or undertakings).
3. To permit merging parties to coordinate multijurisdictional filings in the most efficient manner and to facilitate cooperation among reviewing authorities, the international community should promote harmonization of rules pertaining to when parties are permitted to file premerger notification. This harmonization can be achieved by targeting reform efforts in jurisdictions with definitive agreement requirements and postexecution filing deadlines so as to permit filings at any time after the execution of a letter of intent, contract, agreement in principle, or public bid.
4. For transactions that raise serious competitive issues and require a more in-depth review, the Advisory Committee concludes that merger review should not be an open-ended process and that companies derive value from certainty with respect to merger review periods. The Advisory Committee believes more deadlines should be employed to provide greater certainty and that jurisdictions with lengthy or open-ended review periods should adopt more expedited time frames for review. The Advisory Committee made a number of suggestions in the U.S. context to address these concerns. One possibility is nonbinding but notional time frames for second-stage review that vary in relation to the relative complexity of the transaction.
Notification Forms and Information Requests
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1. While the Advisory Committee acknowledges that agencies have a legitimate interest in requiring the submission of information sufficient to ensure that they are able to identify potentially anticompetitive transactions, some jurisdictions impose very substantial and unnecessary burdens through the use of very detailed filing forms. In these jurisdictions, voluminous filings are required for all transactions, including those that pose no harm to competition. To ensure that transactions that trigger notification obligations are not burdened with excessive information requirements, while at the same time giving competition authorities enough information to identify competitively sensitive transactions, the Advisory Committee recommends that initial notification require the minimum amount of information necessary to make a preliminary determination of whether a transaction raises competition issues sufficient to warrant further review.
2. Recognizing that there is a trade-off between the amount of information initially provided and the time frame in which clearance is to be granted, mechanisms also should be established to narrow the legal and factual issues presented by mergers as early in the review process as possible. One way to accomplish this goal would be to provide a short form-long form option, leaving it to the notifying parties to choose in the first instance which form to use. Alternatively, reviewing authorities may encourage merging parties to provide additional information voluntarily, allowing the authorities to resolve any potential antitrust issues quickly or conduct a focused second-stage inquiry that narrowly targets the antitrust issues.
3. Initial filing requirements in many jurisdictions may be statutorily imposed, and revising these requirements through legislative action may be time consuming. Until reform efforts can be achieved, the Advisory Committee recommends that jurisdictions consider permitting parties to submit an affidavit or letter (in lieu of a notification) alleging brief facts explaining why the transaction does not raise competitive concerns.
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4. To facilitate quick resolution of potentially problematic transactions deemed worthy of further investigations and focus the issues as soon as possible, there is no substitute for frank information exchange between competition authorities and the parties to a proposed transaction. To that end, each reviewing authority should articulate to the merging parties at the beginning of a second-stage inquiry the competitive concerns that are driving the investigation. This summary could be conveyed orally or in writing.
5. Competition authorities around the world could assess their own performance with respect to those transactions they challenge. One way to do this is to conduct an after-the-fact audit of merger challenges to examine in great detail decisions to prosecute, or to refrain from prosecuting, specific matters. The audit also could examine the types of information collected during each investigation. The aim of these audits lies in obtaining an objective and frank assessment of performance in previous investigations, thereby laying the groundwork for improvement in future cases. Audits could be conducted internally in more mature merger regimes or by a group of outside observers in newer regimes.
6. A great deal also can be gained from multilateral efforts to achieve soft procedural harmonization of the type undertaken by the Organization for Economic Cooperation and Development (OECD). The United States should continue to support OECD efforts to further develop a common framework for merger notification, including the development of common definitions. In addition, the OECD should continue to focus its efforts on identifying the minimum information necessary to identify whether mergers raise competitive issues as well as to specify categories of data that may be useful to narrow or resolve potential issues early in the process. As part of this effort, consideration also should be given to ways to reduce unnecessary burden, including translation costs, overly burdensome certification, and other procedural requirements.
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Targeted Reform Efforts in the United States
In Chapter 3 the Advisory Committee recommends a number of practices designed to rationalize the application of merger review procedures. The Advisory Committee believes that the United States should play a leading role in the effort to implement these proposed reforms in the international arena. Perhaps one of the most effective ways in which the United States can stimulate global reform is leading by example. It is therefore important that the United States examine its own merger review system in an attempt to identify and correct those aspects of the system that create uncertainty and unnecessary transaction costs. The applicability of the practices recommended in Chapter 3 to the United States is discussed below.
Targeted Reform in the United States: Notification Thresholds
The Hart-Scott-Rodino Act (HSR) and implementing regulations that spell out the U.S. merger review process already use exemptions from HSR reporting requirements for certain transactions involving non-U.S. companies (foreign person exemptions) to ensure that the U.S. authorities are notified only of transactions with a nexus to the jurisdiction. In addition, the notification thresholds are objectively based. Finally, the U.S. antitrust agencies ensure the transparency of these thresholds and their application by offering guidance to practitioners and businesses through published rules and regulations, guides, speeches, and press releases, and through the Federal Trade Commission (FTC) Premerger Office's provision of advice.
The foreign person exemptions, however, have not been adjusted for many years. Thus, the Advisory Committee recommends that the FTC review the scope and level of the HSR exemptions for transactions involving foreign persons to ensure that the U.S. authorities are notified only of transactions with an appreciable nexus to the United States. A final area that deserves attention concerns ensuring that the notification thresholds are only as broad as necessary to identify transactions that have the potential to generate appreciable anticompetitive effects within the United States.
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1. The thresholds currently employed by the premerger notification system in the U.S. deserve careful review. While recognizing that small transactions are not necessarily competitively benign, the Advisory Committee finds that the notification thresholds currently employed in the United States are too low and capture too many lawful transactions.
2. The most straightforward way to decrease the number of required filings while not materially compromising the agencies' enforcement mission is to increase the size-of-transaction threshold for acquisitions of both voting securities and assets. One method for raising the threshold lies in adjusting for inflation, with periodic future adjustments for inflation. Depending on the base year and deflator used, increasing the size-of-transaction threshold commensurate with inflation would mean increasing the threshold in the $33 million to $43 million range when measured in 1998 dollars. The majority of the Advisory Committee recommends raising the thresholds within this range, although three members advocate raising the size of the transaction threshold even higher, to $50 million.
3. An indexing mechanism has many benefits, but an automatic indexing mechanism also may produce arbitrary results. If an automatic indexing mechanism is not employed, the Advisory Committee recommends that the notification thresholds be reviewed periodically to determine whether they should be adjusted.
4. The Advisory Committee believes that, ideally, filing fees should be delinked from funding for the agencies. A linkage of this nature may skew incentives to revise notification thresholds because of collateral fiscal effects. Another risk is that the ability of the agencies to fund their law enforcement activities may be compromised when the current merger wave subsides. However, because filing fees currently provide 100 percent of the U.S. agencies' enforcement budgets, sufficient funds must be available from other sources before any effort to delink filing fees or raise thresholds occurs. It is critical to the agencies' enforcement mission that resources are not reduced. The antitrust agencies' enforcement efforts could be directly funded from general revenue or indirectly in a variety of ways including increasing the filing fee, creating a sliding scale fee, or assessing a fee based on the amount of work performed by the agencies (although these latter alternatives would not accomplish delinking the budget from fees).
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Targeted Reform in the United States: Review Periods and Timing
The Advisory Committee commends the flexibility of the U.S. premerger notification system, which permits filing at any time after the execution of a letter of intent, contract, agreement in principle, or public bid. In addition, the Advisory Committee commends the fact that the U.S. competition authorities resolve approximately 97 percent of all notified transactions within the initial 30-day review period. Thus, no reform of the U.S. triggering event or initial review period is needed. The second-stage review process can, however, be improved.
1. A consensus exists among Advisory Committee members on the need for certainty in merger review periods and that merger review should be conducted within reasonable time frames. Advisory Committee members are not of a shared view on the appropriate mechanisms for addressing these concerns, however. Some members of the Advisory Committee believe that fixed maximum review periods are necessary to provide certainty and discipline in the merger review process. Most members of the Advisory Committee feel this would be extremely difficult to achieve under the U.S. system and might result in enforcement errors. There also is concern that maximum time periods would effectively turn into standard or minimum review periods. A majority of Advisory Committee members therefore eschew strict time periods but recommend that alternative steps be taken to provide the greater certainty required for effective transaction planning. For example, the agencies could employ nonbinding but notional time frames for second-stage review that vary in relation to the relative complexity of the transaction.
Targeted Reform in the United States: Notification Forms and Information Requests
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The Advisory Committee believes that with modest exceptions, the HSR notification form requests only the information required by the agencies to identify competitively sensitive transactions. In other instances, however, it appears that revisions to the HSR form could enhance the agencies' ability to identify potentially problematic transactions. The Advisory Committee also believes that it is important for the U.S. agencies to implement measures to address some of the problems perceived by the business community and the private bar with respect to the second-request process.
1. The Advisory Committee encourages the FTC to implement changes that better focus the HSR form. In addition, the Advisory Committee recommends that the agencies formalize their current practices that encourage merging parties voluntarily to provide additional information at the initial filing stage in an effort to resolve potential issues without the issuance of a second request. One way to formalize the process is to create an optional long form. Another way lies in creating a model voluntary submission list that identifies the categories of data that merging parties usefully may submit in facially problematic cases.
2. Another useful practice that should be formalized is that of permitting the merging parties voluntarily to withdraw and refile within 48 hours the acquiring person's HSR form (without having to pay another filing fee) in order to give the agencies additional time to resolve the matter without having to issue a second request. In appropriate cases of this nature, the agencies should alert parties to the option of withdrawing and refiling the HSR notification. Publishing statistics on the number of successful (and unsuccessful) attempts to avoid a second request by withdrawing and refiling a notification would demonstrate the viability of this option.
3. When they issue a second request, the agencies should provide the merging parties (either orally or in writing) with their reasons for not clearing the transaction within the initial review period. An explanation of the substantive concerns prompting the second request will facilitate transparency in the merger review process and will expedite the process by further enabling the merging parties to focus on and respond to the agencies' concerns. Further, it will assist parties in understanding that the second request rests on genuine substantive concerns. In designing second requests, moreover, the agencies should avoid overly broad requests and instead tailor their requests for additional information to the issues prompting the need for further review.
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4. In 1995 the agencies announced that they had addressed concerns about the second-request process by adopting a model second request. The predominant view of ICPAC hearing participants, among others, however, is that this reform helped reduce burdens only marginally. In attempting to identify the appropriate components of an effective model second request, one useful project might be an internal after-the-fact audit of select merger challenges. Such an audit could consider whether the agencies are requesting the right types of information and whether this information was subsequently used at trial (and whether discovery tools were sufficient). Perhaps the answers to these questions would enable the agencies to revise their model second request to reduce compliance burdens on businesses.
5. Merging parties and agency staff frequently are able to negotiate modifications to the scope of second requests. The level of willingness to engage in productive negotiations of this nature appears to vary among staff members and counsel for merging parties, and modification requests are sometimes not resolved in a timely fashion. In an attempt to institutionalize productive modification negotiations, the Advisory Committee recommends that the agencies impress on staff the importance of being open to negotiating modifications to the scope of second requests and to do so in a timely fashion. Success in this endeavor also requires merging parties and their advisors to cooperate.
6. When modification negotiations break down, parties should be encouraged to use the appeals process, which currently is used hardly at all. To this end, the Advisory Committee recommends that the agencies implement measures to make the appeals procedure more attractive to merging parties by making the process more expeditious, making its outcome more transparent, and actively encouraging merging parties to use the process. Agencies and parties also should involve direct supervisory officials in the modification negotiation process, when necessary.
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7. The Advisory Committee also considered ways to reduce foreign productions and translation requirements. The agencies should continue their current practice of permitting parties, in appropriate cases, to provide summaries of documents and produce full translations of only those documents the agencies deem particulary relevant to the inquiry. However, the parties should not as a matter of course be required to forgo a defensible market definition in order to take advantage of this practice. The Advisory Committee recommends that in appropriate cases, the agencies consider whether the selection of the specifications that apply to foreign offices could be limited to those that are directly relevant to the geographic market or that seek documents that pertain to the specific competitive concerns at issue.
Targeted Reform in the United States: Multiple Review of Mergers
The Advisory Committee has identified overlapping responsibilities for review of mergers in the United States as an area warranting consideration in its examination of international competition policy. In the United States, a decision by the DOJ or FTC in a specific transaction does not preclude subsequent or parallel competition reviews, nor does it determine the outcome of such proceedings. Federal and state legislatures and judicial decisions have empowered a wide array of public and private parties to challenge mergers, acquisitions, and joint ventures on competition grounds.
Concurrent jurisdiction among multiple domestic agencies has the potential to generate inconsistent policy approaches within a single jurisdiction. As a result, it can make global harmonization efforts and cross-border cooperation more difficult. In addition, it imposes heightened uncertainty as to timing and outcome and further increases transaction costs. In its deliberations, the Advisory Committee identified a number of possible policy approaches to address these issues. These proposals ranged from granting exclusive federal jurisdiction to determine competitive consequences of mergers to the DOJ and FTC, to clarifying the roles of the DOJ, the FTC, state, and federal sectoral regulators, to imposing timetables and deadlines on the merger review process, to nonlegislated convergence strategies.
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1. The Advisory Committee believes that the federal antitrust authorities are better positioned to conduct antitrust merger review than federal sectoral regulators. The majority of Advisory Committee members recommend removing the competition policy oversight duty from the sectoral regulators and vesting such power exclusively in the federal antitrust agencies. Under such a regime, the findings of the federal antitrust agency on the competition issues would be reported to, and binding upon, the specialized agencies. At this juncture, however, some members recommend instead creating a presumption in favor of the analyses undertaken by the federal antitrust enforcement agencies in parallel or subsequent proceedings. Additional approaches advocated in the short run consist of soft convergence strategies between agencies exercising concurrent jurisdiction to encourage the adoption of common analytical methods and enhanced cooperation.
2. With respect to overlapping state review, the Advisory Committee encourages the state attorneys general to resist using antitrust laws to pursue noncompetition objectives. Further, the Advisory Committee recommends that the federal antitrust enforcement agencies file an amicus curiae brief in state courts in select private suits challenging international transactions. For example, appropriate cases may be where the DOJ or FTC has either cleared or settled a transaction where there has been significant cross-border cooperation or the parties agreed to waive confidentiality.
3. All members agree that several issues relating to overlapping agency review deserve further study. These studies should include analyzing the relationship among the DOJ, the FTC, and other federal and state regulators; identifying the differences in review processes with respect to both substantive approaches and procedure; assessing the expertise of the federal antitrust agencies to undertake merger analyses in regulated industries on the one hand and the capacity of federal sectoral and state regulators to conduct antitrust analyses on the other; assessing the ramifications of a change in the status quo; and gathering the views of the reviewing agencies.
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CHAPTER 4—INTERNATIONAL CARTEL ENFORCEMENT AND INTERAGENCY ENFORCEMENT COOPERATION
In the last decade, the U.S. Department of Justice Antitrust Division has aggressively and successfully prosecuted nearly 20 international cartels, filing charges against more than 80 corporate and 60 individual defendants—both domestic and foreign—in cases involving price fixing; volume, customer, and market allocation agreements; and bid-rigging—among other things. These high-visibility prosecutions have involved complex, globally extensive, and sometime long-lived conspiracies and have resulted in the imposition of record-breaking penalties against domestic and foreign defendants alike. Corporate fines in the tens of millions of dollars have become almost commonplace as have significant fines and, increasingly, prison terms for individual defendants.
Several changes in U.S. enforcement efforts have contributed to the detection and successful prosecution of these cartels. In addition to making enforcement efforts against cartels a top priority, the Antitrust Division has instituted a series of incentives for cartel participants to come forward and cooperate with authorities. Moreover, the recent U.S. enforcement successes appear to be occurring amidst a heightened degree of international consensus that cartels should be detected and prosecuted. Some other jurisdictions have followed the U.S. example and are increasing their anticartel enforcement programs, including their focus on international cartels, and their commitment to cooperating more fully with the United States in its anticartel efforts. Yet there is room for even greater international cooperation.
Improving Knowledge about International Cartels
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Whether the surge in U.S. prosecutions means that there are more international cartels in operation than ever before is unclear. What is clear is that international cartels present a serious problem with adverse effects on U.S. and foreign consumers, businesses, and governments. With U.S. anticartel enforcement actions generating considerable interest around the world, the time is opportune for U.S. antitrust agencies not only to expand cooperation with antitrust authorities in other jurisdictions, but also to increase public awareness about the detrimental effects of international cartels.
1. A complete assessment of the incidence of private international cartels is beyond the capabilities of the Advisory Committee. Nonetheless, the Advisory Committee believes that the scope and incidence of international cartels are important matters for further examination and recommends that governments and other experts take up this issue.
2. The Advisory Committee also recommends that the United States expand its efforts to increase public knowledge and awareness at home and abroad of the deleterious effects of cartels for consumers, businesses, and governments.
3. To take advantage of the improved environment for international cooperation on rooting out and prosecuting international cartels, the Advisory Committee hopes that the United States will use all opportunities, both formal and informal, to share its recent experiences with foreign enforcement authorities. Actions to ensure that U.S. anticartel enforcement policies are well understood abroad will enhance the credibility of U.S. enforcement efforts and promote interagency cooperation at the same time.
Increasing Transparency in Handling Confidential Business Information
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The exchange of confidential information between competition authorities is an important feature of deepening cooperation. The United States and international business communities have expressed concerns about agency accountability and transparency in connection with such information exchanges, particularly with respect to cross-border joint investigations into cartel activities (similar concerns in the context of multijurisdictional merger reviews have also been pressed, and they are addressed in Chapter 3). Another recurring concern from some members of the business community and the private bar is that competition authorities do not provide notice when they transfer confidential information or other protected information in their agency files to another enforcement agency. In the view of the Advisory Committee:
1. Cooperation between competition authorities should feature appropriate safeguards for confidential information. Competition authorities should ensure the transparency of standards applied in their enforcement efforts. Continuing efforts are necessary to instill greater business confidence that exchanges will not result in adverse commercial consequences.
2. U.S. antitrust authorities should consider providing notice—either before or after the fact—of their intent to disclose information to antitrust authorities in other jurisdictions unless such notice would violate a treaty obligation of the United States or a court order or jeopardize the integrity of any U.S., state, or foreign investigation.
3. The U.S. antitrust agencies should assess requests from other competition authorities to share confidential information by taking into consideration, among other things, their history of enforcement cooperation with the requesting jurisdiction as well as whether they are confident that the jurisdiction is able to and does protect confidential information under its own laws.
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The Importance of Positive Incentives
The United States should attempt to identify positive incentives that can deepen cooperation between U.S. antitrust agencies and competition authorities in other jurisdictions, instill greater public confidence in the value of such cooperation, reduce tensions associated with U.S. enforcement, and further develop a shared culture of sound competition policy around the world. To this end, the Advisory Committee recommends that:
1. The U.S. government should expand its ability to provide technical assistance, both bilaterally and in coordination with international organizations, to develop traditional core areas such as anticartel enforcement activities and premerger reviews as well as new initiatives (such as those discussed in Chapters 5 and 6) to support the operating needs and capabilities of authorities that are beginning to introduce or to enhance competition law and policy regimes.
