The Antitrust Division of the U.S. Department of Justice yesterday issued a report entitled "Competition and Monopoly: Single-Firm Conduct under Section 2 of the Sherman Act" examining when certain types of conduct may constitute illegal monopolization under U.S. antitrust law.1 The report follows a series of hearings held jointly by the Department and the Federal Trade Commission ("FTC") between June 2006 and May 2007 to explore in depth the antitrust treatment of single-firm conduct.
The report describes how the Department would analyze various types of behavior under Section 2 of the Sherman Act. Notable points include:
- Monopoly Power. The Department
reconfirmed its view that, for Section 2 purposes,
"monopoly power" must be market power that is both
considerable and durable: that is, the putative monopolist
must be able to "persistently charge prices
well above competitive levels." The Department
will presume monopoly power if a firm has maintained a market
share above 67% share for a "significant period"
with no change in sight.
- Exclusionary Conduct Standard. In
considering the applicable standard for determining whether a
monopolist has engaged in illegal exclusionary conduct, the
Department rejects the use of a "Profit Sacrifice"
test, which asks whether conduct is less profitable in the
short run than other less-exclusionary conduct the firm could
have undertaken. The report argues that use of such a test
would raise concerns of enforcement error and
administrability. Instead, the Department recommends the use
of what it calls a "disproportionality" test -- for
Section 2 liability, the conduct must produce anticompetitive
effects that are "substantially disproportionate"
to any associated pro-competitive effects.
- Unilateral Refusal to Deal. The
Department rejects imposition of liability for a
monopolist's unilateral, unconditional refusal to
deal with a competitor, arguing that the long term adverse
incentives, and lack of administrable relief by courts,
outweigh any benefits of short term price competition created
by compelling a monopolist to deal with competitors.
- Predatory Pricing. The Department
reiterates its agreement with the Supreme Court's
test in Brooke Group v. Brown & Williamson Tobacco
Corp.2 in order for Section 2 liability to
attach, the putative monopolist must be selling its products
at prices below "an appropriate measure" of its
costs, and have a dangerous probability of recouping its
short term losses once competitors are excluded. The report
argues that "average avoidable cost" is the most
appropriate cost measure for most cases, and generally
disfavors "average variable cost" (used by most
circuits), except when incremental output cannot be
identified. The report also counsels that focusing first on
the "recoupment" prong can avoid the more difficult
cost issue in some cases, and that out-of-market recoupment
might be relevant.
- Tying, Bundling and Loyalty Discounts.
The report rejects the current qualified per se rule
against tying, noting that certain types of tying, including
"technological tying," are likely to do more good
for consumers than harm. The report states that bundling
should be treated as predatory pricing, imputing the full
bundle discount to the competitive product(s) in the bundle.
The Department said it is also inclined to treat loyalty
discounts as predatory pricing, but cautions that the
practice might be anticompetitive even if the
customer's purchases exceed the seller's
costs. The Department therefore reserves final judgment
pending further study.
- Exclusive Dealing. The report announces
a "safe harbor" for exclusive dealing arrangements
that foreclose less than 30% of customers to a rival. The
report also downplayed the importance of the length of
contract term in an exclusive dealing arrangement.
FTC Criticism
Importantly, the report does not reflect the position of the FTC, which shares Section 2 civil enforcement authority with the Department of Justice. Indeed, FTC Commissioners Harbour, Leibowitz and Rosch issued a statement sharply criticizing the report as "a blueprint for radically weakened enforcement of Section 2 of the Sherman Act." According to these Commissioners, "[a]t almost every turn, the Department would place a thumb on the scales in favor of firms with monopoly or near-monopoly power and against other equally significant stakeholders." After criticizing the reasoning underlying the Department's position, the three Commissioners state that the "Department's premises lead it to adopt law enforcement standards that would make it nearly impossible to prosecute a case under Section 2 of the Sherman Act." Thus, the Commissioners "strongly distance [themselves] from the enforcement positions stated in the Report." For instance, the three Commissioners were critical of the Department's "disproportionality" standard, arguing that the proper test is simply whether anticompetitive harm "outweighs" pro-competitive benefits. The three Commissioners also criticized the Department's "average avoidable cost" standard for predatory pricing as creating an inappropriate "safe harbor" for certain high fixed cost industries.
FTC Chairman Kovacic, in a separate statement, expressed regret that the agencies could not agree on a joint report, and suggested that the report "would have benefited from a fuller examination of the history of modern doctrine and policy,...including identifying the formative influences in the evolution of the United States' system and assessing how those influences bear upon the future development of law and policy towards dominant firms."3
Although the FTC has not released a companion report detailing its views on these issues, the significant difference of opinion between the Department of Justice and at least three of the current FTC Commissioners suggests more aggressive enforcement of Section 2 by the FTC than appears likely by the Department of Justice.
Footnotes:
1. A full copy of the report can be found on the Department of Justice's website at: http://www.usdoj.gov/atr/public/reports/236681.pdf .
2. 509 U.S. 209 (1993).
3. The FTC statements can be found on the FTC website at: http://www.ftc.gov/opa/2008/09/section2.shtm .
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
© Morrison & Foerster LLP. All rights reserved
