Brantley and its Implications for the Proposed Consumer Choice Antitrust Standard

Josh Wright —  16 June 2011

Thom‘s excellent post highlights the Ninth Circuit’s recent decision in Brantley and describes its implications both in terms of rejecting Professor Elhauge’s claim that metering ties and mere surplus extraction amount to competitive harm for the purposes of antitrust and also for the future of the quasi-per se rule of tying.   Thom, in my view correctly, observes:

Given this procedural posture, the Ninth Circuit starkly confronted whether, as Elhauge maintains, the price discrimination/surplus extraction inherent in Stigler-type bundling is an “anticompetitive” effect that warrants liability.  In affirming the district court and holding that plaintiffs’ claims of higher prices were not enough to establish anticompetitive harm, it effectively held, as I and a number of others have urged, that there should be no tying liability absent substantial tied market foreclosure.

I want to highlight another very interesting aspect of the decision, i.e. Brantley appears to reject the so-called “Consumer Choice” standard that has been gaining significant traction in the antitrust literature both in the U.S. and Europe.  Averitt & Lande describe the consumer choice antitrust standard as follows:

It suggests that the role of antitrust should be broadly conceived to protect all the types of options that are significantly important to consumers. An antitrust violation can, therefore, be understood as an activity that unreasonably restricts the totality of price and nonprice choices that would otherwise have been available.

The central idea is that the efficiency perspective is hampered by “only” looking at things like prices and output (including quality-adjusted prices), and occasionally innovation.  The fundamental observation of the “consumer choice” framework is that a reduction of “choice” (however defined, but lets come back to that), even if coupled with a reduction in price or increase in output, is a cognizable antitrust injury.

This approach is getting some traction.  For example, Commissioner Rosch has argued both that the consumer choice standard is desirable and that, after the Supreme Court’s decision in Leegin, is the law (“injury to consumer choice (as well as an increase in price) is now recognized as injury to consumer welfare in the United States.”).

I’ve criticized the consumer choice standard, largely because it was likely to lead to systematic error in predicting the impact on consumer welfare.  Indeed, in cases involving tradeoffs like reduced product variety at lower prices, the standard would systematically condemn conduct that is likely to improve consumer outcomes (e.g. competition for exclusives with retail shelf space).    The bottom line is that I do not think there is any basis in either economic theory or empirical evidence to support the view that the consumer choice standard would be a better predictor of consumer outcomes than current tools allow.   Thus, its application is likely to make consumers worse off.

So why does Brantley appear to reject the consumer choice standard?  If I may borrow from Thom’s description of the case:

Brantley, et al. v. NBC Universal, Inc., et al., involved a challenge by cable television subscribers to T.V. programmers’ practice of selling cable channels only in packages.  The plaintiffs, who preferred to purchase individual channels a la carte, maintained that the programmers’ policy violated Sherman Act Section 1.  As the Ninth Circuit correctly recognized, the arrangement really amounted to tying, for the programmers would sell their “must have” channels only if subscribers would also take other, less desirable channels.  (Indeed, the practice is closely analogous to the block booking at issue in Loew’s, where the distributor required that licensees of popular films also license flops.)

The district court dismissed plaintiffs’ first complaint without prejudice on the ground that plaintiffs failed to allege that their injuries (purportedly higher prices) were caused by an injury to competition.  Plaintiffs then amended their complaint to include an allegation “that Programmers’ practice of selling bundled cable channels foreclosed independent programmers from entering and competing in the upstream market for programming channels.”  In other words, plaintiffs alleged, the tying at issue occasioned substantial tied market foreclosure.

After conducting some discovery, plaintiffs decided to abandon that theory of harm.  They prepared a new complaint that omitted all market foreclosure allegations and asked the court to rule “that plaintiffs did not have to allege that potential competitors were foreclosed from the market in order to defeat a motion to dismiss.”  Defendants again sought to dismiss the complaint.  The district court, reasoning that the plaintiffs had failed to allege any cognizable injury to competition, granted defendants’ motion to dismiss, and plaintiffs appealed.

The crux of the complaint, of course, is a reduction in consumer choice.  The plaintiffs argue that a la carte programming would prevail in the absence of bundling and thus increase consumer choice.  The Ninth Circuit describes the plaintiffs’ claim as follows: “the challenged bundling practice limits Distributors’ method of doing business and reduces consumer choice, while raising prices.”  In the absence of allegations of market foreclosure or exclusion resulting in harm to competition, the complaint isolates the claim that a stand-alone reduction of consumer choice is actionable antitrust injury.  The Ninth Circuit ties the complaint to consumer choice directly:

They argue that the sale of multi-channel packages harms consumers by (1) limiting the manner in which Distributors are unable to offer a la carte programming, (2) reducing consumer choice, and (3) increasing prices.  These allegations do not state a Section 1 claim.

The Court is clear to note that “limitations on the manner in which Distributors compete with one another, without more, constitute a cognizable injury to competition,” citing Chicago Board of Trade.  Contrary to Commissioner Rosch’s claims, the Ninth Circuit finds that Leegin explicitly rejects the consumer choice standard, observing that “in Leegin, the Supreme Court made clear that even in the face of clear limitations on distributors’ ability to compete, proof of competitive harm is required to state a cognizable antitrust claim,” and also highlights the fact that “antitrust law recognizes the ability of businesses to choose the manner in which they do business absent an injury.”  Further, the Court points out the mere fact that a common business practice is adopted by many firms in an industry — thus reducing the diversity of business arrangements and consumer choice — is likely a signal that the practice is efficient, not that it reduces consumer welfare.