2. U.S. antitrust authorities are encouraged to expand the jurisdictions with which they have modern antitrust cooperation agreements, including those that feature more detailed provisions regarding positive comity. The U.S. authorities should seek cooperative arrangements with qualified jurisdictions that have newer competition systems as well as with those with more established competition laws.
CHAPTER 5—WHERE TRADE AND COMPETITION INTERSECT
In this chapter, the Advisory Committee considers the intersection of trade and competition policy. Notably, the Advisory Committee focuses on anticompetitive or exclusionary restraints on trade and investment that are implemented by firms, governments, or some combination of the two, and that hamper the ability of firms to gain access to or compete in a foreign market. Traditionally, such problems have been considered primarily the responsibility of national competition authorities concerned about anticompetitive effects to markets and consumers on their soil. Some countries, notably the United States, have at times applied their law extraterritorially in an attempt to remedy such practices. As formal governmental barriers to international trade and investment are reduced or eliminated, international attention is turning more to anticompetitive practices occurring within nations that affect trade and investment flows from other nations. As a result, perceived restrictions emanating from exclusionary or anticompetitive practices have generated economic and political tensions between nations and firms.
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This chapter reviews the landscape of global problems that implicate both international trade concerns about access to markets and competition policy concerns about anticompetitive practices that block the operation of markets. Many international competition problems are not seen by this Advisory Committee as matters of relevance to international trade policy. As discussed in Chapters 2 and 3, the proliferation of merger control regimes is raising transaction costs and introducing new frictions. As discussed in Chapter 4, international cartels appear to be a serious problem for the U.S. and the global economy. These matters are global competition problems but they are not trade and competition policy issues. Yet, there is an important global competition agenda that needs greater attention by the appropriate policymakers at home and abroad. This is considered most directly in Chapter 6.
Chapter 5 considers a variety of acts of governments and firms that can restrict international trade. Around the world, formal governmental actions immunize some firm conduct. Governments also may take measures that are excessively trade-restricting and anticompetitive. Anticompetitive private arrangements also can have adverse effects on international trade and access to markets. And, in some instances such arrangements occur against a background of governmental restraints that are supportive of private restraints. In this way, practices that may be anticompetitive or exclusionary may not fall neatly into a category of either purely private restraints or governmental practices.
Trade and competition policies are two methods of addressing such problems. Trade law and policy are centrally focused on the actions of governments. Competition or antitrust laws are principally focused on firm conduct. In this way, trade and competition policies are designed to look at restraints that come from different sources. As this chapter discusses, aspects of these policies' tools can be mutually supportive. At the same time, overlapping policy concerns can lead to different conclusions regarding the effects of a particular restraint. For example, examination of a vertical distribution practice under U.S. antitrust law might find that the restraint is efficiency-enhancing and beneficial to consumers or merely neutral to consumer welfare, while the same restraint might be seen from a trade policy perspective as exclusionary and adversely affecting access to markets.
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Neither trade nor antitrust policy tools provide complete solutions to the problems that emanate from this mix of governmental and private restraints. And at present, no international set of rules directly addresses business practices, although some experts are of the view that such disciplines should be developed at the international level.
This chapter considers and evaluates the utility of both old and new approaches to such problems. It starts by defining the scope of the problem internationally, then reviews cases that have animated international attention, and finally considers alternative policy approaches, including bilateral cooperative solutions, U.S. enforcement responses, and expanded international initiatives, at the World Trade Organization (WTO) and elsewhere.
Defining the Problem
Much of the international discussion on the effect of anticompetitive practices has focused on the impact of private restraints on international trade. The Advisory Committee believes that U.S. policy should look beyond purely private business practices, because governmental practices and restraints of a mixed private and public nature also can have significant trade-distorting consequences. The Advisory Committee therefore considers policy recommendations for the broad ambit of practices that can have an anticompetitive impact on trade and investment.
Evaluating the Evidence
As a first step in considering appropriate policy responses for addressing exclusionary or anticompetitive practices abroad, the Advisory Committee considers the current record of cases and disputes that have both competition and trade or market access features. In the view of this Advisory Committee, this record, while uneven, is sufficient to show that private and governmental restraints that inhibit market access are a problem. While the problems recur as a source of international tension between certain countries, private anticompetitive restraints are not geographically limited. The Advisory Committee believes that the current record is sufficient for the U.S. government to make some policy judgments about the nature of the global trade and competition problems.
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Policy Approaches
Through its outreach efforts and public hearings, the Advisory Committee has solicited input from various enforcement officials, business groups, economists, organized labor, lawyers, and other interested parties regarding potential policy options for addressing anticompetitive and exclusionary practices that restrain exports. In general, alternative approaches considered by this Advisory Committee fall into several broad categories:
1. The United States should encourage the development and expansion of bilateral agreements including positive comity provisions. The development of positive comity can be used to address anticompetitive restraints occurring in foreign markets that result in foreclosure. It is a tool to encourage other nations to enforce their competition laws regarding anticompetitive conduct that occurs on their territory and has adverse effects abroad.
2. Where countries are unwilling or unable to address such anticompetitive behavior within their own borders, the harmed nation should, if feasible, use its own laws to reach the offending conduct, if feasible.
3. New or more robust multilateral initiatives could be explored through existing international organizations such as the OECD or the WTO. Alternatively, a new multilateral agreement could develop international rules or initiatives to address such complaints.
The Advisory Committee believes that there is no single approach that responds to all aspects of competition problems facing the global economy and U.S. firms. Several different approaches may be promising. Bilateral agreements with positive comity offer a potentially useful instrument for addressing private restraints. The extraterritorial enforcement of U.S. antitrust laws can be necessary and prove effective under some circumstances. Importantly, in the view of this Advisory Committee, economic globalization requires the further development of international competition policy initiatives. Through certain adjustments in each of these approaches, U.S. policy can improve upon its approach to problems that intersect both trade and competition policy concerns.
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Bilateral Agreements with Positive Comity
The Advisory Committee believes that positive comity remains a useful first step in addressing anticompetitive restraints affecting trade where the territorial party has the authority and the willingness to take effective action. The benefits associated with the positive comity process hold substantial potential for enhanced cooperation and minimization of conflicts that can arise during cross-border investigations of conduct affecting market access. In market access cases, jurisdictional issues and even the theoretical threat of extraterritorial enforcement of antitrust laws have engendered significant levels of tension between governments. The application of positive comity principles can greatly reduce these frictions. However, positive comity is not a replacement for the option to pursue extraterritorial enforcement; it is but one tool within the entire framework of options available to antitrust enforcement officials.
While enhanced cooperation and use of the positive comity instrument can clearly produce benefits, the Advisory Committee recognizes that several shortcomings need to be addressed if positive comity is to become an effective element of international cooperative efforts. The historic enforcement record of antitrust agencies around the world does not instill confidence in those agencies' willingness to pursue antitrust actions against domestic firms in instances where the practices of those firms have allegedly impaired the ability of foreign firms to compete effectively. In the absence of a nation's serious commitment to undertake such actions, where legally warranted, the benefits of positive comity may remain modest or illusory. Moreover, to be truly effective, positive comity requires correspondence between the parties' antitrust laws and enforcement commitment. Confidence in positive comity can be weakened if the process is delayed and not transparent. And, of course, it remains a relatively new and untested approach.
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Recommendations for addressing concerns about positive comity and improving the process include:
1. The U.S. Department of Justice should build on the U.S.–EC positive comity agreement as a model for future agreements and should continue to expand the jurisdictions with which it enters into bilateral cooperation agreements.
2. It may be possible to improve upon the structure of positive comity provisions still further. The Advisory Committee proposes several specific recommendations to increase communication and transparency in the positive comity process.
3. In addition to visible support for positive comity by competition enforcement agencies, international organizations that address trade and competition issues also should endorse the benefits associated with positive comity in their mission. By advertising the advantages reaped from effective positive comity cooperation, international organizations hold the potential to expand such cooperation to nations or jurisdictions that have similar antitrust laws and enforcement policies.
4. As a means to ensure that aggrieved U.S. firms view positive comity tool as a serious policy option for addressing anticompetitive practices in foreign markets, the Department of Justice should make a conscientious effort to implement and test recent bilateral agreements with positive comity provisions as a first response to solve real problems, when meritorious cases arise.
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U.S. Enforcement to Gain Market Access
The record of U.S. government antitrust enforcement actions against foreign restraints that bar access to markets abroad by U.S. firms is limited. The reasons for this are diverse but suggest that significant legal, evidentiary, and other obstacles are likely to make extraterritorial enforcement, particularly with respect to foreign anticompetitive restraints that limit U.S. exports, only infrequently available as a viable policy response. At the same time, unilateral remedies must remain a part of U.S. antitrust policies, particularly when foreign governments are unwilling or unable to undertake their own enforcement actions. U.S. policymakers should make clear that the United States remains committed to using such instruments when necessary and possible.
1. Although the Advisory Committee believes that it is important for the United States to develop incentives to obtain foreign authorities cooperation, U.S. antitrust laws should not be weakened in an effort to obtain such assistance. For example, the Advisory Committee believes in maintaining treble damage liability in cases where the only antitrust violation alleged is harm to U.S. export commerce.
2. Private and governmental litigation can raise traditional comity concerns on the part of foreign governments. Improvements should be sought in the process and standards by which competing interests are balanced for comity purposes. To that end, the Advisory Committee recommends that federal, state, and local judges hearing private disputes that raise claims or defenses based on considerations of governmental policy invite concerned governments, including the U.S. Department of Justice, to submit their views at an early stage in the litigation. Such ''airing of views'' commonly takes the form of amicus curiae submissions.
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3. The Advisory Committee recognizes that U.S. extraterritorial antitrust enforcement against foreign market-blocking restraints is a sensitive issue for foreign governments that can affect antitrust enforcement cooperation efforts in particular and law enforcement cooperation more broadly. Because of these concerns and the potential obstacles discussed above, the expected results of extraterritorial enforcement against offshore restraints on U.S. exports should not be overestimated. Indeed, it is for such reasons that the Advisory Committee recommends that a first step in attempting to address these restraints should be to consider whether it is realistic to approach the foreign nation where the practices occur and seek its cooperation. Where such cooperation is not forthcoming, a willingness to use U.S. antitrust enforcement tools may have the salutary effect of acting as a lever to encourage excluding nations to pursue their own enforcement actions. A tenable U.S. antitrust enforcement effort against market-blocking restraints may contribute to a greater culture of cooperation and enforcement. It is also essential to the credibility of U.S. antitrust enforcement that the business community have confidence that the Antitrust Division will vigorously pursue cases, including export restraint cases, wherever possible and when no superior alternatives such as positive comity are available. Further, the Advisory Committee recommends that the U.S. antitrust agencies continue to have responsibility vis-á-vis trade agencies over legal determinations of the anticompetitive conduct of private firms, at home or abroad.
4. One of the most challenging aspects of U.S. enforcement against market-blocking restraints is developing adequate evidence of anticompetitive conduct. In any case that could result in an enforcement action, that information and analysis will be highly fact specific. Nonetheless, considerable disagreement remains about the merits of particular disputes and the extent to which private, governmental, and mixed public-private restraints inhibit trade. It therefore may be useful to undertake some broader empirical analysis such as a study of the magnitude of global trade problems that stem from private or governmental restraints abroad or an analytical effort to evaluate the effects of recent transnational cases such as in the cartel area. Such inquiries would not establish definitive estimates, but could provide a foundation of evidence or analysis for informed national decisionmaking and international discourse that could be updated, as needed.
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The Role of International Organizations
The Advisory Committee believes that in addition to pursuing bilateral cooperation with positive comity, the United States should continue to develop its broader multilateral engagement on competition policy matters. These efforts should encompass a variety of forums and should be aimed at seizing opportunities for developing more seamless markets and expanding meaningful cooperation on practical enforcement problems. The goals for enhanced international engagement should include: (1) developing a more broadly international perspective on competition policy, with the goals of reducing parochial actions by firms and governments; (2) fostering soft harmonization of competition policy systems; (3) developing improved ways of resolving conflicts; and (4) developing a degree of consensus on what constitutes best practices in competition policy and its enforcement.
The World Trade Organization is the multilateral organization most often mentioned in connection with an international effort to develop competition rules. The WTO has a unique place among international organizations and rulemaking bodies by virtue of its inclusiveness (with more than 135 members from developed and developing economies) and its centrality as a forum for negotiating binding rules governing the economic conduct of nations. The WTO's central focus has been on the trade-distorting conduct of governments. With the exception of antidumping and countervailing duty laws, the WTO has not focused on firm conduct. However, while several WTO agreements have elements that implicate competition policy, and while many WTO principles are supportive of competition policy objectives (such as transparency, nondiscrimination, and national treatment), the treatment of competition policy as such in WTO agreements has been only fragmentary.
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In thinking about the role that the WTO or another international organization might play with respect to competition policy in the future, the following approaches are not endorsed by the Advisory Committee.
Specifically, this Advisory Committee sees efforts at developing a harmonized and comprehensive multilateral antitrust code administered by a new supranational competition authority or the WTO as both unrealistic and unwise. This is not an argument against efforts at promoting soft convergence; indeed the Advisory Committee advances several proposals that it believes would be useful along those lines. However, deliberations and consultations on substantive as well as procedural features of competition policy regimes are not the same as negotiating a comprehensive international antitrust code.
Also unrealistic is the proposition that purely national approaches are sufficient and broader international engagement is unnecessary. This viewpoint ignores both the costs of the current sources of disharmony among nations and equally important, the opportunities that now appear to exist for productive collaboration among competition authorities as well as trade and competition authorities, including at the WTO.
The Advisory Committee believes that attention should be focused on the substantial middle ground between these two extremes. It is here that the WTO can play a constructive role in developing a common understanding of the issues surrounding the intersection of trade and competition policy. However, not all competition problems are trade problems, and hence not all competition problems that are global will find a natural home at the WTO.
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1. The Advisory Committee therefore recommends that the primary focus of the WTO and its area of core competence remain as an intergovernmental trade forum focusing on governmental restraints. There is a great deal of further liberalization of trade to achieve and that agenda can itself have a positive impact on the environment for competition policy around the world.
2. The Advisory Committee also recommends that the U.S. government support and pursue additional incremental steps at the WTO to deepen the work already under way on the intersection of trade and competition policy. The WTO Working Group on the Interaction Between Trade and Competition Policy is a productive intergovernmental initiative engaging trade and competition officials from both developed and developing economies. To foster the work of this group, the Advisory Committee recommends the WTO undertake these illustrative and largely educative steps to make the WTO a more ''competition policy friendly'' environment.
The most obvious move in this direction would be the continuation of the deliberations of the Working Group, which has had a productive start but is still in the early stages of deliberations.
The WTO should increase the competition policy expertise at the WTO Secretariat and in the country missions, wherever possible.
The WTO should continue to conduct regular summary reports or review of those countries that have competition laws or policies in place, possibly including such reports in the Trade Policy Review Mechanism (TPRM).
3. At this juncture, the majority of the Advisory Committee believes that the WTO as a forum for review of private restraints is not appropriate. Given the possible risks, and the lack of international consensus on the content or appropriateness of rules or dispute settlement in this area, this Advisory Committee believes that the WTO should not develop new competition rules under its umbrella. Various concerns animate the Advisory Committee's skepticism toward competition rules at the WTO, including the possible distortion of competition standards through the quid pro quo nature of WTO negotiations; the potential intrusion of WTO dispute settlement panels into domestic regulatory practices; and the inappropriateness of obliging countries to adopt competition laws. While recognizing that in some instances it may not be a fully satisfactory result, the Advisory Committee believes that national authorities are best suited to address anticompetitive practices of private firms that are occurring on their territory.
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4. If anticompetitive practices and market-blocking restraints are occurring in a jurisdiction that does not have a competition authority or that authority is unable or unwilling to remedy the problem, then the harmed nation may be able to apply its own laws effectively in an extraterritorial fashion. If relief is not practicable (because of an inability to obtain necessary evidence or other means), then it may be the case that the harmed nation simply has limited relief available to it under the current system. This may appropriately be a subject of international consultation. However, it seems less appropriately a matter for WTO dispute settlement.
5. Over the longer term, the WTO may be called upon to resolve disputes between nations that hinge on whether private practices that foreclose access to markets are ultimately attributable to governmental practices. The ability of the WTO to resolve such disputes is not fully tested under the WTO's existing rules or jurisprudence and is an area that this Advisory Committee believes needs particular study and consideration by trade and competition policymakers in the years ahead. As the world moves into the next century, and as new countries join the WTO, the problems of market access will surely deepen, and the line between public and private restraints will become increasingly opaque. Hence, it is a particularly important area of attention by trade and competition policymakers.
CHAPTER 6—PREPARING FOR THE FUTURE
The Advisory Committee was invited to think broadly and boldly about new tasks and concepts that the United States and the international community should consider in addressing emerging competition issues. This chapter looks at four such areas. First, it examines the possible need for additional multilateral initiatives to deal with competition policy matters that either transcend national boundaries or that would benefit from more international attention. A key recommendation is the proposed ''Global Competition Initiative,'' which is designed to address differences in national approaches to competition that have international consequences. Second, and closely related, the chapter considers the need for an international mechanism that will allow countries to resolve disputes over competition policy. Third, the chapter considers an emerging issue of growing importance, namely, the intersection of competition policy and electronic commerce. Finally, the chapter considers the configuration of U.S. foreign economic policymaking itself and the role that competition policy perspectives can play in that process.
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Global Competition Initiative
Many competition issues are not trade issues but are nevertheless broadly international. Such issues include harmonization of procedural or substantive features of merger notification and review and protocols to protect confidential information exchanged in the course of enforcement measures, among others. In the Advisory Committee's view, the United States and other nations should continue to use—but not be limited to—existing international organizations and venues. Indeed, the Advisory Committee recommends that the United States explore the scope for collaborations among interested governments and international organizations to create a new venue where government officials, as well as private firms, nongovernmental organizations (NGOs), and others can exchange ideas and work toward common solutions of competition law and policy problems. The Advisory Committee calls this the ''Global Competition Initiative.''
1. A Global Competition Initiative should be inclusive and foster dialogue directed toward greater convergence of competition law and analysis, common understandings, and common culture. Such a gathering also could serve as an information center, offer technical expertise to transition economies, and perhaps offer mediation and other dispute resolution capabilities. Areas for constructive dialogue might include further discussions among competition agencies to:
Multilateralize and deepen positive comity;
Agree upon the consensus disciplines identified in Chapter 2 regarding best practices for merger control laws and develop consensus principles akin to the recent OECD recommendation on hard-core cartels; consider and develop disciplines to define actions of governments; for example in areas with negative spillover potential such as export cartels, which require broader international cooperation and consultation;
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Consider and review the scope of governmental exemptions and immunities that insulate markets from competition around the world (as discussed in Chapter 5);
Consider approaches to multinational merger control that aim to rationalize systems for antitrust merger notification and review (as discussed in Chapter 3;
Consider frontier subjects that are quintessentially global such as e-commerce, which will create new challenges for policymakers around the world;
Undertake collaborative analysis of issues such as global cartels (discussed in Chapter 4) and market blocking private and government restraints (discussed in Chapter 5); and
Possibly undertake some dispute mediation and even technical assistance services.
