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High Noon: DOJ and FTC Shootout Over Report on Single Firm Conduct

Sep.08.2008

In the waning days of the Bush Administration, as many are focused on what the future may hold for antitrust enforcement, the normally cordial relations between the FTC and the Justice Department erupted into a full fledged fight over the future of Section 2 enforcement. The FTC and DOJ today released statements revealing not only significant differences between the way the two agencies currently view unilateral, potentially monopolistic conduct, but quite possibly a glimpse of what is to come in the next administration regardless of who wins the presidency.

Today's fireworks have their roots in the joint DOJ/FTC hearings held in 2006 and 2007, in which the agencies heard from eminent professors, practitioners, and businesspeople as a basis to articulate a future course for enforcement of cases involving single firm conduct. Ultimately, the two agencies could not agree on that course, leaving considerable uncertainty for firms trying to comply with the Sherman Act.

The DOJ's report, "Competition and Monopoly: Single-Firm Conduct Under Section Two of the Sherman Act," reflects a marked concern for the risk of over-enforcement. While the report cautions against the use of any single test to gauge the legality of many different kinds of conduct under the Sherman Act, it sets out standards and "safe harbors" it advocates as likely "to create certainty for businesses and encourage procompetitive activity." Many of these standards, if implemented in practice, would underpin a less-stringent approach to single-firm conduct enforcement.

Among the standards promulgated, the DOJ proposes:

  • A presumption of market power "[w]hen a firm has maintained a market share in excess of two-thirds for a significant period and its market position would not likely be eroded in the near future;"
  • Evaluating predatory pricing by a standard that seeks to "identify loss-creating sales that could force an equally efficient rival out of the market," using average avoidable cost as the appropriate cost measure;
  • Abandoning the "per se" approach to tying, which the DOJ deems "inconsistent with the U.S. Supreme Court's modern antitrust decisions;"
  • Avoiding efforts to compel access to a rival in cases of unilateral, unconditional refusals to deal, because to do so "is likely to harm long-term competition and courts are ill suited to be market regulators;"
  • Treating as legal "[e]xclusive-dealing arrangements foreclosing less than 30 percent of existing customers or effective distribution."

The report further recommends that Section 2 remedies should be designed with the goal of "re-establish[ing] the opportunity for competition without unnecessarily chilling competitive practices or undermining incentives to invest and innovate."

Within hours, the FTC fired back. In a statement, Commissioners Harbour, Leibowitz and Rosch expressed their strong disagreement with the DOJ's pro-business approach, complaining that "the Department's Report is chiefly concerned with firms that enjoy monopoly power or near-monopoly power, and prescribes a legal regime that places these firms' interests ahead of the interests of consumers."

According to the three Commissioners, the DOJ "overstates the level of legal, economic, and academic consensus regarding Section 2." In so doing, they write, the DOJ places too much emphasis on the incentive effects of monopoly profits, obsesses about over-enforcement, and goes too far in laying out bright-line rules to reduce uncertainty. As a result, according to the Commissioners, the DOJ has "adopt[ed] law enforcement standards that would make it nearly impossible to prosecute a case under Section 2 of the Sherman Act."

The Commissioners find most objectionable what they characterize as the DOJ's "baseline" Section 2 test: do the questioned conduct's anticompetitive effects "disproportionately" outweigh its pro-competitive effects? According to the Commissioners, such a standard is a distortion of the rule of reason that would make an already "significant hurdle to liability" an impossible one. Similarly concluding that the DOJ's specific approaches to predatory pricing, loyalty discounts, bundled discounts, tying, unilateral refusals to deal, and exclusive dealing are too lax, the Commissioners promise that "[t]his Commission stands ready to fill any Sherman Act enforcement void that might be created if the Department actually implements the policy decisions expressed in its Report."

FTC Chairman Kovacic did not join the statement by Commissioners Harbour, Leibowitz and Rosch. Instead, he issued a separate statement analyzing the history of antitrust enforcement - and how it has, influenced by the Chicago and Harvard Schools, "grown more tolerant of dominant firm behavior since the mid-1970s." Given this longstanding trend, Chairman Kovacic writes, concern "that U.S. antitrust doctrine and policy today expose dominant firms to significant, systematic risks attributable to over-inclusive liability rules" may be misplaced.

When a new administration turns to put its stamp on antitrust enforcement, it will find a lively discussion on the issues already ongoing.

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