2. A Global Competition Initiative does not require a new international bureaucracy or substantial funding. The Group of Seven (G–7) summit is an attractive model, in that it demonstrates that countries can create mechanisms to exchange views and attempt to develop consensus on economic issues without an investment in a secretariat or permanent staff. This proposed initiative would benefit from support from international organizations such as the WTO, OECD, the World Bank, and UNCTAD.
International Mediation of Competition Disputes
The Advisory Committee recognizes that existing multilateral organizations are not equipped to handle some competition conflicts between nations. The only options currently available in those conflicts are domestic litigation against a sovereign state, brinkmanship, or diplomatic negotiation. Consequently, some consideration and experimentation with approaches is needed to provide alternative options for resolving these conflicts. One possible approach is to create a mediation mechanism in which neutral but expert parties can help the parties reach a settlement and where no party to a dispute enjoys any home-court advantage.
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1. The Advisory Committee recommends that the U.S. government and other interested governments and international organizations consider developing a new mediation mechanism as well as some general principles to govern how international disputes, at least sovereign competition policy disputes, might be evaluated under such a mechanism. This mechanism could be developed under the auspices of the proposed Global Competition Initiative or elsewhere.
2. The members of the mediation panel would be drawn from a roster of internationally respected antitrust and competition experts. An examination of a competition policy conflict by an expert panel will face many challenges. However, in some circumstances it could prove useful to clarify the competition policy characteristics of the problem at hand.
Electronic Commerce and Competition Policy
In thinking about the global challenges to competition policy in the next century, the Advisory Committee identified e-commerce and the application of competition policy to high technology industries as important frontier issues. Accordingly, in Chapter 6 the Report considers some of the competition policy dimensions raised by e-commerce.
The Role of the Department of Justice in U.S. Foreign Economic Policy
For a variety of reasons, the Antitrust Division of the Department of Justice has not traditionally played a central role in deliberations on U.S. foreign economic policy nor seen its role as broadly international in nature. Globalization is changing this reality if not the existing structures. The Report considers whether and how the role of the Antitrust Division should be included in U.S. Government discussions concerning foreign economic policy.
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1. The Advisory Committee believes that the law enforcement dimensions of antitrust must remain outside of the deliberative interagency process. Some members are concerned that the participation of antitrust officials in senior interagency deliberations broader than antitrust enforcement runs the risk of politicizing antitrust decisionmaking; others are more of the view that it is important to have such participation in all domestic and foreign policy deliberations that implicate competition policy.
2. One potentially constructive step would be to ensure that the Antitrust Division, working in close consultation with the Federal Trade Commission, is the lead negotiator on any international discussions on competition policy, be they multilateral, bilateral, or regional. This approach has parallels in other international negotiations, such as those involving financial services and securities.
Expanding U.S. Technical Assistance in Competition Law and Policy
The Advisory Committee has considered additional affirmative steps the United States might undertake to expand technical assistance to overseas competition agencies. Technical assistance programs may provide the United States with a voice to support the adoption of sound competition principles and promote the rule of law, especially by transition economies. Further, in light of the proliferation of new antitrust authorities, technical assistance can be used to convey practical experience and advice to emerging antitrust regimes, as well as guidance on the formulation of domestic competition policies that make sense in the globalized economy. U.S. support of new competition policy regimes also creates an opportunity for the United States to share its perspective. This can be important as a means of influencing the legal environment in which U.S. exporters and businesses operate.
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U.S. government support for technical assistance programs to support competition policy regimes around the world has been a small but important component of its enforcement cooperation work over the past decade. U.S. antitrust authorities have provided technical assistance under programs characterized by modest funding, geographical limitations, and varying duration or scope. The Advisory Committee advocates application of a broader view of U.S. priorities in this regard, and recommends the following:
1. The United States and indeed the world community should devote more technical assistance to the development of competition policy structures abroad.
2. Support to transition and developing antitrust regimes should be included among U.S. funding priorities, and the U.S. government should more vigorously support a variety of ways of offering such support.
3. The United States should create and seek opportunities for deepening consultation and cooperation with other countries and organizations providing technical assistance, including those major jurisdictions that are engaged in providing structured technical assistance, and multilateral or international organizations such as the OECD, the World Bank, the International Monetary Fund, and the WTO.
INTERNATIONAL COMPETITION POLICY ADVISORY COMMITTEE
BIOGRAPHY OF MEMBERS
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Co-Chairs:
James F. Rill: Senior Partner with Collier, Shannon, Rill & Scott, PLLC. He has been practicing exclusively antitrust, competition, and merger law for almost 40 years. From 1989 to 1992, Mr. Rill was the Assistant Attorney General, Antitrust Division, U.S. Department of Justice. As AAG, he was responsible for negotiating the 1991 U.S.–EU antitrust cooperation agreement. Mr. Rill is a former Chair of the American Bar Association's Section of Antitrust Law, and is current Vice-Chair of the International Business and Industry Advisory Committee to the OECD Competition Law and Policy Committee. He is author and contributor to numerous publications and serves on the editorial board of BNA Antitrust and Trade Regulation, The Antitrust Bulletin, and the Antitrust Report.
Paula Stern: President of The Stern Group, Inc., an economic and trade analysis firm providing advice on international competitiveness policy and regulatory matters. As Commissioner and Chairwoman of the U.S. International Trade Commission from 1978 to 1987, the Honorable Dr. Stern analyzed and voted on over 1,000 trade cases across a spectrum of industries and agriculture. Dr. Stern serves on many public policy councils, including the President's Advisory Committee for Trade Policy and Negotiations. She is an author and public speaker on trade and foreign policy, Congress-Executive relations, women's issues, and U.S. relations in the Middle East, Asia, Europe and Latin America.
Executive Director:
Merit E. Janow: Professor in the Practice of International Trade at Columbia University's School of International and Public Affairs (SIPA). She is also Director of the International Economic Policy program at SIPA and Co-Director of Columbia's APEC Study Center. From 1990–93, she served as Deputy Assistant U.S. Trade Representative for Japan and China. At USTR, she was involved in the negotiation of over a dozen trade agreements. Previously, she practiced corporate law with Skadden, Arps, Slate, Meagher & Flom in New York. She is fluent in Japanese and is the author of several books and numerous articles.
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Committee Members:
ZoeAE4 Baird: President of The Markle Foundation. Formerly Senior Vice President and General Counsel at Aetna, Inc. Ms. Baird has worked for General Electric as Counselor and Staff Executive and was a partner in the law firm of O'Melveny & Myers. She is a member of the Council on Foreign Relations, the American Law Institute and the James A. Baker III Institute for Public Policy. Ms. Baird serves on the Board of the Brookings Institution and the President's Foreign Intelligence Advisory Board.
Thomas E. Donilon: Senior Vice President, General Counsel and Corporate Secretary, Fannie Mae. Formerly a partner with the firm of O'Melveny & Myers. From 1993 to 1997, Mr. Donilon served as Assistant Secretary of State for Public Affairs and as Chief of Staff to Secretary of State Warren Christopher, for which he received the State Department's highest award, the Secretary of State's Distinguished Service Award. Mr. Donilon is currently co-chair of the Council on Foreign Relations' Congress and United States Foreign Policy Program.
John T. Dunlop: Lamont University Professor, Emeritus at Harvard University. He is a past Chairman of the Department of Economics at Harvard, former Dean of the Faculty of Arts and Sciences, and was acting Director of the Business and Government Center at the School of Government. Secretary of Labor during the Ford Administration. Professor Dunlop is the author of numerous books on wages and industrial relations. He is a Life Member of the National Academy of Arbitrators.
Eleanor M. Fox: Walter J. Derenberg Professor of Trade Regulation at New York University School of Law. She was a partner and is counsel at Simpson Thacher & Bartlett. She has served as Commissioner on President Carter's National Commission for the Review of Antitrust Laws and Procedures, as Chair of the Antitrust Law Section of the New York State Bar Association, as Vice President of the Association of the Bar of the City of New York, and as Vice Chair of the ABA Antitrust Law Section. .
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Raymond V. Gilmartin: Chairman of the Board, President and Chief Executive Officer of Merck & Company, Inc. Mr. Gilmartin is former Director and Chairman of the Pharmaceutical Research and Manufacturers of America and Chairman of the Healthcare Leadership Council. He is also a Director of the College Fund/The United Negro College Fund and a member of the Business Roundtable, the Business Council, and the Council on Competitiveness.
Vernon E. Jordan, Jr.: Senior Managing Director, Lazard Frères & Co. LLC; Of Counsel, Akin, Gump, Strauss, Hauer & Feld. Mr. Jordan was President of the National Urban League, Executive Director of the United Negro College Fund, and Attorney-Consultant to the U.S. Office of Economic Opportunity. He also has served on the President's Advisory Committee to the Points of Light Initiative Foundation, the Secretary of State's Advisory Committee on South Africa, and the Advisory Council on Social Security. Mr. Jordan is a member of the American Law Institute, the National Bar Association and the Council on Foreign Relations.
Steven Rattner: Deputy Chairman of Lazard Frères & Co. LLC. Mr. Rattner founded Lazard's Communications Group. Before beginning his investment banking career in 1982 with Lehman Brothers Kuhn Loeb Incorporated, Mr. Rattner was employed by The New York Times as a correspondent in New York, Washington and London, specializing in economic and energy matters. Mr. Rattner is Chairman of the Educational Broadcasting Corporation, a Trustee of the Brookings Institution and a member of the Council on Foreign Relations. In 1994 Mr. Rattner was named a Global Leader for Tomorrow by the World Economic Forum.
Richard P. Simmons: Chairman of the Board of Allegheny Technologies Incorporated. In addition to his role as Chairman of Allegheny Technologies, he is a member of the Executive Committee of Allegheny Conference on Community Development. He is also a life member of the MIT Corporation and a director of PNC Bank Corporation. Mr. Simmons is a director and past Chairman of the United Way.
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G. Richard Thoman: President and Chief Executive Officer of the Xerox Corporation. Prior to joining Xerox, Mr. Thoman was Senior Vice President and Chief Financial Officer of the IBM Corporation. He is a member of the Council on Foreign Relations, The Business Council, and The Business Roundtable. He is also a director of DaimlerChrysler, a trustee of the Museum of Modem Art, a board member of the Americas Society, an advisory board member of the Yale University School of Business and the Fletcher School of Law and Diplomacy.
David B. Yoffie: Max and Doris Starr Professor of International Business Administration, Harvard Business School. Chairman of the Competition and Strategy Department and Chairman of the Advanced Management Program, Professor Yoffie also ran the School's international executive program, Managing Global Opportunities, and directed Harvard's four year research project on international trade. He is a widely published author on international business, technology, and competitive strategy.
Counsel
Cynthia R. Lewis: Before joining the Advisory Committee as counsel, Cynthia Lewis was an associate with the law firm Skadden, Arps, Slate, Meagher & Flom from 1993–1998. While at Skadden she practiced with the Antitrust and EC Law departments in New York and Brussels, Belgium where she analyzed mergers under U.S. and European competition laws. She also assessed antitrust filing requirements in the U.S., Europe and the rest of the world on behalf of clients engaged in multinational transactions. She graduated magna cum laude from Georgetown University Law Center in 1993.
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Andrew J. Shapiro: Before joining the Advisory Committee as counsel, Andrew Shapiro was an associate with the Washington law firm of Covington & Burling from 1995–1998 practicing with the international, litigation, and antitrust practice groups. He graduated from Columbia University School of Law in 1994 as a Harlan Fiske Stone Scholar and received a Master's Degree in International Affairs from Columbia University's School of International and Public Affairs in 1995. He is a term member of the Council on Foreign Relations.
Stephanie G. Victor: Ms. Victor joined the Advisory Committee as counsel with a background in international litigation and interagency enforcement cooperation after spending several years with the U.S. Commodity Futures Trading Commission. Previously, she practiced antitrust and trade law as an associate with the Washington law firm of Ablondi, Foster, Sobin and Davidow. Ms. Victor is a 1990 graduate of the Georgetown University Law Center and earned her undergraduate degree from the University of Pennsylvania in 1985. She is fluent in French.
Mr. HUTCHINSON. Thank you, Mr. Rill. I wanted to take the Chair's prerogative here and welcome Mr. Farrar of Guardian Industries, who happens to have a plant in my district in Arkansas, which I have toured in Rogers.
I want to welcome you to the panel. You will be recognized for 5 minutes.
STATEMENT OF STEVEN FARRAR, DIRECTOR OF INTERNATIONAL BUSINESS, GUARDIAN INDUSTRIES
Mr. FARRAR. Thank you, Mr. Chairman. For the benefit of others, Mr. Chairman, Guardian is a major, worldwide manufacturer of flat glass products used mainly in the construction and automotive industries. Over the past two decades, we have expanded rapidly in the international markets, first into Europe, then into South America and into Asia. Today we produce glass in some 23 locations, 12 of which are abroad. Each one of these locations represents an investment of between $100 million and $150 million.
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We have sales, warehousing, and fabricating operations in some 80 countries around the world. Japan, which is the second largest flat glass market in the world—country market—is the glaring exception to our record of success.
I would like to use my time today to give you some background and make three points about our experience in Japan. My first point is that we have what Mr. Rill and his colleagues in the ICPAC said in their report was the prototypical market access problem. That is one in which non-U.S. private firms or firms located outside the United States, perhaps with the support of the host government, engage in anti-competitive conduct that restricts exports to that market and inhibits access by U.S. firms.
We have worked for the past decade to build a commercial presence in Japan. But, today, we have a market share of barely over 1 percent. This compares poorly with the ten to 20 percent market share that we enjoy typically in other developed country markets. The problem centers on Japan's distribution system. Each of the three Japanese flat glass manufacturers maintains a virtually exclusive network of distributors. The three have operated as a cartel mainly among themselves maintaining steady market shares of approximately 50/30/20 percent since the 1960's. Foreign suppliers are not part of the club. Distributors are prevented from buying more than token amounts of imported glass in a variety of ways, including threats that their domestic sources of supply will be cut off.
My second point is that efforts to address our situation, both as a trade policy issue and as a competition policy issue, have been unsuccessful to date. In January 1995, the U.S. Trade Representative signed a 5-year bilateral agreement intended to open the distribution system to competitive foreign suppliers. Despite that agreement and the commendable efforts of the U.S. Government to enforce it, the Japanese flat glass market had changed little when the agreement expired last December. The Japanese government has rejected all U.S. efforts to renew that agreement. They argue that the market is now open, and U.S. firms only need to work harder to understand it.
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Well, Mr. Chairman, Guardian's business is understanding and developing markets. We have done that successfully around the world. The obstacles we face in Japan are unique and are rooted in anti-competitive conduct by an aggressive cartel of domestic flat glass manufacturers. I submit that governments, ours and theirs, will have to take meaningful steps to ensure that competition laws are enforced before the situation can change.
This brings me to my final point. It is that recent steps toward cooperation between the Antitrust Division and the Japan Fair Trade Commission provide grounds for action. While Japan's anti-monopoly law tracks closely with the U.S. antitrust laws, the Japan Fair Trade Commission has been a notoriously weak implementing agency. For example, when the JFTC gave the flat glass industry a clean bill of health last summer, it did so on the basis of survey questionnaires filled out by the flat glass manufacturers and distributors on a voluntary basis. That sort of voluntary survey would never be used by our own authorities to determine whether an industry is complying with antitrust laws.
Despite the JFTC's lackluster reputation for enforcement, last fall, after years of negotiations, the Antitrust Division and the JFTC signed a joint antitrust cooperation agreement with a positive comity provision. The Department of Justice press release announcing the agreement stated that it will—and I quote—improve the ability of both Nations' antitrust agencies to address anti-competitive activities in Japan that have the ability to create market access problems. The Antitrust Division has set an understandably high bar for referring to the JFTC requests for investigations and prosecutions.
We at Guardian are working with the Antitrust Division to evaluate the evidence. As we do so, however, it is apparent that the discovery problem for foreign-located evidence is a real one. We are convinced that scenes such as those shown in the videotape by Mr. Klein took place many times over the years in Japan's flat glass industry. If someone had been there with a camera, we would have the evidence. But, to date, we do not have the evidence, and the Antitrust Division has not launched its own investigation, perhaps in part because of these discovery problems.
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Article VIII——
Mr. HUTCHINSON. I think you are about to wrap up. If you could do it——
Mr. FARRAR. Two seconds. Article VIII of the Joint Cooperation Agreement provides that the parties shall consult with each other upon the request of either parties' competition authorities.
We hope that the Antitrust Division will consider using this article VIII as an integral part of the agreement to engage the JFTC in meaningful discussions.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Farrar follows:]
PREPARED STATEMENT OF STEVEN FARRAR, DIRECTOR OF INTERNATIONAL BUSINESS, GUARDIAN INDUSTRIES
Mr. Chairman and other distinguished committee members. My name is Stephen Farrar. I am Director of International Business at Guardian Industries Corp. of Auburn Hills, Michigan. Guardian is a major worldwide manufacturer of flat glass products used mainly in the construction and automotive industries.
Over the past two decades, Guardian expanded rapidly and successfully overseas—first into Europe, then into Asia and South America. Today we produce glass using the so-called float technology at 12 locations abroad, each representing investments of $100 to 150 million. We have sales, warehousing or distribution operations in more than 80 countries.
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Japan is the glaring exception to our record of success in foreign markets. I would like to use my time today to make three points about Guardian's experience in Japan's flat glass market.
My first point that is that we have what the recent report of the International Competition Policy Advisory Committee called the prototypical market access problem:
Where non-U.S. private firms or firms located outside the United States, perhaps with the support of the host government, engage in anticompetitive conduct that restricts exports to that market and inhibits access by U.S. firms. (page 245)
We have worked for the past decade to build a commercial presence in Japan. But today, we have a market share of little more than 1 percent. This compares poorly with the 10 to 20 percent share we typically enjoy in other developed country markets.
The problem centers on Japan's distribution system. Each of the three Japanese flat glass companies maintains an exclusive network of distributors. The three have operated as a cartel, maintaining steady market shares of 50, 30 and 20 percent respectively since the early 1950's. Foreign suppliers are not part of the club. Distributors are prevented from buying more than token amounts of imported glass in a variety of ways, including threats that their domestic sources of supply will be cut off.
My second point is that efforts to address our situation, both as a trade policy issue and as a competition policy issue, have been unsuccessful to date.
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In January 1995, the U.S. Trade Representative signed a five-year bilateral agreement intended to open the distribution system to competitive foreign suppliers. Despite the agreement and the commendable efforts of the U.S. Government to enforce it, the Japanese flat glass market had changed little when the agreement expired last December. The Japanese Government has rejected all U.S. efforts to renew the agreement. They argue that the market is now open and U.S. suppliers only need to work harder to understand it.
Mr. Chairman, Guardian's business is understanding and developing markets. We've done that successfully around the world. The obstacles we face in Japan are unique and are rooted in anticompetitive conduct by an aggressive cartel of domestic flat glass manufacturers. I submit that governments—ours and theirs—will have to take meaningful steps to ensure that competition laws are enforced before this situation will change.
This brings me to my final point. It is that recent steps toward cooperation between the Antitrust Division and the Japan Fair Trade Commission provide grounds for action.
While Japan's Anti-Monopoly Law tracks U.S. antitrust law quite closely, the Japan Fair Trade Commission has been a notoriously weak implementing agency. For example, when the JFTC gave the flat glass industry a clean bill of health last summer, it did so on the basis of survey questionnaires filled out by flat glass manufacturers and distributors on a voluntary basis. That sort of self-serving survey would never be used by our own antitrust authorities as a measure of whether an industry is complying with antitrust laws.
Despite the JFTC's lackluster reputation for enforcement, last fall, after years of negotiations, the Antitrust Division and the JFTC signed a joint antitrust cooperation agreement with a positive comity provision. The Department of Justice press release announcing the agreement stated that it will ''improve the ability of both nations' antitrust agencies to . . . address anticompetitive activities in Japan that have the ability to create market access problems.''
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The Antitrust Division has set an understandably high bar for referring to the JFTC requests for investigation and prosecution under the new agreement. We at Guardian are attempting to amass a body of factual and economic evidence that might be sufficient to clear that bar. As we do so, however, it is apparent that the often-cited discovery problem for foreign-located evidence is a real one. For example, we are convinced that Japanese manufacturers use various means of coercion and intimidation to prevent distributors from doing business with us. However, it is difficult for us to collect the price data or actual evidence of unlawful conduct in order to prove it to the Antitrust Division's apparent satisfaction. And, to date, the Antitrust Division has not launched its own investigation, perhaps in part because of these very same discovery problems.
If the joint antitrust cooperation agreement is to work, a way must be found around the discovery problem that now makes it almost impossible for private parties, such as Guardian, to amass the evidence needed to satisfy the antitrust authorities. It seems reasonable, Mr. Chairman, that the spirit of cooperation that led to the signing of the agreement might cause the private parties and the antitrust authorities to begin working together at an early stage, to develop the data upon which a referral request might be based.
For example, Article VIII of the agreement provides that the parties shall consult with each other upon the request of either party's competition authorities and on any matter that may arise in connection with the agreement. We hope that the Antitrust Division will consider using Article VIII consultations as an integral part of the agreement to, at the very least, engage the JFTC in meaningful discussions about ways to resolve the seemingly intractable flat glass problem. Otherwise, it is hard to see how the agreement will live up to its promise.
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Thank you for the opportunity to appear before you. I would be pleased to respond to any questions you may have.
Mr. HUTCHINSON. Thank you, Mr. Farrar. Before we continue, we do have a vote on the floor. Chairman Hyde indicated we need to adjourn. We will recommence as soon as the vote is over.
So, we will need to break. We will reconvene as soon as the vote is over on the floor. Thank you.
[Recess.]
Mr. HYDE [presiding]. The committee will come to order.
I like to think that we make up in quality what we lack in quantity, but that is too self-serving. I wanted to assure you that your statements will be studied carefully by some of the members and all of the staff. [Laughter.]
The latter is far more important than the former, but we do appreciate your patience. Mr. DeLong is next.
STATEMENT OF JAMES V. DeLONG, VICE PRESIDENT AND GENERAL COUNSEL, NATIONAL LEGAL CENTER FOR THE PUBLIC INTEREST
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Mr. DELONG. It is a pleasure to be here today to discuss the role of intellectual property in our economy, a fascinating topic, and more particularly to discuss the interaction between intellectual property and the antitrust enforcement.
The importance of the topic is immense. The Nobel Prize-winning economist, Douglass North, wrote 20 years ago that the development of property rights over innovations was a key to the explosion of economic well-being that began in the 18th century. The importance has actually increased over the past few years with multiple revolutions in computing and communications.
Recently, scholars at the Brookings Institution calculated that, as of 1998, about 70 percent of the value of publicly traded companies is based on patents, trademarks, copyrights, brand names, know-how, and other products of the human mind. So, it is not surprising that the topic has become one of obsessive interest by business-people, by lawyers, by government officials, by academicians, and of course by Congress.
I will put a plug in here for the National Academy of Sciences. Two months ago, I attended a fine conference put on by the STEP program, the Board on Science, Technology, and Economic Policy, of the NAS. It was entitled ''Intellectual Property Rights. How Far Should They Be Extended?'' It focused primarily on patents. It was wide-ranging in both approach and content. I certainly would recommend the proceedings when the NAS publishes them, particularly to your staff.
The reason I mention this is that much of the discussion in that session sounded like an antitrust conference. The issues that concern people involve competition and monopoly. How do we reward and encourage innovation without creating monopolies? How comprehensive do we make exclusive rights to inventions or creative works? How do we allocate rights when many people participate in creation and how do we distinguish what is novel from what is sort of in the air of the times? These issues are at the heart of determinations of the scope of the charters given intellectual property.
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Given this state of affairs, it might seem logical that antitrust doctrines would have a great deal to say about intellectual property and its limits. But here I would urge the committee to go very cautiously. Going back 20 years, during the 1970's and '80's, conventional antitrust doctrine, as it existed at the time, was subjected to a series of withering intellectual attacks associated with the Chicago School of Antitrust Analysis. Those conventional theories were pretty much destroyed. A major result was that antitrust had to pull back substantially from its ''go-go years'' of the 1960's.
During the past decade enforcement has revived, but, unfortunately, in my view—and I suspect there are others here who will disagree with me—the criticisms that were made back then by the Chicago School really have never been answered. They are, rather, simply being ignored. The fundamental problems of the classic doctrine as it existed in the '60's in terms of exclusive-dealing ties, vertical arrangements, all sorts of issues, never were refuted. Now, newer theories are trotted out to justify a new aggressiveness that has come in the last 10 years.
You hear, particularly, the idea of lock-in or path dependence, or network effects. In fact, you heard about them this morning. Now, I do not think these stand up under analysis at the present time. They are interesting. They are provocative. They raise a lot of issues. They are worth a lot of conferences. But, the particular anecdotes that usually support them, like the anecdotes about the Betamax, simply do not stand up. Thus the old theories have been debunked, and new ones are not in place.
The bottom line, in my view, is that the foundation of antitrust as applied to the old economy has turned into a series of buzz words rather than a body of coherent doctrines. The conventional criticisms that were made then are still true. Antitrust doctrine is based on static rather than dynamic economic models. It ignores the time dimension of decisions. It ignores strategic responses available to competitors and ignores the problem of the frequent necessity for super-normal returns in complex industries. Old doctrine does not embody consistent definitions of the core term, competition. It sometimes means, sort of, civil rights for small business. It sometimes means having enough firms, even a monopoly. It sometimes means perfect competition. We don't have adequate definitions of the core concepts of relevant markets.
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And I might say there is an issue in the current Microsoft case that there is. You don't have insufficient recognition of business justifications for many practices branded anti-competitive. You have confusion over the difference between protecting consumers and protecting producers. You have problems on pay-offs on investments in industries where the pay-off on most investment tends to be either zero or negative.
Finally, you don't have enough concern about what Robert Bork called partial integration, the deals by which firms combine part of their operations but remain independent in other spheres. This is a particularly important failure in the new economy, because technology is making partial integrations very possible.
There are important issues, so I would urge the committee strongly that, unless more intellectual respectability can be given the field, it should be very skeptical of expanding the role of antitrust enforcement in the new economy.
Thank you.
[The prepared statement of Mr. DeLong follows:]
PREPARED STATEMENT OF JAMES V. DELONG, VICE PRESIDENT AND GENERAL COUNSEL, NATIONAL LEGAL CENTER FOR THE PUBLIC INTEREST
It is a pleasure to be here today to discuss the role of intellectual property in our economy, and, more particularly, the interaction between intellectual property and antitrust enforcement.
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The importance of this topic is immense. Nobel Prize winning economist Douglass C. North concluded that ''the failure to develop systematic property rights in innovation up until fairly modern times was a major source of the slow pace of technological change.'' Once better-specified property rights raised the rewards for innovation, he said, the rate of invention and consequent economic progress increased rapidly. North also noted that ''more important than patent law per se is the development and enforcement of a body of impersonal law protecting and enforcing contracts in which property rights are specified.''(see footnote 94)
The behavior of current financial markets bears out North's view about the economic importance of intellectual property. Two scholars at the Brookings Institution calculate that as of 1978 the book value of property, plant, and equipment owned by publicly-traded non-financial corporations equaled 83 percent of the long-term financial claims on the company (i.e., the value of outstanding bonds and common stock). The comparable figure for 1998 was 31 percent. In other words, as of 1998, 69 percent of the value of companies was based on patents, trademarks, copyrights, brand names, know-how, trade secrets, and other products of the human mind.(see footnote 95) Given the run-up in markets in the past couple of years, heaven knows the figure for the year 2000. For many companies in the high tech sector, for which the tangible assets consist of a couple of desks, a computer, and two 20-somethings with an idea, all of the value is intellectual.
Considering this immense economic impact, it is not surprising that intellectual property has become a subject of intense interest within the legal profession. It has gone from ''boutique backwater'' (in the phrase of Robert Merges of the University of California) to the hottest of specialties. (As proof, billing rates for IP specialists are up 20 percent this year, say the legal newspapers.)
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Intellectual property has also become a focus of interest for academicians. Their motives are largely scholarly, but they and their university employers also have strong financial incentives. The Bayh-Dole Act of 1980 expanded the ability of those who conduct research with government funds to patent the results, and the beneficiaries have been getting more entrepreneurial ever since.
This growing obsession with intellectual property has brought a number of serious issues to the fore. In February of this year, the Board of Science, Technology, and Economic Policy (STEP) of the National Academy of Sciences held a superb two-day conference on Intellectual Property Rights: How Far Should They Be Extended? The session brought together a mix of corporate employees, government officials, academicians, and lawyers. While it focused primarily on patents, it was wide-ranging in both approach and content, and the proceedings, when NAS publishes them, will certainly be worth the close attention of this committee.(see footnote 96)
Important issues about intellectual property raised at the NAS conference and in other forums include:
Most people agree substantially on the basic values to be fostered by the nation's intellectual property protection system. These include producing and distributing knowledge, encouraging disclosure of new technology by awarding exclusivity to its inventor, rewarding creativity without allowing appropriation of society's ''cultural commons,'' balancing the contradictory interests in favor of exclusivity and against monopoly, and minimizing the transaction costs of the system. As usual, the devil is in the details of how to design a system that makes appropriate trade-offs in cases of conflict.
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High tech issues are stressing the system. Since 1982, when appellate jurisdiction over all patent appeals was given to the U.S. Court of Appeals for the Federal Circuit, there has been a de facto lowering of the bar on standards of patentability. This expansion has occurred contemporaneously with the increase in applications for patents on computer software, business methods, biotech, and other complex intellectual products that do not always fit well into a system originally oriented toward gadgets.
The basic criteria governing patentability are sound—novelty, non-obviousness, and utility—but there are questions about their application in practice. The most fundamental objection is that PTO regards patent applicants and holders as its constituency, and pays little attention to the interests of patent users. This is a problem: PTO should be recognizing the interests of both users and patentees, and should be careful not to allow people to claim ideas that are part of our society's cultural commons. It should not be throwing its weight entirely on the side of the patentees, especially since patent grants carry a presumption of validity into judicial review and are judged on an ''arbitrary and capricious'' standard.
Problems of possible expropriation of society's cultural commons also arise in the context of copyright.(see footnote 97) Many observers object strongly to last year's extension of the length of copyrights on works that were about to fall into the public domain; they see this action as an expropriation by the Congress of property that belonged to the public.
Who ''owns'' the investment of time that consumers make in learning a particular program? In the fascinating 1995 case Lotus v. Borland, the First Circuit held that the menu command hierarchy is a ''method of operation'' and is thus not copyrightable.(see footnote 98) See particularly the concurring opinion's comment: ''A new menu may be a creative work, but over time its importance may come to reside more in the investment that has been made by users in learning the menu and in building their own mini-programs—macros—in reliance upon the menu.'' This is an important concept: the principle of protecting intellectual property does not require that companies be allowed to appropriate the sweat equity of the program's users.
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Commissioner Q. Todd Dickinson argues that PTO has little discretion over patentability. The Supreme Court made clear in the 1980 Chakrabarty decision that ''anything under the sun that is made by man'' can be patented, and the Federal Circuit emphasized that this includes business methods in State Street (1998).(see footnote 99) Federal Circuit judges echo Dickinson's view, saying that it is the laws, not the judges, that are pro-patent. Dickinson notes that many concerns about patentability are really concerns about access to patents and about transaction costs. He thinks these issues can and should be kept separate; access can be guaranteed without artificially narrowing the scope of patentability.
Positions on the issues are quite fluid. Most companies that are greatly concerned about the patent system are both holders and users of patents. Their uncertainty as to where their self-interest lies leads to a refreshing willingness to judge the system in terms of long-term principle instead of short-term advantage.
In some industries, particularly software, lawyers are advising clients not to search for prior art. There is immense uncertainty over which patents are valid. If a company finds earlier patents and makes an erroneous judgment that they can be ignored, then it can be hit with penalties for willful violation. If it does not find the earlier patents, then the penalties for infringement are less. So—don't look.
Companies are greatly concerned about the deadly combination of legal uncertainty over patent scope and validity and huge damages for infringement. Many companies have paid hundreds of millions of dollars. Most patents can be invented around, given certainty about their scope, but it is easy for companies to get mousetrapped. The $900 million that Polaroid collected from Kodak in 1991 is a case in point; Kodak had engaged in what the trial judge called a model process designed to avoid infringement, and still got nailed. In addition, it costs at least $2 million to fight a patent case, so there is considerable support for such devices as alternative dispute resolution and the use of expert panels on issues of patent validity.
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Patents are not the most important way in which companies protect IP. Secrecy is more heavily relied on. Companies also rely on lead times, complementary capabilities, and market position. Different industries use patents in quite different ways, depending on particular characteristics. Some examples of the differences between conventional manufacturing, computer software, biotech, and electronics are:
— In conventional manufacturing, purchasing a component off the shelf buys the right to use all the intellectual property embodied in it. This makes life much simpler than is the case in software or biotech, where everything is built from scratch and there are few off-the-shelf components.
— Software companies are dominated by short product cycles. They are skeptical of software patents because the scope and validity are uncertain and the timing of the patent review process is too long. They patent defensively, in case someone accuses them of infringement.
— Biotech companies rely heavily on patents to safeguard their values. They also tend to file for patents even when products do not appear useful as a safeguard against the possibility that new utilities will be discovered in the future.
— The semiconductor industry is covered by so many patents that everyone is always infringing something. So companies use the system defensively, accumulating portfolios of patents to use as bargaining chips with others in the industry.
— Individual companies also follow varying philosophies in dealing with their intellectual property. Some want to maintain a monopoly, some engage in selective licensing, some go into the licensing business. Again, industry characteristics play a big role in the decision.
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International issues grow more pressing, as global companies lobby hard for harmonization. The U.S. is the only nation with a ''first to invent'' standard; everywhere else the patent goes to the ''first to file.'' Other problems revolve around the considerable variations in national practices with respect to IP patents.
This is a formidable list of fascinating and complex issues, and it could, of course, be extended. This brief treatment only scratches the surface.
The list of conundrums will keep growing. Inevitably, when technology changes people must go back and rethink and refine concepts of property rights.(see footnote 100) With respect to real estate, for example, it used to be said that the owner of land possessed everything from the center of the earth to the top of the heavens. Then the airplane was invented, and the extent of rights to land was made more precise, to reflect the realities of the new technology. The invention of the railroad forced courts to grapple with the impact of smoke and pollution on neighboring land owners.(see footnote 101) The spread of the cell phone is creating much the same set of concerns, as society considers where to put the necessary towers. The technological turmoil we are now undergoing is requiring us to rethink and refine concepts of intellectual property rights.
Obviously, government must be heavily involved in this process. No matter what view one takes about the derivation of property rights, even if one believes that they are a product of natural law and not within the power of governments to withhold, governments must always define them at the margins and enforce them. This is especially true for intellectual property, which is more dependent on government than physical assets. Land or machinery exists independently, whatever a government says, and can be protected by fences and force, but a patent or copyright exists only within the context of a system of law.
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This necessary involvement of government is a bit worrying, because over the past few decades neither the Congress nor the executive agencies have demonstrated much respect for property rights. As I recently wrote:
Those immersed in the topic [of property rights] think that governments at all levels—local, state, federal, and international—have become cavalier in attitude and action, not just willing but eager to ignore both the letter and the spirit of the commandment in the Fifth Amendment to the U.S. Constitution that says ''nor shall private property be taken for public use without just compensation.'' In consequence, the right to own and use private property, a right that constitutes one of our most crucial civil liberties, essential to the economic efficiency of our society and to its moral ordering and legitimacy, is being undermined.(see footnote 102)
This Committee can bear witness to this concern, based on its long struggle to enact the Civil Asset Forfeiture Reform Act (H.R. 1658). And it seems doubtful that Congress will pass the Private Property Rights Implementation Act (H.R. 2372), a law which would force governments to give landowners with a grievance the opportunity to be heard in court. In fact, H.R. 2372 seems to do little except enact the ethical obligation of all attorneys not to abuse legal processes. The fact that Congress will not pass, and the President will not sign, such a law is extremely disquieting.
I have written at length about problems of property rights in the monograph quoted above and in my book Property Matters, cited earlier, so let me say only that both Congress and the federal agencies need to take Professor North's point most seriously. We cannot maintain our prosperity and freedom if the government regards property rights as subjects of whimsy to be cut and trimmed according to political interest rather than as matters of enduring principle.
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Of course, one of the ways in which governments meddle with property rights, for better or worse, is through antitrust enforcement.
The tectonic shift in the foundations of the economy embodied in the current revolution in information and communications technologies has profound implications for antitrust. Initially, one is tempted to assume that surely there is a large role for antitrust enforcement here. Many of the concerns discussed above relate to values that underlie, at least in theory, our antitrust laws, primarily the importance of avoiding monopoly and maintaining competition. The current turmoil over patents on business methods is a prime example; the precise concern is fear that some firms will be given a monopoly over important ways of doing business, such as on-line auctions or click-through technology. Even leaving aside the issue whether such patents would be justified under the novelty and non-obviousness standards, there is a reluctance to let property rights extend so far that they create monopolies over whole methods of doing business.
Further reflection leads to the conclusion that antitrust intervention into this ongoing technological revolution should be extremely cautious, however. The current structure of antitrust doctrine, with its century-long accumulation of barnacles from the industrial revolution, the New Deal, and post-World War II era, is not up to the task.
Antitrust theory and practice is based on complex and often unstated assumptions about capital and its mobility and about the workings of markets. When the most important capital takes the form of ideas, electrons, or light waves rather than machinery or equipment, it is not clear why anyone should expect the old assumptions to hold. When the Internet expands markets geographically to encompass the whole nation or even the whole world, and increases their speed to the pace of email, the gap between old assumption and new reality widens further.
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For example:
An important characteristic of most physical property is that its use must be exclusive, limited to one or a few people at a time, and, often, that it is exhausted by use. For much intellectual property, neither of these things is true. Once a software program is created, an infinite number of people can use it at the same time. And they do not wear it out no matter how many times they run it.
Many heavy industries are characterized by high initial investment costs followed by low variable costs for the production of each individual unit, but intellectual property takes this characteristic to new levels. An author may spend 10 years producing the first copy of a book or a computer company may spend lay out hundreds of millions of dollars paying programmers to write millions of lines of code. But, once the first copy is produced, turning out the second, the tenth, or the ten-millionth may cost only pennies.
Two hundred years ago, markets were localized. The railroad, the telegraph, and the catalogue sales company greatly expanded the possibilities, making the nation into a single market for many goods. Now, the Internet is expanding geographical markets and extending these expanded markets to an increasing variety of goods.
These changes present formidable challenges to applying antitrust doctrine to intellectual property issues, especially considering the complexity of the issues listed earlier in this statement. The challenges would be daunting even if antitrust doctrine had worked well for the economy before the current technological turmoil. In fact, however, antitrust as a body of doctrine was already in severe trouble.
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To understand this, it is useful to go back about 25 years, to the 1970s. During that decade, the antitrust analysts of the Chicago School leveled devastating critiques at antitrust doctrine. To take one crucial example, as Robert Bork noted in 1979 the system had several different definitions of the core term ''competition,'' and the meaning tended shift back and forth.(see footnote 103) At any given time, and in any given case, the definition reflected the balance of political forces, not a coherent body of legal thought.
By the 1980s, the Chicago School analysts had largely persuaded the courts that the antitrust emperor had no clothes, and few of the old assumptions remained standing. Familiar legal doctrine in one area after another was found to be either inadequate or positively harmful.(see footnote 104) For example, antitrust enforcers were very slow to understand the business rationales behind many kinds of vertical restrictions, and suppressed many arrangements that would actually have helped small companies hold their own against big ones. To this day, the enforcement agencies are ambiguous about whether the fact that a merger produces increased efficiencies is a defense of the merger or an additional ground to prevent it.
For a decade or so after 1980, antitrust enforcement retreated to the areas on which almost all analysts agree—enforcing the rules against price fixing or merger-to-monopoly.
At contemporary conferences on antitrust, participants often debate whether pre-existing antitrust doctrine is adequate to deal with this ''new economy,'' based on technology and intellectual property. This debate is based on a false assumption, that the doctrines were adequate for the old economy. They were not.(see footnote 105)
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In the 1990's, antitrust has revived, spurred in large part by the upheaval of the new economy. But so far as I know the basic criticisms leveled at standard doctrines were never answered. In the past decade, the old ideas have simply been trotted out to do service once again. It reminds one of the year 1099, when the Spanish Christian forces stuffed the body of their dead hero, El Cid, strapped him to his horse, and sent him out to battle the Moors.
To be sure, one sees references to ''post-Chicago'' analysis and to other concepts that purport to justify a new activism. So far, however, there does not seem to be enough substance in these to provide a basis for serious public policy. They represent unproven hypotheses. There is certainly not enough to be sure of complying with what should be the first rule of antitrust policy, as it is of medicine: ''First of all, do no harm.''
For example, examine the concept of ''lock in,'' the idea that an inferior technology can get an advantage off the starting line and that thereafter society is ''locked in'' to it, unable to change. But no one has found real-world examples. The cases usually cited are the adoption of the QWERTY keyboard over the Dvorak, and the triumph of the VCR over the Betamax home recorder. The validity of both these examples has been demolished, and substitute anecdotes have not yet been found.(see footnote 106)
Similarly, ''network effects'' are cited, and ''increasing returns to scale.'' Again, however, real examples are hard to find. Many ''network effects'' turn out to be variations on the familiar concept of economies of scale, not some new and exotic fruit of the new economy.(see footnote 107) As economist Lawrence J. White says: ''In recent years the term network industry has become an expansive, all inclusive term that appears to embrace almost any composite good or service embodying complementary components. . . . Indeed, scholars have applied the terms metaphorical networks and virtual networks to describe the broader usages.''(see footnote 108) In other words, ''networks'' has become a buzzword, not a true analytic concept.
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The end result is that the 1970's criticisms of antitrust doctrine remain unrebutted. These doctrines:
Are based on static, not dynamic, economic models, and ignore the time dimension of decisions, the strategic responses available to competitors, and the frequent necessity for super-normal returns in complex industries.
Do not embody adequate and consistent definitions of the core term ''competition.''
Do not provide adequate definition of the core concept ''markets.''
Fail to recognize business justifications for many practices branded ''anti-competitive.''
Are confused over the difference between protecting consumers and protecting producers.
Are inadequate for dealing with industries where pay-offs on investments tend to be either zero (or negative) or quite large.
Do not place adequate value on ''partial integrations'' among firms—deals by which firms combine part of their operations but remain independent in other spheres with the goal of enabling small firms to be ''the right size.''(see footnote 109) (This is a particularly important failure, because technology is making partial integrations increasingly possible, and they are absolutely crucial to the new economy.)
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To illustrate how serious these problems are, Bork's criticism of the amorphous nature of the term ''competition'' remains as valid today as it was 20 years ago.
Similar uncertainty surrounds another concept absolutely fundamental to antitrust thought, that of ''market power.'' According to the DOJ/FTC guidelines on licensing intellectual property, the term means: ''[T]he ability profitably to maintain prices above, or output below, competitive levels for a significant period of time.''(see footnote 110) This simple sentence embodies a mountain of uncertainty. What is a ''competitive'' level, and by what principle is it defined? Is the reference to the economic model of perfect competition, Or to some other model? What is a ''significant'' period? In calculating a rate of return, what is in the cost base? For example, suppose a firm invests in three research projects, two of which come up empty while the third is a great success. Will the government count the rate of return as based on the costs of all three or only the third? And in calculating whether the return is above competitive levels (whatever that means) will it take account of the ex ante risk that all three efforts would fail? How, pray tell, does this ''guidance'' guide anyone?
Another example, provided by Professor Lawrence J. White, concerns the ''essential facilities doctrine.'' White points out that courts and agencies have frequently granted competitors access to ''essential facilities.'' This has happened for a railroad, a railroad terminal, the telephone system, real estate multiple listing services, news services, electricity, a skiing facility, and airline computer reservation systems. However, he notes: ''[N]either the courts nor Congress has ever clearly specified what constitutes an essential facility for antitrust purposes. . . . One has little guidance.''(see footnote 111) Again, if there is no adequate structure to explain such a doctrine in the old economy, how can one possibly extrapolate it to apply to the new and even more complex circumstances of this new age? Yet the term ''essential facility'' is bruited about constantly in discussions of antitrust enforcement in the new economy, as if the term actually had some clear meaning.
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My conclusion is simple. A system of thought that was not adequate for dealing with the old economy, based on heavy machinery and physical investment, provides a poor foundation for dealing with a new economy based on intellectual property. Extrapolating these inadequate doctrines to the new concept will create a system of enforcement by whim, not by law, and the consequences will be destructive.
A couple of months ago, I was at a conference where the technical director for a large, technology-based corporation was discussing some of his company's work. He described how a new technical development had suddenly and surprisingly led them to believe that the capacity of one of their crucial components could be increased by 50 percent.
I asked him: ''How on earth do you make investment decisions if something like this can come out of left field and surprise even someone as sophisticated as you are?''
He smiled—rather grimly, I thought—and said (I paraphrase): ''We spend a lot of time sitting around talking about that very topic, and without coming up with many good answers. And antitrust does not make it any easier. We have to worry that when we do guess right the government is going to decide that our rate of return is super-competitive and we are an evil monopolist. They will forget about our losers.''
As Douglass North said, property rights must be specified and predictable. This applies to intellectual property as well as to other kinds. And it certainly applies to antitrust enforcement, where uncertainty and whimsy are the enemies of both prosperity and freedom.
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Mr. HYDE. Thank you, Mr. DeLong. Before Professor Baker starts, I want to suggest to the entire panel, if it occurs to you and if you are of a mind to do so, you can help us by suggesting changes in the law. As Mr. DeLong just pointed out, there are some ambiguities and inadequacies and shortfalls.
We would like to think that all great ideas just stayed within ourselves, but not so as you know. Good things are often derivative. But, if it occurs to any of you to suggest some language that you think would improve existing statutes, no matter how old and infirm they may be, we would love to read what you send to us because we would like to improve things if we can.
That may have a special relevance to Professor Baker.
STATEMENT OF JONATHAN BAKER, ASSOCIATE PROFESSOR, WASHINGTON COLLEGE OF LAW AT AMERICAN UNIVERSITY
Mr. BAKER. Thank you, Mr. Chairman.
I am delighted to appear before you to discuss the important role that the antitrust laws play in protecting consumers and other buyers in high-technology industries.
In my remarks, I will explain how the antitrust laws and the process of competition that they safeguard promote innovation and ensure low consumer prices in high-tech markets.
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I will discuss three points——
The flexibility with which the antitrust laws can be applied in new markets—and we don't need changes in the antitrust laws for that to happen; the importance of antitrust for promoting innovation; and the relevance of antitrust in markets characterized by fast-paced change. I will also describe how antitrust enforcement takes into account the unique characteristics of high-tech industries. These issues are discussed in more detail in my written testimony, which I have provided to the committee.
First, the antitrust laws provide the flexibility that the enforcement agencies and the courts need to identify old problems when they appear in new clothes. To illustrate that, I will examine the kind of competitive problems that might arise with the development and widespread use of the Internet. One attractive vision of what the Internet might bring into markets is what Bill Gates called ''frictionless competition'' in a book he wrote. Under his vision, the reduction in transactions costs would provide sellers with a large customer pool and give buyers more choice among products and suppliers. That may well be what we will see in most market, as the Internet grows.
But, there is another, less attractive, vision of what the Internet could create. Rapid information exchange among rivals may also improve their ability to coordinate high prices without meeting in person. Rather than frictionless competition, we could see, in some markets, frictionless coordination among sellers able to set and maintain high prices.
In addition, Internet-based markets may give dominant firms new ways to employ unfair exclusionary practices to preserve their monopoly position. As the tools of competition and the tools firms use to ford it migrate to the Internet, antitrust law will naturally follow. The existing precedents concerning anti-competitive collusion and anti-competitive exclusion provide an adequate roadmap for antitrust lawyers to deploy in counseling firms to avoid these possible competitive problems in the electronic marketplace.
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My second point is that antitrust enforcement promotes innovation in high-technology industries by ensuring that markets perform competitively. We know from our experience as consumers how competition among sellers leads firms to develop product improvements that bring them to the market quickly. Product competition works as quickly to promote competition in high-technology industry.
These markets are often winner-take-all or, perhaps more accurately, winner-take-most: One firm's product becomes the industry standard, and that captures most of the buyer demand.
In such settings, firms compete furiously to claim the prize: the first to patent, the first to achieve efficient scale, or the first to take a commanding lead in developing a network that new buyers will prefer to join. Antitrust enforcement protects innovation and competition in a number of ways.
The antitrust laws apply to mergers that would combine firms with competing research efforts, when dominant firms are prohibited from engaging in tactics mainly aimed at excluding rivals rather than delivering better, cheaper products. Antitrust enforcement can protect innovation and competition without markedly undercutting the primary spur to leading firm innovation, the winner-take-most prize.
Third, antitrust enforcement is as relevant and important in evolving markets where change is fast-paced as in more mature markets. Recent experience with high-profile cases brought by the Justice Department and the Federal Trade Commission has made clear that antitrust enforcements in markets that change rapidly need be no more time-consuming and expensive than significant commercial litigation among private-sector firms.
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I think Mr. Hutchinson made that point earlier. The IBM case experience was an unfortunate aberration, not the modern-day rule. More importantly, the antitrust laws protect the public by deterring future violations as well as by providing a method for redress for those who have been injured. Even when antitrust law could be characterized as somehow closing the barn door after the horse has left, doing so is worthwhile when many other valuable horses are still inside, as often will be the case in rapidly innovating industries.
The recent experience with antitrust enforcement in high-tech markets has been measured. The pace of change and low entry requirements for many high-tech markets, combined with the need to protect incentives to innovate created by the intellectual property laws, limit the circumstances where antitrust intervention will be necessary. Historically, the antitrust standards have tended to resolve unclear cases in favor of innovative firms even with high market shares. It has—given the pace of merger activity and the number of firms with shares, it is really impressive how few antitrust actions have been brought.
If I may conclude, the antitrust enforcement appropriately takes into account the unique characteristics of high-technology industries. The antitrust laws are not only relevant to high-tech markets, they are essential to create the conditions for the flourishing innovation of enhancing consumer choice and giving the buyers the best products at the lowest prices.
Thank you, Mr. Chairman, for inviting me to share these views, and I would be happy to answer questions.
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[The prepared statement of Professor Baker follows:]
PREPARED STATEMENT OF JONATHAN BAKER, ASSOCIATE PROFESSOR, WASHINGTON COLLEGE OF LAW AT AMERICAN UNIVERSITY
Chairman Hyde, Ranking Member Conyers, and Members of the Committee,
I am delighted to appear before you to discuss the important role the antitrust laws play in protecting consumers and other buyers in high-technology industries. In my remarks, I will explain how the antitrust laws, and the process of competition they safeguard, promote innovation and ensure low consumer prices in high-tech markets.
Over the course of my career, I have examined the role that competition and the antitrust laws play in our economy from a number of vantage points, and more than one scholarly discipline, as I am both an economist and a lawyer. In the early 1980s, I practiced antitrust law as a law firm associate, and served as an advisor to an FTC Commissioner. At the end of that decade, I spent four years teaching economics at a leading business school. From 1990 through 1998, I held a variety of policy-making jobs in the federal government, at the Department of Justice, at the Council of Economic Advisors, and at the Federal Trade Commission. My most senior government position was Director of the Bureau of Economics at the Federal Trade Commission. I left the FTC at the end of 1998, and have taught antitrust law at American University's Washington College of Law ever since. I am currently serving as an expert witness for the Justice Department in an antitrust case not related to any of the issues I will be discussing today.
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My focus is on the application of the antitrust laws to the review of business conduct in high-technology industries. I will discuss three points: the flexibility with which the antitrust laws can be applied in new markets, the importance of antitrust enforcement for promoting innovation, and the relevance of antitrust enforcement to safeguarding innovation incentives in markets characterized by fast-paced change. In all three respects, antitrust enforcement takes into account the unique characteristics of high-tech industries.
First, the antitrust laws provide the flexibility enforcement agencies and courts need to identify old problems when they appear in new clothes. To illustrate this point, I will examine the kind of competitive problems that might arise with the development and widespread use of the Internet.(see footnote 112)
One attractive vision of what the Internet might bring to markets is what Bill Gates has called ''Frictionless Competition.''(see footnote 113) Under this vision, direct sales to consumers on the Internet and business-to-business markets for intermediate goods and services are dramatically reducing the time and cost of transactions and lowering the costs of search. As a result, sellers will have a larger customer pool and buyers will have more choice among products and suppliers. Internet access and advertising could also reduce the sunk costs of entry, making markets more competitive. Geographically distant firms are increasingly collaborating as though they were neighbors, helping them make better and cheaper products. Collaborative joint ventures have particularly been important in the automobile industry, even among rivals. Less formal forms of collaboration—from standard-setting to sharing information about new product features in order to facilitate the development of complementary products—have been particularly important in the computer industry.
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But there is another, less attractive vision of what the Internet could create. Rapid information exchange among rivals may improve their ability to observe and respond to each other's pricing, helping them reach and police anticompetitive coordination without meeting in person.(see footnote 114) Firms might use what they learn about customers to target captive buyers for high prices. Entry may be limited naturally by the need for sellers to develop a reputation as a legitimate producer of high quality products and services in order to attract buyers. Entry could also be limited by the exclusionary acts of incumbent firms. Rather than frictionless competition, we could see, in some markets, ''frictionless coordination'' among sellers, who are able to set and maintain high prices, or see dominant firms that employ unfair exclusionary tactics to preserve their monopoly position.
The antitrust laws already possess the flexibility needed to address these possible ways that anticompetitive conduct could arise in the electronic marketplace. As the tools of competition and the tools firms use to thwart it migrate to the Internet, the existing precedents provide a detailed road map for antitrust lawyers to employ in counseling firms to avoid anticompetitive collusion(see footnote 115) and anticompetitive exclusion. It is worth pausing on the possibility of anticompetitive exclusion, or as it is now often termed, ''raising rivals' costs.''(see footnote 116) Commentators critical of the antitrust jurisprudence of the 1960s and 1970s—the cases decided before the Chicago school revolution in the courts transformed the antitrust landscape—often singled out for particular censure judicial decisions alleging harm from exclusion. The main problem with the earlier precedents is that they often looked solely to the foreclosure of rivals, without carrying through the analysis to evaluate whether the remaining firms would likely be successful in exercising market power. This deficiency has been remedied in the contemporary judicial analysis of exclusion, and the possibility that competition could be harmed by exclusionary conduct is today taken seriously by the leading appellate judges associated with the Chicago school.(see footnote 117)
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Second, antitrust enforcement promotes innovation in high technology industries by ensuring that markets perform competitively. We know from our experience as consumers how competition among sellers leads firms to develop product improvements and bring them to market quickly. Think about innovation in a product category as familiar as soft drinks. Royal Crown, trying to find a way to compete with Coke and Pepsi, produced the first diet cola, the first caffeine-free soft drinks, and the first soft drinks in cans. Coke and Pepsi responded competitively by copying these new ideas and developing further innovations. Consumers have been the big winners: we now can choose among an array of soft drink products, and find better matches between our tastes and the goods available in the marketplace—with multiple sellers helping keep prices low.
Competition works just as powerfully to promote innovation in high-technology industries.(see footnote 118) These markets are often winner-take-all or, perhaps more accurately, winner-take-most: one firm's product becomes the industry standard, and that seller captures most of the buyer demand. This can occur for many reasons: when the innovator secures broad intellectual property protection or experiences scale and scope economies in production, or when a market in which ''network externalities'' are important ''tips'' to favor one firm.(see footnote 119) In such settings, firms compete furiously to claim the prize—to be the first to patent, first to achieve efficient scale, or first to take a commanding lead in developing a network that new buyers will prefer to join. Innovation competition occurs in multiple rounds; the winner in a later round may often but not always be the firm that won the round before. IBM, for example, preserved its leading role in computing over decades, through many rounds of innovation, as the industry evolved from tabulating machines to mainframes, but famously lost its lead when innovation turned to personal computers.
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Antitrust enforcement protects innovation competition in a number of ways. The antitrust laws prevent mergers that would combine firms with competing research efforts, when other firms' research does not have as strong prospects for success and the combination does not promise efficiencies.(see footnote 120) The antitrust laws also prevent dominant firms from channeling innovation by unfairly excluding rivals who pose competitive threats. This is critical in winner-take-most markets: the excluded firms may appear competitively insignificant if the industry has a dominant firm, but there may be no better-situated rivals to take on the leading firm in the next round of innovation competition. And there is little danger of chilling the innovative effort of a dominant firm with a strong research and development program of its own. When dominant firms are prohibited from engaging in tactics that are mainly aimed at excluding rivals rather than delivering better or cheaper products, antitrust enforcement can remove an inhibition on innovation competition without markedly affecting the primary spur to leading firm innovation, the winner-take-most prize.
Third, antitrust enforcement is as relevant and important in evolving markets where change is fast-paced as in more mature markets. I have heard it suggested that the antitrust laws are not relevant to high technology markets because courts, unlike firms, cannot operate on ''Internet time.'' This complaint misses the mark. Recent experience with high profile cases brought by the Justice Department and the Federal Trade Commission has made clear that antitrust enforcement need be no more time consuming and expensive than significant commercial litigation among private sector firms;(see footnote 121) the IBM case experience was an unfortunate aberration, not the modern-day rule.
More importantly, no one suggests that the laws against fraud, deceptive advertising, or other harmful business practices should be taken off the books even though the violators are ordinarily not brought to justice until after they have committed their offenses. These laws protect the public by deterring violations, and also by providing a method for redress by those who have been injured. So too with antitrust. Outside of merger enforcement, prosecutions for antitrust violations, from price-fixing to monopolization, typically occur after the harm has been done, too late to prevent the harm to exploited consumers and injured rivals, but in time to deter other firms from undertaking similar conduct in the future. Even when antitrust law could be characterized as closing the barn door after the horse has left, doing so is worthwhile when many other valuable horses are still inside.
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Moreover, the recent experience with antitrust enforcement in high-tech markets has been measured, and properly so. Sound antitrust enforcement intervenes only where competitive problems are clear. The pace of change and low entry requirements for many high-tech markets, combined with the need to protect the incentives to innovate created by the intellectual property laws,(see footnote 122) limit the circumstances where antitrust intervention will be necessary. In addition, the antitrust standards historically applied by the courts tend to resolve unclear cases in favor of innovative firms, even if they have high market shares.(see footnote 123) Indeed, given the pace of merger activity and the number of firms with significant market shares in high-tech industries, it is impressive how few antitrust actions have been brought. When the federal enforcement agencies bring such cases, these actions are focused as the evidence warrants and settled when possible.(see footnote 124)
In conclusion, antitrust enforcement appropriately takes the unique characteristics of high-technology industries into account. The antitrust laws are not only relevant to high-tech markets, they are essential—to create the conditions under which innovation will flourish, consumer choice will be enhanced, and buyers will obtain the best products at the lowest prices.
Thank you for inviting me to share these views. I would be happy to answer any questions.
Mr. HYDE. Thank you, Professor, and I thank the entire committee. I notice it is 1:45 p.m., and you haven't had lunch, and, of course, I can't, either. I can afford to miss it. I don't know if you can.
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Just a very few questions or comments. In this increasingly globalized economy, how do we make antitrust laws work? How do we give them extraterritoriality? I always had trouble with some words. Politicization is another one. I wrestled with that a long time. But, how do we make it work when many major corporations aren't limited by national boundaries? Do we need global antitrust laws? Professor Baker, that is an academic's question.
Mr. BAKER. The answer is we need coordination. As to whether we need global antitrust laws, we don't yet, no. I would say a couple of decades ago the problem we faced was gaps between nations, when we thought that practices were anti-competitive. Sometimes they could occur in foreign countries and harm U.S. consumers. Notwithstanding the extraterritorial breadth of the antitrust enforcement, in practice it was hard to reach them.
Today, the problem is, increasingly, overlaps rather than gaps, and we are starting to run into the question of what do we need to harmonize? Already, it is clear that we need to harmonize procedures throughout the nations of the world. Further, the need to harmonize substantive standards is less clear, because that seems to be happening already.
Mr. HYDE. Mr. Rill, do Mr. Klein and Mr. Pitofsky have the tools they need to do their job?
Mr. RILL. I think their legal tools are available in some areas to enforce the antitrust laws against overseas restraints that inhibit U.S. trade. I think there are difficulties in those assertions. It's a tool that needs to be kept and used in those particular cases. I think much more of a prospect for success exists in the appropriate use of what is called positive comity that is available under a number of the agreements that have increasingly been negotiated between the Department of Justice, the Federal Trade Commission, and foreign antitrust agencies.
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As Assistant Attorney General Klein indicated, those are works in progress. I think that the oversight function available to this committee to see how that work in progress is being performed would be a very, very valuable function, particularly with respect to the frequency of the requests that might be made by the United States agencies. The transparency of the result of those requests and the question of whether or not the overseas agencies have the will and the authority to honor those requests in the spirit of international cooperation is vitally important.
I don't think the call is for new law. I think the call is to bring about greater convergence through the enforcement of existing law and through international cooperation along the lines of agreements that have been entered into, starting with the US/EU agreement that I negotiated in 1991.
Mr. HYDE. I have lots more questions, but I will save them for another day, because you paid your dues to the public service quite well enough.
I want to thank you, though. You have made a great contribution. What you have had to say will be thoroughly digested. Thanks very much. Do either of you have some very urgent, earth-shaking questions? [Laughter.]
Mr. Nadler.
Mr. NADLER. I will be brief. Mr. Hamberger said in his testimony earlier that intermodal traffic or intermodal business companies' traffic is exempt from the antitrust exemption.
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Now, Mr. Voltmann, in your testimony, you seem to imply the opposite. So, first, could Mr. Voltmann comment on that, and then could Mr. Hamberger comment?
Mr. VOLTMANN. Thank you, sir. First of all, the ICC exempted intermodal from regulation. But, when the Agency did that under its power, it retained jurisdiction over it. The law did not exempt it. The Agency did. Secondly, that is the problem with the antitrust laws in their application to railroads. The ICC Termination Act and the Interstate Commerce Act states that the STB has paramount jurisdiction over railroads.
So, there is a question in there. Then, you move on to the Keogh Doctrine and other aspects.
Mr. NADLER. Just let me ask you this. Are you saying that, under the law, there is not an antitrust exemption but the STB does the judgments on antitrust and the STB has exempted it? Is that what you are saying?
Mr. VOLTMANN. What I am saying is that there is confusion. What I am saying is that the Agency retains jurisdiction though it has chosen not to regulate.
Mr. NADLER. But it is not statutorily exempt?
Mr. VOLTMANN. That's right, but, now, if the AAR is willing to stipulate that the antitrust laws don't apply to intermodal, we would be happy to accept that.
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Mr. NADLER. Why would you be happy?
Mr. VOLTMANN. Then we would have an aspect of rail in which the antitrust laws would apply.
Mr. NADLER. Okay. Mr. Hamberger?
Mr. HAMBERGER. Sounds like it's time for me. In fact, the ICC did find that there should be an exemption for intermodal traffic because of the marketplace competition. There is no traffic more competitive than intermodal.
Mr. NADLER. They made it a policy decision that, in their opinion, because things are competitive and should be exempt, or they interpreted the law as saying the law made it exempt?
Mr. HAMBERGER. It is my understanding that they made a policy decision that it was exempt because of the competition. Therefore, the antitrust exemption that Mr. Voltmann is referring to, The Keogh Doctrine for example, had no relevance to intermodal in transportation. In fact, there is a case out there, the Alliance Shippers case, where the court exercised substantive jurisdiction on a section 1 Sherman Act collusion issue, so that antitrust law was, in fact, applied to intermodal rail shipments.
On a second count in the case, as I understand it, a price-discrimination count, it was brought under Robinson-Patman which, of course, does not apply to any services, including rail transportation. Even though, there was no jurisdiction under the antitrust laws, the court indicated that plaintiffs could go back to the STB to see if, in fact, they could make a showing for the ICC—now the STB—to revoke the exemption.
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Mr. NADLER. So, in other words, the courts—What you are saying is the STB, as a matter of policy, said, because there's a lot of competition in there, that there is no need for the antitrust?
Mr. HAMBERGER. No, there is no need for STB rate regulation. Therefore, because there is no STB—or, at the time, ICC—rate regulation, then there is no exemption from or immunity from the antitrust laws.
Mr. NADLER. There is no immunity from the antitrust laws?
Mr. HAMBERGER. There's a lot of antitrust law. I am not an antitrust expert, but, basically, section 1 and section 2 of the Sherman Act and the Keogh Doctrine. The Keogh Doctrine has no relevance and sections 1 and 2, collusion charges can be alleged against railroads.
Mr. NADLER. Wait a minute. So, the courts found that, because of what the STB declared, the intermodal traffic is exempt from the antitrust exemption. Therefore, the antitrust laws apply. Is that what you are saying?
Mr. HAMBERGER. That is what I am saying.
Mr. NADLER. Is that correct, Mr. Voltmann?
Mr. VOLTMANN. But then it was referred back to the Agency for action. But, we are not talking about rates. We are talking about access to the market.
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Mr. NADLER. And, Mr. Hamberger, on the question of access to the market?
Mr. HAMBERGER. What Mr. Voltmann is implying on one page of his testimony is collusion between railroads. That is subject to antitrust under section 1.
Mr. NADLER. What about with railroads? I don't want to take your shipments, because I don't like you.
Mr. HAMBERGER. Under the common carrier obligation, we can't do that.
Mr. NADLER. So what is the problem, Mr. Voltmann?
Mr. VOLTMANN. The problem is confusion.
Mr. NADLER. Give me an example of what they get away with that you think they shouldn't. They should be subject to antitrust. For example, what is the problem caused to a shipper or somebody?
Mr. VOLTMANN. The problem with intermodal is the freight is very movable. It is the companies that are not. The railroads require the companies to enter into commitments for service. We have no problem with that. So, the company becomes captive to the railroad to meet those service commitments.
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The problem comes in when that company goes to sell intermodal service, and the railroad now can choose between the companies with which it has service agreements, because the shippers' freight is very movable.
Mr. NADLER. And the common carrier obligation doesn't force them to give service?
Mr. VOLTMANN. It forces them to give service to the shipper, not necessarily to the intermodal marketing company. The railroads can pick and choose between their intermodal marketing partners.
Mr. HYDE. Mr. Delahunt.
Mr. DELAHUNT. Thank you, Mr. Chairman. I understand there is a difference of opinion in terms of the authority of the FTC between Mr. Rein and Mr. Strenio, although my own analysis of the precedent would tend to support Mr. Strenio as opposed to Mr. Rein. But, that is not for me to say. I just want to be clear, Mr. Rein, are you here representing Mylan, or are you here representing the United States Chamber of Commerce?
Mr. REIN. Thank you, Mr. Delahunt. We are here representing both, because the Chamber supported Mylan in this case, but only with respect to the issue of the propriety of using 13[b]. We are not here to discuss the merits.
Mr. DELAHUNT. I don't want to discuss that.
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Mr. REIN. So we have a common view, yes. The answer is both of them have the same view.
Mr. DELAHUNT. They are both paying for your services today?
Mr. REIN. Yes, if paying—If that is the word.
Mr. DELAHUNT. I hope they are paying well.
Mr. REIN. I would only say—I would certainly say Mr. Strenio is correct in citing the precedents. We don't think those precedents are particularly apt, and, more important, I think we believe that they——
Mr. DELAHUNT. This is not an appellate court, and I am sure that that will be resolved. But, I just want to be clear. There is a press release here from the Federal Trade Commission, that, in January of this year, your client, Mylan Company, stated it raised the wholesale price of clorazepate from $11.36 to approximately $377.00 for a bottle of 500 tablets. You are not contesting that?
Mr. REIN. I am really not in a position to comment on that, because our participation in that case on behalf of the Chamber was really with respect to this particular issue. Mylan only asked us to express their views on the issue of 13[b], not on the merits of the underlying proceeding, so I really don't know enough about it.
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Mr. DELAHUNT. So you don't know enough?
Mr. REIN. You can assume that, for this purpose, that that is accurate. I have no facts available to contest or not contest that statement.
Mr. DELAHUNT. And this press release goes on and states that, in March, the wholesale price of lorazepam went from $7.30 for a bottle of 500 tablets to approximately $190.00 for a bottle of 500 tablets. Again, your response to that would be you don't know.
Mr. REIN. I don't know of personal knowledge, but I will assume that it at least has some basis or the government wouldn't have alleged it.
Mr. DELAHUNT. So, again, if arguendo, there was a finding against Mylan, what would be the public's remedy?
Mr. REIN. As you can tell from the lawsuits, the public has numerous remedies. State attorney generals.
Mr. DELAHUNT. You describe that conduct as piling on.
Mr. REIN. I think the question is how much remedy does the public need. These are always difficult questions.
Mr. DELAHUNT. I would suggest, Mr. Rein, if that is the case—and there are a number of individuals in my district who are currently making the decision between prescription drugs and food, and prescription drugs and heat, and prescription drugs and rent—that this isn't about a difference of opinion between learned legal scholars on the issue of the authority or the jurisdiction of the FTC.
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Let me ask one other question—and maybe you don't know this—but are you familiar with a group called the Campaign for Fair Pharmaceutical Competition?
Mr. REIN. No, I am not, Mr. Delahunt. I am sorry. I don't know the group.
I would just like to say one thing that might be helpful. Clearly, if there has been a wrongful increase in prices, then there is some need for remedy. The question is do you remedy it one time, two times, three times, four times, ten times? If somebody is speeding down the highway, you can impose the death penalty. The question is what is proportionate?
Mr. DELAHUNT. I am sorry. I understand, and we use a lot of criminal sanctions that I think are sometimes disproportionate. But, I have to suggest this with all due respect, Mr. Rein, that, if people in my district were making the choice between these two particular generic drugs, and there were serious physical harm—or even death that came about, I just think that this is conduct that I find absolutely unconscionable. I yield back.
Mr. HYDE. Well, I will simply say that Mr. Delahunt feels passionately about this. Of course, all of us are concerned when price exploitation occurs, but this is not the place to try that case. Mr. Rein disavows any knowledge of the facts surrounding it, and, so, he doesn't need me to defend him.
Mr. DELAHUNT. I don't intend to shoot the messenger. I want to be very clear about that.
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Mr. Rein—if I may, Mr. Chairman, Mr. Rein was very specific in terms of what his representation was about. I just was referring to this press release, and, again, I like to consider myself someone who doesn't rush to judgment, likes to understand the facts. But, as I stated before, for the sake of argument, if these facts are true, I would suggest a remedy, whether it is 10 times or 20 times or 30 times. I can't imagine a disproportionate remedy.
Mr. REIN. Without arguing with you, sir, let me just suggest this. It is possible that price goes up because of wrongful activity. It is also possible that price goes up because of natural market circumstances. The burden on the consumer is the same if they have to pay a higher price, but it isn't unlawful. They are still going to have to make those hard choices. That is unfortunate. Not everybody has the means to make all the choices they would like to make, and I understand the concern you have.
Mr. DELAHUNT. It is a hell of a lot easier, Mr. Rein, to make a choice at $7.00 a bottle than it is at $377.00.
Mr. HYDE. I am going to have to step in and try to terminate this. I will say this as a lawyer and as a citizen. I am happy that litigation many times is determined upon the evidence and not press releases. But, nonetheless, I thank you all. You have made a great contribution, and we have learned something. Thank you very much. The committee stands adjourned.
[Whereupon, at 2 p.m., Wednesday, April 12, 2000, the hearing was adjourned.]
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A P P E N D I X
Material Submitted for the Hearing Record
| Association of American Railroads, |
| Washington, DC, June 14, 2000. |
Hon. HENRY J. HYDE, Chairman,
Committee on the Judiciary,
House of Representatives, Washington, DC.
DEAR MR. CHAIRMAN: Please permit me the opportunity to clarify, for the record, my views on an issue raised by Congressman Nadler during my testimony before the Committee at its April 12, 2000 hearings on ''Antitrust Enforcement Agencies, The Bureau of Competition of the Federal Trade Commission, and The Antitrust Division of the Department of Justice''.
At the hearings, I noted that intermodal (trailer/container on flatcar) transportation by railroad was exempt from regulation by the Surface Transportation Board (''STB'') in view of the competitive nature of such transportation; and, accordingly, the railroads are not immune from the antitrust laws when setting rates on intermodal traffic. This was in response to written testimony by Mr. Robert Voltman, President of the Transportation Intermediaries Association, advocating the application of the antitrust laws to railroads to purportedly protect his Association's members.
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During the discussion which followed and after I again confirmed that railroad rate setting activities regarding intermodal shipments were not immune from the antitrust laws, Mr. Nadler sought additional clarification of the railroads' obligation to accept intermodal shipments from customers by asking: ''What about railroads? I don't want to take your shipments, because I don't like you.'' To the extent that the railroads are subject to the antitrust laws, they, of course, would be subject to the same constraints regarding doing business with customers as any other industry. Whether a railroad could refuse to accept an intermodal shipment and, if it could, under what circumstances, would be subject to antitrust analysis in the same manner as in any other industry; and intermodal customers would have the same antitrust remedies as customers of any other service providers subject to the antitrust laws.
I indicated, however, in my response to Mr. Nadler, that the railroads could not refuse to accept an intermodal shipment because of their common carrier obligations. I believe it is important to note for clarification that the railroads' common carrier obligations and intermodal customers' rights to enforce such obligations would only be available if the intermodal customers deprived of service first successfully petitioned the STB for a revocation of the exemption from regulation for the traffic at issue. Absent such a revocation of the exemption, intermodal customers' remedies would be those available only under the antitrust laws.
Thank you for the opportunity to clarify my response to Mr. Nadler. I would be pleased to provide the Committee with any further information it may require regarding this matter.
Sincerely,
PREPARED STATEMENT OF THE CONSUMER FEDERATION OF AMERICA
FACTS, LAW AND ANTITRUST REMEDIES: TIME FOR MICROSOFT TO BE HELD ACCOUNTABLE FOR ITS MONOPOLY ABUSES
ISSUE BRIEF
I. A Perceived Benevolent Despot Proves To Be A Plain Old Monopolist
The Microsoft antitrust trial has resulted in stunning Conclusions of Law. Having identified about two dozen forms of consumer harm (see Exhibit 1) that result from pervasive anticompetitive conditions and practices in the software market (see Exhibit 2), the federal district court has found that Microsoft violated the antitrust laws in three distinct and significant ways (see Exhibit 3)—by illegally maintaining a monopoly in the PC operating system market, by illegally attempting to acquire a monopoly in the Internet browser market, and by illegally tying a browser to the monopoly operating system.
A wide range of possible remedies is now being discussed. Conservatives, such as the Progress and Freedom Foundation, and liberals, such as Ralph Nader, alike have called for a break-up of the company. Others have argued that punishment should be left to private antitrust actions, which could cost Microsoft tens of billions of dollars in damage claims. During settlement negotiations, Microsoft suggested minor restrictions on its behavior.
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The Supreme Court has made it dear that, having found monopolization, a federal court has a duty to prescribe relief that should ''terminate'' the illegal monopoly, prevent ''practices likely to result in monopolization in the future,'' and ''deny to the defendant the fruits of its statutory violation.'' There is also little dispute that antitrust relief should avoid ''transforming the district court into a regulatory agency.''
In light of the sweeping nature of the violations of law, this paper examines two stern remedies that seem commensurate with the extent of abuse—break-up (into three operating system companies and one applications company) or a comprehensive set of conduct remedies including vigorous enforcement mechanisms. Based on these principles of antitrust law, a break-up would be a much more effective solution.
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II. A Structural Remedy Is Preferable To Restore And Preserve Competition
Breaking up Microsoft into several companies, each of which owns the operating system code would accomplish the goals of the antitrust laws in an expeditious fashion. The obvious benefits are to immediately create competition in the market There would be no need to regulate behavior. The leverage that the single dominant firm has had over computer manufacturers and others who sell directly to the public would be undercut, since they would now have alternatives. Even if the new companies were inclined to behave in the old ways, they would lack the market power to do so.
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Operating systems prices would drop, while customers would enjoy greater choice and increased innovation in operating systems. Operating systems competition likely would spawn competition in the core applications as well, with corresponding price savings and increased innovation. In addition, operating system changes would be more reflective of consumer needs.
A competitive environment would be more hospitable toward new hardware platforms and cross-platform software development With competing browser offerings, for example, innovation in that product could revive. Overall, consumers would have significantly more choice of software and, very likely, enhanced performance and reliability.
A divestiture that created head-to-head competition in Windows would greatly reduce the amount of ongoing judicial regulation needed to preserve competition. A remedy that forced Microsoft to divest away its monopoly power would make Microsoft's conduct of less immediate competitive concern, relieving the market of much anticompetitive risk, while requiring little continuing judicial oversight
It would also be helpful to split the applications software from the operating system software, although this is less critical to a competitive outcome. If the applications products are left with the new operating systems companies, the integrated operating system/applications companies would have an advantage, vis-à-vis other software companies, even though they would face competition among themselves. Since virtually all other software companies have been ''stand-alone'' applications companies (due to the Microsoft monopoly) vertical divestiture of applications is appropriate. The operating system companies would not be prevented from entering the applications business, since more competition is better. They would, however, have to develop new applications and could not use the old code, which they would not own and should not be allowed to license.
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Significantly, a structural remedy that creates head-to-head competition by definition does not benefit competitors. Indeed, competitors are likely to be worse off if Microsoft is divided into several competitors, each with a share in a broad array of extremely valuable computer code and billions in cash. The consumer benefits of a structural remedy that creates direct competition are likely to come at the direct expense of competitors.
III. Conduct Remedies Are Unlikely To Be Effective
This paper also identifies a set of conduct remedies that could be used to attempt to address the many problems indicated in Microsoft's behavior (see Exhibit ES–4). It argues that imposing these in an effective manner would be difficult and not likely to accomplish the purpose of the antitrust laws as effectively as a divestiture.
The conduct remedy would have to be extensive, since Microsoft has engaged in such a broad range of anticompetitive practices. The policing of the remedy would have to be aggressive, since Microsoft has shown itself to be recalcitrant both in its failure to comply with the earlier consent decree and in its steadfast denial of wrongdoing in this case. Even if Microsoft obeyed the decree, competition would be slow to take root because Microsoft has dominated the operating systems market for so long.
Any conduct remedy would also have to extend to some form of licensing arrangements, in which Microsoft is forced to license the operating system code and the terms of that license are regulated by the courts for an extended period of time. This would result in a cumbersome administrative process overseen by the courts.
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A comprehensive behavioral remedy would need specific provisions to address each of the anticompetitive practices that contributed to the violations of law and enforcement mechanisms that have a reasonable chance of eliciting compliance or discovering and rectifying non-compliance.
Under the Table: For certain anticompetitive practices, the Conclusions of Law stand as a remedy in themselves. The Conclusions of Law signal strongly that this conduct is not acceptable. They may trigger private and class action lawsuits. These could deprive Microsoft of one the most important fruits of its monopoly, the huge horde of cash on hand. Given the manner in which the federal case was conducted, that is the only way to get at the past fruits of monopoly conduct
Scope: In order to overcome the barriers to entry, the remedy should be broad in scope, commensurate with the scope of the campaign Microsoft has conducted against competition. Behavioral conditions, such as disclosure requirements and prohibitions on discrimination, must apply to the entire ''Windows Family'' and the applications built on it They must also apply to all aspects of the interface between Microsoft and both distribution channels and other software vendors.
Applications Barrier to Entry: In addition to the disclosure requirement, Microsoft should be required to port Office to other operating systems.
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Contracting: It goes without saying that exclusive arrangements should not be tolerated. However, the Court has recognized that preferential deals are a powerful tool to preserve the monopoly. A prohibition on discrimination should apply to prices, functionalities, support, testing, marketing, and other considerations that Microsoft has used to discriminate in the past.
Quality Impairment: Porting of Office, disclosure of APIs and access to source code will all help diminish Microsoft's ability to impair the quality of competing or potentially competing products. A mechanism to ensure non-discriminatory access will be crucial. Microsoft should also be required to support older operating systems and to provide training on new operating systems.
Bundling: Microsoft should be required to spin off the browser. This is the market that was monopolized and competition could yet be restored in it It is also an important choke point for leveraging other Internet related markets. Other bundling issues will have to be referred to a special master. However, the Court has established a clear test Where products can stand alone, they should be required to be offered for sale separately.
Price: The conduct remedy will not place immediate downward pressure on operating system prices. Price discrimination can The eliminated with a requirement to publish a uniform pricing schedule. This will alleviate one major source of leverage over OEMs. The practice of raising the price on older versions when new ones come out should be banned. Older version should also be supported for a period. Two-way compatibility should be maintained. This will alleviate the pressure to upgrade.
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Consumer Harm: As previously noted, consumer harm is the result of the anticompetitive conduct and it would presumably be rectified by effective implementation of the previous remedies. A unique consumer impact identified by the Court involves freedom to alter the boot screen and the start sequence. Not only should OEMs be allowed to do so, but Microsoft should be required to support this freedom.
Enforcement: Since enforcement is so crucial, four types of enforcement mechanisms in two broad categories—private and governmental—are needed.
Private: One of the critical factors is to empower private individuals to take action. This reduces the extent to which enforcement must rely on the limited resources of government With respect to past illegal behavior, there are likely to be ancillary private and class action law suits that allege antitrust violations based on the liability finding. The court should establish clear private rights of action for individuals who allege discrimination or other abuse giving them expedited remedy and protection from retribution, should they allege abuse. Banning Non-Disclosure Agreements (NDAs) should make it clear that private parties have access to code.
Government: With respect to restoring competition and preventing future monopolization an annual review by the Court should be conducted to ensure that contracting and market behaviors are in compliance in a global sense. The court could contracting and market behaviors are in compliance in a global sense. The court could oversee a proceeding, similar to the triennial review requirement that was imposed as part of the AT&T break-up. Three years is too long to wait in the computer industry, however, and that proceeding was so cumbersome that it was followed only once in the 12 years that the AT&T decree was in effect A second alternative would be for the court to confidentially review contracts and other agreements signed by Microsoft over the year to satisfy itself that undue discrimination is not taking place. Finally, a special master will have to be appointed to oversee more technical issues. There will inevitably be questions raised about the disclosure of API, access to source code, integration of functionalities, etc. that will require technical advice to the court
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IV. Consumers Will Benefit From Renewed Competition In The Software Industry
The superiority of a structural remedy, from a legal and regulatory perspective is clear. The primary complaint about the break-up approach, from a public interest point of view, is that it opens the door to incompatible systems. Although the new companies would be starting from a position of compatibility, these arguments claim that there is a risk that they might choose to change the code in their efforts to win customers.
At its heart, the arguments against a break-up are essentially a defense of monopoly in the industry. The trial undermines the claim that the monopoly persists because of the unique natural forces of the software market. The causes of its durability are to be found in the plain old anticompetitive business practices of Microsoft. Competition is not likely to impose the costs that its critics claim.
Since the divested companies would be starting from an installed base that represents over 90 percent of the PC market, they are unlikely to introduce changes that would cut themselves off from that base. They are likely to ensure that their operating systems remain compatible, even as they improve on them. To the extent that it does become necessary to port applications between the different versions of the Windows operating systems, this is likely to be a worthwhile activity. The chicken-and-egg problem with ''competing'' operating systems is that new entrants simply cannot attract enough demand to make it worthwhile for programmers to write for multiple operating systems. To the extent that a large installed base would be divided among three companies, each of the companies is likely to retain a sufficiently large base to provide an attractive market for software vendors to serve.
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In fact, Microsoft has fought to against software compatibility in market after market Over time, as Microsoft's market share has grown, it has built more and more barriers to interoperability between Windows and other operating systems or application software. Microsoft has repeatedly attacked and driven products out of the market because they would increase compatibility. It has created incompatibilities with non-Microsoft products to prevent them from becoming popular. Microsoft is not actually concerned about incompatibility; when it controls that incompatibility and it suits its business interests. At this very moment it is seeking to migrate business users to an entirely new operating systems (Windows 2000). That migration requires the very costs that Microsoft defenders claim would be unacceptable in a competitive market.
Experience in other industries suggests that real competition would produce many integrated, consumer-friendly operating systems that perform more reliably and better meet consumer needs. In a world of competing systems, compatibility would become a highly valued commodity and open standards would be developed. Competitive industries center on standards that all companies can develop products for. Non-dominant firms strive for enhanced compatibility.
V. Conclusion
If the court does not enter a serious remedy, Microsoft will again ignore the law or try to manipulate narrow conduct restrictions to its benefit, as it did in its 1995 Consent Decree. As revealed by documents introduced in the trial, the ink was not yet dry on the consent decree when Microsoft was already bragging that its business practices would not change as a result That settlement failed to meet the challenge of restoring competition and consumers have paid a heavy price.
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Just over a century ago the antitrust laws, were adopted and applied when America was taking leadership of the world industrial economy. Break-ups of the major industrial corporations at that time were intended to prevent abuse and restore competition to the most important industries the industrial age. Claims that preventing the concentration of economic resources would hurt the economy were raised at that time and they proved to be wrong. For exactly the same reason they are wrong today at the dawn of the information age: competition is the wellspring of economic progress and technological innovation.
(Footnote 1 return)
Testimony of the Federal Trade Commission before the House Committee on the Judiciary (Nov. 5, 1997).
(Footnote 2 return)
Chairman Henry J. Hyde, Antitrust: A Cornerstone Principle, 14 Antitrust 82 (Spring 2000).
(Footnote 3 return)
Sandra Sugawara, Merger Wave Accelerated in '98: Economy, Internet Driving Acquisition, Wash. Post at E1 (Dec. 31, 1999).
(Footnote 4 return)
See Attachment 1.
(Footnote 5 return)
In addition, 19 merger filings were withdrawn before the Commission's investigation was completed.
(Footnote 6 return)
Telecommunications, especially in the areas of cable and video programming, also has been, and continues to be, an area of substantial activity. See Prepared Statement of the Federal Trade Commission, Presented by Robert Pitofsky, Chairman, Before The Committee on Commerce, Science, and Transportation, United States Senate, November 8, 1999.
(Footnote 7 return)
Federal Trade Commission v. BP Amoco, p.l.c., Civ. No. C 000416 (SI) (N.D. Cal. Feb. 4, 2000) (complaint).
(Footnote 8 return)
The complaint also alleges that the combination of BP's and ARCO's pipeline and oil storage facilities in and around Cushing, Oklahoma, a major crude oil trading center, would enable the combined firm to manipulate the market for crude oil futures contracts traded on the New York Mercantile Exchange. Those contracts involve crude oil designated for delivery in Cushing. The complaint alleges that the combination of BP's futures trading business and existing pipeline and terminal facilities with ARCO's pipelines, oil storage infrastructure, and in-line transfer business would increase BP's ability to manipulate crude oil futures trading by giving it access to information and control over pipelines and other essential facilities.
(Footnote 9 return)
Exxon Corp., FTC File No. 991 0077 (Nov. 30, 1999) (proposed consent order).
(Footnote 10 return)
British Petroleum Company p.l.c., C–3868 (April 19, 1999) (consent order). BP/Amoco involved very large companies but relatively few significant competitive overlaps. The Commission ordered divestitures and other relief to preserve competition in the wholesaling of gasoline in 30 cities or metropolitan areas in the eastern and southeastern United States, and in the terminaling of gasoline and other light petroleum products in nine geographic markets.
(Footnote 11 return)
Shell Oil Co., C–3803 (April 21, 1998) (consent order). The Shell/Texaco transaction raised competitive concerns in markets for gasoline and other refined petroleum products in the Pacific Northwest (Oregon and Washington), California, and Hawaii, for crude oil in California, and in the transportation of refined light petroleum products to several southeastern states. The Commission required the divestiture of a refinery in Washington, a terminal on the island of Oahu, Hawaii, retail gasoline stations in Hawaii and California, and a pipeline interest in the Southeast.
(Footnote 12 return)
The Commission also has testified and advised Congress on electricity deregulation and related issues. See Testimony of Commissioner Mozelle Thompson before the House Committee on the Judiciary, July 28, 1999; Letter to Chairman Thomas E. Bliley, House Committee on Commerce, on H.R. 2944, Electricity Competition and Reliability Act, Jan. 14, 1999. The FTC also held a two-day workshop last fall on electricity deregulation issues. FTC Public Workshop, Market Power and Consumer Protection Issues Involved With Encouraging Competition in the U.S. Electric Industry, September 13–14, 1999.
(Footnote 13 return)
PacifiCorp, FTC File No. 971 0091 (consent order accepted for public comment, Feb. 17, 1998). This order was withdrawn when the parties abandoned the transaction.
(Footnote 14 return)
Dominion Resources, Inc., C–3901 (Dec. 9, 1999) (consent order).
(Footnote 15 return)
CMS Energy Corp., C–3877 (June 2, 1999) (consent order).
(Footnote 16 return)
FTC v. Cardinal Health, Inc., 12 F. Supp.2d 34 (D.D.C. 1998).
(Footnote 17 return)
1992 U.S. Dep't of Justice and Federal Trade Commission Horizontal Merger Guidelines, reprinted in 4 Trade Reg. Rep. (CCH) 13,104 (April 2, 1992; as amended, April 8, 1997).
(Footnote 18 return)
Albertson's, Inc., FTC File No. 981 0339 (June 21, 1999) (consent agreement accepted for public comment). The Commission has also challenged a number of other supermarket mergers. E.g., Albertson's, Inc., C–3838 (Dec. 8, 1998) (consent order) (acquisition of Buttrey Food and Drug Store Co.); Koninklijke Ahold N.V., C–3861 (April 14, 1999) (consent order) (acquisition of Giant Food, Inc.).
(Footnote 19 return)
E.g., Hoechst AG, FTC File 991 0071 (consent agreement accepted for public comment, Dec. 2, 1999) (acquisition of Rhone-Poulenc S.A.; direct thrombin inhibitor drug); Zeneca Group PLC, C–3880 (June 7, 1999) (consent order) (acquisition of Astra AB; long-lasting local anesthetic); Roche Holdings Ltd., C–3809 (May 22, 1998) (consent order) (acquisition of Corange Ltd.; cardiac thrombolytic agents and chemical used to detect the presence of illegal substances). The Commission also took action to prevent competitive harm from a pharmaceutical manufacturer's acquisition of a company providing services as a pharmacy benefits manager. Merck & Co., Inc., C–3853 (Feb. 18, 1999) (consent order) (acquisition of Merck-Medco Managed Care, LLC).
(Footnote 20 return)
SNIA S.p.A., C–3889 (July 28, 1999) (consent order) (heart and lung machines); Medtronic, Inc., C–3880 (June 3, 1999) (consent order) (non-occlusive arterial pumps); Medtronic, Inc., C–3842 (Dec. 21, 1998) (consent order) (automated external defibrillator).
(Footnote 21 return)
Reckitt & Colman plc, C–3918 (Jan. 18, 2000) (consent order) (household cleaning products); Nortek, Inc., C–3831 (Oct. 8, 1998) (consent order) (residential intercoms); S.C. Johnson & Son, Inc. C–3802 (May 20, 1998) (consent order) (soil and stain removers); CUC Int'l, C–3805 (May 4, 1998) (consent order) (timeshare exchange services).
(Footnote 22 return)
Fidelity National Financial, Inc., C–3929 (Feb. 25, 2000) (consent order) (title information services); Unum Corp., C–3894 (Sept. 29, 1999) (consent order) (data for disability insurance); Commonwealth Land Title Insurance Co., C–3834 (Nov. 10, 1998) (consent order) (title insurance); Landamerica Financial Group, Inc, C–3808 (May 20, 1998) (consent order) (title operations).
(Footnote 23 return)
The figure includes transactions that were withdrawn before the Commission's investigation was completed. Under the GPRA methodology, consumer savings estimates are based on the volume of commerce in the markets adversely affected by a merger, the percentage increase in price that likely would have resulted from the merger, and the likely duration of the anticompetitive price increase. In the absence of case-specific evidence that indicates higher or lower figures, conservative default parameters are applied to the volume of commerce: a one percent price increase for two years.
(Footnote 24 return)
Staff of the FTC Bureau of Competition, A Study of the Commission's Divestiture Process (1999).
(Footnote 25 return)
Many companies indicate a willingness to settle a case before completing their document production. Other companies work with staff from the Commission or the Department of Justice to determine some subset of documents that will enable a ''quick look'' at certain issues, so that resources can be focused on the topics of greatest debate.
(Footnote 26 return)
''[The Guidelines] no doubt will make a net positive contribution as a statement of agency thinking in this complex area of law.'' Comments of Chamber of Commerce at 2.
(Footnote 27 return)
''[The Guidelines] are quite good overall.'' Hovenkamp Comment at 1.
(Footnote 28 return)
Comment of Thomas F. Purcell, Lindquist & Vennum, St. Paul, Minnesota, at 1.
(Footnote 29 return)
In addition, on the consumer protection side, we must maintain vigilance to protect consumers from fraudulent practices by the few unscrupulous providers of such services. Since the agency's first Internet case in 1994, the FTC, primarily through its Bureau of Consumer Protection, has brought over 100 Internet-related cases involving over 300 defendants. The Commission has obtained injunctions stopping illegal schemes, collected over $20 million in redress for victims, and obtained orders freezing another $65 million in cases that are still in litigation. Most of these cases have involved the migration to the Internet of traditional kinds of fraud, such as business opportunity schemes, credit repair scams, pyramid schemes, and false claims for health-related products, to name a few.
(Footnote 30 return)
Fair Allocation System, Inc., C–3832 (Oct. 30, 1998) (consent order).
(Footnote 31 return)
Toys ''R'' Us, Inc., Docket No. 9278 (1998), appeal docketed, No. 98–417 (7th Cir. Apr. 16, 1999).
(Footnote 32 return)
See Testimony of Willard K. Tom, Deputy Director, Bureau of Competition, before the House Committee on the Judiciary (Oct. 20, 1999); see also Slotting: Fair for Small Businesses and Consumers? Hearing before the Committee on Small Business, United States Senate (Sept. 14, 1999).
(Footnote 33 return)
FTC v. Mylan Laboratories, Inc, CV–98–3115 (D.D.C., filed Dec. 22, 1998; amended complaint filed Feb. 8, 1999). The drugs are lorazepam and clorazepate. They are used for treatment of anxiety and there are over 20 million prescriptions written for these drugs each year.
(Footnote 34 return)
Hoechst Marion Roussel, Inc., Docket No. 9293 (complaint, March 16, 2000).
(Footnote 35 return)
Under the Hatch-Waxman Act, the first company to file an Abbreviated New Drug Application (ANDA) with the FDA for a generic drug (in this case, Andrx) has an exclusive right to market its generic drug for 180 days. Under the alleged Hoechst-Andrx agreement, Andrx could not give up that exclusivity right. Thus, by allegedly agreeing not to market its drug, Andrx prevented the 180-day exclusivity period from beginning to run, so that other sellers of generic versions of Cardizem CD also could not enter the market.
(Footnote 36 return)
Abbott Laboratories, FTC File No. 981 0395 (proposed consent order, March 16, 2000); Geneva Pharmaceuticals, Inc., FTC File No. 981 0395 (proposed consent order, March 16, 2000).
(Footnote 37 return)
Congressional Budget Office, How Increased Competition from Generic Drugs Has Affected Prices and Returns in the Pharmaceutical Industry, Ch. III, pp. 1, 20 (July 1998).
(Footnote 38 return)
Amy Barrett, Crunch Time in Pill Land, Business Week 52 (Nov. 22, 1999).
(Footnote 39 return)
Summit Technology, Inc. and VISX, Inc., D. 9286 (Feb. 23, 1999) (consent order).
(Footnote 40 return)
CBS Market Watch, Visx gets black eye from price cuts (Feb. 23, 2000) (<http://cbs.marketwatch.com/archive>).
(Footnote 41 return)
FTC Staff Comments to the Food and Drug Administration, 180-Day Exclusivity Period for Generic Drugs (Nov. 4, 1999); FTC Staff Comments to the Food and Drug Administration, Citizen Petitions (March 2, 2000).
(Footnote 42 return)
FTC Bureau of Economics Staff Report, The Pharmaceutical Industry: A Discussion of Competitive and Antitrust Issues in an Environment of Change (March 1999).
(Footnote 43 return)
The President's proposed budget also includes additional resources for the FTC's consumer protection mission.
(Footnote 44 return)
The AAR is not speaking for Canadian National Railway Company, which is a member of the AAR.
(Footnote 45 return)
The FTC's discussion of what it terms the ''legislative history of section 13(b)'' makes no effort to place the enactment of that provision in historical context, presumably because the power grab attempted by the Commission here makes no sense against the backdrop of the agency's historical role in antitrust enforcement. Thus, the Commission relies only on isolated fragments of floor statements from 1973, and does not attempt to explain how its current position could possibly be consistent with the role that it was designed to play, and, indeed has played, for over 80 years. See FTC Mem. at 9–11.
(Footnote 46 return)
Woodrow Wilson, Address Before a Joint Session of Congress on Additional Legislation for the Control of Trusts and Monopolies (Jan. 20, 1914), H.R. Doc. No. 63–625, at 3 (1914).
(Footnote 47 return)
51 Cong. Rec. 8861 (1914) (remarks of Rep. Hinebaugh).
(Footnote 48 return)
See id. at 9910–11.
(Footnote 49 return)
See S. Rep. No. 63–597, at 3 (1914).
(Footnote 50 return)
Id. at 4. The familiar ''cease and desist'' language of the final version of the FTCA was substituted for ''restraining and prohibiting'' as a result of a substitute offered on the Senate floor and adopted without debate.
(Footnote 51 return)
51 Cong. Rec. 12,652 (1914) (remarks of Sen. Cummins).
(Footnote 52 return)
See, e.g., id. at 13,301 (remarks of Sen. Borah) (stating that a law prohibiting unfair competition can only be effective if commission is given sufficient enforcement power); id. at 13,141 (remarks of Sen. Clapp) (indicating concern for rights of victims and recommending passage of private right of action).
(Footnote 53 return)
See id. at 11,379–80 (remarks of Sen. Cummins) (opining that those who violate the act without moral turpitude should not be unfairly punished); id. at 13,119 (remarks of Sen. Williams) (expressing concern that business people performing established business practices not be punished retroactively for actions later found to be ''unfair''); id. at 13,121 (remarks of Sen. Reed) (noting unfairness of exposing business people to vague or incomplete laws).
(Footnote 54 return)
Id. at 13,149 (remarks of Sen. Newland).
(Footnote 55 return)
Wheeler-Lea Act of 1938, ch. 49, 52 Stat. 111 (codified as amended at 15 U.S.C. §45–57 (1988).
(Footnote 56 return)
See S. 356, 93d Cong. §210 (1973). The language of the permanent injunction provision in the 1973 bill was identical to the current §13(b). It read: ''Provided further, That in proper cases the Commission may seek, and after proper proof, the court may issue, a permanent injunction. . . .''
(Footnote 57 return)
See Report of the Senate Committee on Commerce, S. Rep. No. 93–151, at 30 (1973) (accompanying S. 356).
(Footnote 58 return)
Id.
(Footnote 59 return)
Id. at 31.
(Footnote 60 return)
The Report also noted that the permanent injunction proviso would ''allow the Commission to seek a permanent injunction when a court is reluctant to grant a temporary injunction because it cannot be assured of a[n] early hearing on the merits. Id. at 30–31.
(Footnote 61 return)
See Letter from Ronald M. Dietrich, General Counsel, FTC, to Sen. Jackson, reprinted at 119 Cong. Rec. 21,445 (1973) (emphasis added).
(Footnote 62 return)
Id.
(Footnote 63 return)
There was no discussion of this clause during debate on the Trans-Alaska Pipeline Act.
(Footnote 64 return)
51 Cong. Rec. 13,149 (1914) (remarks of Sen. Newland).
(Footnote 65 return)
See id.
(Footnote 66 return)
Section 13(b) states:
(Footnote 67 return)
See Report of the Senate Committee on Commerce, S. Rep. No. 93–151, at 30–31 (1973) (accompanying S. 356).
(Footnote 68 return)
Report of the Senate Committee on Commerce, S. Rep. No. 93–151, at 8–11 (1973) (accompanying S. 356) (emphasis added).
(Footnote 69 return)
The Commission also half-heartedly claims that this construction of §13(b) is entitled to Chevron deference. See FTC Mem. at 12, 15. That argument is clearly incorrect. Chevron applies only to review of administrative action, and there has been no such action in this case. The agency chose to bypass the usual administrative processes, and to bring this case directly to Court. The question here is the scope of the Court's jurisdiction to issue permanent injunctive relief, which is a question for the Court, not the agency. Accordingly, the FTC's reliance on the principle that an administrative agency may be entitled to deference on statutory interpretation regarding the scope of its own jurisdiction, see, e.g., Your Home Visiting Nurse Servs. Inc. v. Shalala, 119 S. Ct. 930, 934 (1999) (cited by the FTC Mem. at 12), is misplaced.
(Footnote 70 return)
The Commission correctly points out that one district court case, FTC v. Abbott Laboratories, 1992–2 Trade Cas. (CCH) at 68,833, has permitted the FTC to pursue a permanent injunction in an antitrust case. In that case, however, the court ignored the statutory prerequisites to jurisdiction in §13(b)(1) and §13(b)(2), see supra at 10–12, simply held that the Commission may seek a permanent injunction for violation of ''any provision of law enforced'' by the Commission. The court also failed to give any meaning to the statutory limitation of ''proper cases.'' For these reasons, the Chamber believes that Abbott Labs was incorrectly decided.
(Footnote 71 return)
51 Cong. Rec. 13,149 (1914) (remarks of Sen. Newland).
(Footnote 72 return)
Notably, however, §19 authorizes such relief only where the defendant has violated a published rule of the Commission, or where the Commission previously had issued a final cease and desist order relating to practices ''which a reasonable man would have known under the circumstances was dishonest or fraudulent.'' 15 U.S.C. §57b(2). Thus—unlike §13(b)—§19 has built-in safeguards to protect defendants from being unfairly subjected to monetary penalties in circumstances where they could not be expected to have known that their behavior was unlawful. Section 13(b) lacks such safeguards for the simple reason that it was not intended to authorize monetary relief under any circumstances.
(Footnote 73 return)
The Commission claims that because §19(e) provides that its remedies are ''in addition to, and not in lieu of, any other'' relief available, and that the section should not be construed to affect the authority of the Commission under other provisions of law, ''Congress emphatically disclaimed . . . that Section 19(e) implicitly restricts the Commission's authority under Section 13(b).'' FTC Mem. at 21. The point here, however, is not that §19(e) somehow limits the FTC's authority under §13(b), but rather that §19(e) demonstrates Congress's ability to expressly provide for monetary relief when it wants such relief to be available.
(Footnote 74 return)
See Part I, supra.
(Footnote 75 return)
Moreover, where Congress has specifically provided for a monetary remedy under §4 of the Clayton Act, see infra at 19, an additional, ''equitable'' monetary remedy under §13(b) cannot be justified as overcoming an inadequate remedy at law, and is thus inconsistent with general rules of equity jurisprudence.
(Footnote 76 return)
Notably, however, in parallel with the FTC's unprecedented claim for ''disgorgement'' under §13(b), the State plaintiffs in this case now make the original argument that §16 of the Clayton Act also authorizes ''disgorgement.'' Quite apart from the fact that neither statute has ever been interpreted to allow such relief, one cannot help but wonder how many times plaintiffs think that the same allegedly illegal profits could possibly be ''disgorged.''
(Footnote 77 return)
Of course, that concern applies with equal force in the circumstances of the present case.
(Footnote 78 return)
15 U.S.C. §53(b).
(Footnote 79 return)
Section 13(b) provides:
(Footnote 80 return)
See, e.g., Times-Picayune Publishing Co. v. United States, 345 U.S. 594, 609 (1953); FTC v. Cement Inst., 333 U.S. 683, 690, 693 (1948); Fashion Originators' Guild v. FTC, 312 U.S. 457, 464 (1941). See also Averitt, The Meaning of ''Unfair Methods of Competition'' in Section 5 of the Federal Trade Commission Act, 21 B.C.L. Rev. 227, 238–42 (1980).
(Footnote 81 return)
1992–2 Trade Cas. (CCH) 69,996 (D.D.C. 1992).
(Footnote 82 return)
Id. at 68,833.
(Footnote 83 return)
Id.
(Footnote 84 return)
Id.
(Footnote 85 return)
Id. at 68,834.
(Footnote 86 return)
62 F. Supp. 2d 25 (D.D.C. 1999).
(Footnote 87 return)
The court said:
(Footnote 88 return)
See FTC v. Febre, 128 F.3d 530, 534 (7th Cir.1997); FTC v. Gem Merchandising, 87 F.3d 466, 470 (11th Cir.1996); FTC v. Pantron, 33 F.3d 1088, 1102 (9th Cir.1994); FTC v. Security Rare Coin, 931 F.2d 1312 (8th Cir.1991); FTC v. Southwest Sunsites, Inc., 665 F.2d 711 (5th Cir.1982).
(Footnote 89 return)
Andrew J. Strenio, Jr., Why Thirteen Should Be a Lucky Number for Victims of Price-Fixing, 57 Antitrust L. J. 149, 154 (1988).
(Footnote 90 return)
Id. at 155.
(Footnote 91 return)
In addition to Abbott and Mylan, the Commission has invoked its equitable authority in four competition cases that were settled by consent order. FTC v. College of Physicians-Surgeons of Puerto Rico, Civ. No. 97–2466 HL (D.P.R. Oct. 2, 1997) ($300,000 restitution to Puerto Rico); FTC v. Mead Johnson & Co., Civ. No. 92–1266 (D.D.C. June 11, 1992) (restitution in kind to USDA); FTC v. American Home Products Corp., Civ. No. 92–1367 (D.D.C. June 11, 1992) (same); FTC v. Joseph Dixon Crucible Co., Civ. No. C80–700 (N.D. Ohio 1983) ($525,000 in consumer redress, plus $75,000 civil penalty).
(Footnote 92 return)
A hybrid restraint involves a trade restraint, such as a boycott or restriction standard, which is governmentally encouraged and privately implemented. Whether such a restraint would be admissible under US or foreign competition laws could depend on the application of such doctrines as state action and sovereign compulsion.
(Footnote 93 return)
According to the Department, informal referrals have been made in other instances such as that involving assertions of noncompetitive practices by A.C. Nielsen.
(Footnote 94 return)
Douglass C. North, Structure and Change in Economic History, W.W. Norton (paper ed.) (1981), pp. 158–65.
(Footnote 95 return)
Margaret Blair & Thomas A. Kochan, ''Introduction,'' in The New Relationship: Human Capital in the American Corporation (Blair & Kochan, eds.), Brookings Institution (2000), pp. 1–2.
(Footnote 96 return)
The STEP Board is considering next steps for research and analysis. For more information on its long-term plans and on the publication of the conference proceedings, contact STEP at <www4.nas.edu/pd/step.nsf>.
(Footnote 97 return)
See Jesse Walker, ''Copyright Catfight: How intellectual property laws stifle popular culture,'' Reason (March 2000) <www.reason.com/0003/fe.jw.copy.html>.
(Footnote 98 return)
Lotus Development Corp. v. Borland International, Inc., 49 3d 807 (1st Cir. 1995), aff'd per curiam by an equally divided Court, 116 S. Ct. 804 (1996).
(Footnote 99 return)
Diamond v. Chakrabarty, 447 U.S. 303 (1980); State Street Bank & Trust Co. v. Signature Financial Group, 149 F.3d 1368 (Fed. Cir. 1998).
(Footnote 100 return)
James V. DeLong, Property Matters: How Property Rights Are Under Assault—And Why You Should Care, Free Press (1997), pp. 70–72.
(Footnote 101 return)
Richards v. Washington Terminal Company, 233 U.S. 546 (1914).
(Footnote 102 return)
James V. DeLong, The Battle Over Property Rights Hits the Corporate Boardroom, National Legal Center for the Public Interest (July 1999), p. 1.
(Footnote 103 return)
Robert Bork, The Antitrust Paradox (1979).
(Footnote 104 return)
See, e.g., James V. DeLong, ''The Role, If Any, of Economic Analysis in Antitrust Litigation,'' 12 Southwestern University Law Review 358 (1981).
(Footnote 105 return)
For further discussion, see James V. DeLong, ''The New Trustbusters,'' Reason (March 1999), p. 36 <www.reason.com/9903/fe.jd.the.html>.
(Footnote 106 return)
Stanley J. Liebowitz & Stephen E. Margolis, Winners, Losers and Microsoft: Competition and Antitrust in High Technology, Independent Institute (1999).
(Footnote 107 return)
Timothy J. Muris, ''Is Heightened Scrutiny Appropriate for Software Markets?'' in Competition, Innovation and the Microsoft Monopoly: Antitrust in the Digital Marketplace (Jeffrey A. Eisenach & Thomas M. Lenard, eds.), Progress and Freedom Foundation (1999), pp. 83–92.
(Footnote 108 return)
Lawrence J. White, U.S. Public Policy Toward Network Industries, AEI-Brookings Joint Center for Regulatory Studies (1999), p. 2.
(Footnote 109 return)
See Bork, Antitrust Paradox.
(Footnote 110 return)
U.S. Department of Justice and Federal Trade Commission, Antitrust Guidelines on Licensing Intellectual Property (April 6, 1995), Sec. 2.2 <www.usdoj.gov/atr/public/guidelines/ ipguide.htm>.
(Footnote 111 return)
White, U.S. Public Policy Toward Network Industries, pp. 27–28.
(Footnote 112 return)
See generally, Jonathan B. Baker, Identifying Horizontal Price Fixing in the Electronic Marketplace, 65 Antitrust L.J. 41 (1996).
(Footnote 113 return)
Bill Gates, The Road Ahead 157 (1995).
(Footnote 114 return)
My testimony emphasizes the possibility that coordination in output markets could raise prices to buyers above competitive levels. It is also possible that coordination in input markets could depress the prices paid to suppliers below competitive levels.
(Footnote 115 return)
Cf. United States v. Airline Tariff Publishing Co., 1994–2 Trade Cas. (CCH) 70,687 (D.D.C. 1994) (consent decree settling government charges that the major airlines had fixed prices through the exchange of price change proposals over a computer system run by an airline joint venture).
(Footnote 116 return)
See generally, Thomas Krattenmaker & Steven Salop, Anticompetitive Exclusion: Raising Rivals' Costs to Achieve Power over Price, 96 Yale L.J. 209 (1986); Jonathan B. Baker, Vertical Restraints with Horizontal Consequences: Competitive Effects of ''Most-Favored-Customer'' Clauses, 64 Antitrust L.J. 517 (1996).
(Footnote 117 return)
E.g. JTC Petroleum Co. v. Piasa Motor Fuels, Inc., 190 F.3d 775 (7th Cir. 1999) (Posner, C.J., joined by Easterbrook, J.). (Judge Rovner also served on the appellate panel and joined Chief Judge Posner's opinion.)
(Footnote 118 return)
See generally, Jonathan B. Baker, Promoting Innovation Competition Through the Aspen/Kodak Rule, 7 Geo. Mason L. Rev. 495 (1999); Jonathan B. Baker, Fringe Firms and Incentives to Innovate, 63 Antitrust L.J. 621 (1995).
(Footnote 119 return)
Network externalities arise when each customer's valuation of a product or service increases with the number of other customers who purchase it. For example, telephone service is more valuable to everyone when most people in town have such service than it would be if few people in town were connected to the network. This effect can also arise without communication, in markets where goods and services have complements (like ''hardware'' and ''software''); under such circumstances, the network externalities have been termed ''virtual.'' Here, each customer's purchase of a product or service leads to increased purchases of the complement; with economies of scale in the production of the complement, the valuation of the first product to the next customer rises as the first product's sales increase. See generally, Carl Shapiro & Hal R. Varian, Information Rules 13–14, 183–84 (1999); Mark A. Lemley & David McGowan, Legal Implications of Network Effects, 86 Cal. L. Rev. 479 (1998). Network externalities tend to generat a winner-take-all competition in which the market ''tips'' to favor one firm. Shapiro & Varian, supra, at 176.
(Footnote 120 return)
See, e.g., In re Ciba-Geigy Ltd., 62 Fed. Reg. 409 (Jan. 3, 1997) (analysis to aid public comment).
(Footnote 121 return)
See Andrew I. Gavil, The End of Antitrust Warfare?: An Analysis of Some Procedural Aspects of the Microsoft Trial, 13 Antitrust 7 (Summer 1999).
(Footnote 122 return)
E.g. Data General Corp. v. Grumman Systems Support Corp., 36 F.3d 1147, 1187 (1st Cir. 1994).
(Footnote 123 return)
See generally, Jonathan B. Baker, Product Differentiation Through Space and Time: Some Antitrust Policy Issues, 42Antitrust Bull. 177, 193–94 (1997).
(Footnote 124 return)
E.g. In re Intel Corp., FTC Docket. No. 9288 (consent settlement accepted Aug.6, 1999).