In addition the Brantley’s implications for tying (and with respect to Professor Elhauge’s claims about non-foreclosure related consumer harm), it is a rather straightforward rejection of the consumer choice standard.   I think this is all to the good for the reasons described above, and in Thom’s post.  A movement to a vague “consumer choice” standard threatens to take the focus off of consumer welfare — and in some cases, is in direct conflict with it.  The consumer choice movement runs counter to the modern trend (e.g. in the Horizontal Merger Guidelines) to directly measure the impact of business practices on consumer welfare instead of indirect proxies like market structure or “choice.”

10 responses to Brantley and its Implications for the Proposed Consumer Choice Antitrust Standard

  1. 

    Josh, I offended with “partisan,” and I apologize. I didn’t mean to offend. I think partisanshipness is unavoidable on this stuff. Except for a law school student in an antitrust class because it fills a hole in a schedule, no one thinking about this stuff is ambivalent. I’m a partisan. I advocate for more intervention.

    We do agree that the Brantley legal space isn’t clear–yet. I agree, sadly, that you’re probably correct about where it’s headed.

    Using contracting (or more accurately, contracted) section 2 liability rules to argue for limiting section 1 liability is smart. It’s likely to work. I personally think they are separate concepts. Courts used to say they were. But bringing all of section 1 and 2 down to a rule of per se legality does seem possible in the current climate. I’m told that there are ancient artifacts of actual antitrust and consumer protection statute violations in the Fifth Circuit where my practice is, but I’m personally skeptical of those reports. Certainly, we quickly stamp out the ocassional jury verdicts now when they errantly happen.

    Yes, Scalia did say in Trinko that monopoly pricing is what’s best for America. That doesn’t make me feel any better. He didn’t need to say that. It wasn’t the issue in Trinko. Trinko wasn’t an injury case. It was a unilateral duty to deal case. More importantly to me philosphically about that, though, is my difference with him and you over the significance of and net ledger on that “static welfare loss.” You think consumers are better off for paying those supra-competitive prices. If we just pay those higher prices today and tomorrow and maybe even for a little while after that we’ll get something good and of even higher cumulative net value back later down the road. I know there are elegant models and formulas that show that is so. Still, I don’t think so. But I’ll write when I get word that it’s arrived.

    I’ve enjoyed the discussion. You’re kind and generous to have taken your time and shared your thoughts with me. Also to have offered me the last word. I offer it back if you want it. Royal

  2. 

    RL: I appreciate the additional further thoughtful comment.

    Let me start with a point upon which I think we agree. While I believe that the Brantley decision is correctly decided — I also agree that this is a space in the law which is not incredibly clear — thus its blogworthiness! Elhauge makes a serious attempt at the claim that the law supports his position. I happen to disagree. I do believe the existing law provides greater support for my position. I believe a movement toward a consumer choice standard over a strict consumer welfare standard would be bad for consumers. And I believe Brantley is a step in the right direction. But we agree that this is an area that is not so clear in all circumstances, even if I believe it is pretty clearly articulated in cases like Nynex, Rambus, etc. This is especially clear in the Section 2 context. But Independent Ink, a unanimous SCOTUS decision involving a metering tie, also causes significant problems for Elhauge’s claim that existing law condemns these arrangements as anti-competitive. The Sec 1/ Sec 2 distinction doesn’t quite get you there.

    I continue to strongly object to your use of the word partisan here to dismiss the evidence by referencing this camp or that camp or my views. Its inappropriate, inaccurate, and misleading. The move from the fact that you find my views predictable to a rejection of the evidence produced by the economic profession as a whole over a period of decades doesn’t follow. Even a cursory look at the literature reveals that it is not accurate as a factual matter to claim that the theory discussed above belongs to one set of like-minded people. Of course even if it where the evidence would deserve to be evaluated on the merits. But as a matter of fact, the empirical evidence I cited to above does not derive from a bunch of free-market folks and TOTM bloggers (not anything wrong with that if it did!). Yet you’ve ignored that point. The body of theory on RPM, on tying, on vertical restraints has come from all sides. Consider the literature survey from Dan O’Brien cited above — an enforcement agency economist who has done substantial work on modeling theories of competitive harm (among other things) — concluding that the overwhelming bulk of theory and evidence supports the conclusion that vertical restraints are generally pro-competitive. Same with the Lafontaine & Slade study. The fact that I have a view point does not mean that I cannot read and report and form views based upon the existing literature.

    You might be saying that I am likely to have a biased interpretation of that evidence. But this is why I provided the cites. If the theory and evidence the economic profession generates doesn’t convince you, that is fine. But then your claim is not about the partisanship at all. Its that you don’t think the consumer welfare standard is the right standard because it doesn’t include something important. That’s fine too. But again, it is neither fair nor accurate to dismiss the vast literature on these issues as a function of mere partisan preference by like-minded folks simply because you disagree with it or find the consumer welfare standard lacking. Better to just say that, I would think.

    And finally, and a bit of an aside, the logic of Scalia’s Trinko language, and in the allowance for lawful monopolists to charge the monopoly price, is right there in the quoted language. It is that American antitrust law has made the policy judgment that the incentive to innovate and long-term economic growth is best served by a rule that encourages innovation and dynamic competition even if it comes at the cost of static welfare losses in the form of monopoly prices from time to time. Logically, the rule defines those sorts of static welfare losses as non-actionable under Section 2. Mere pricing isn’t exclusionary conduct precisely *because* the court believes consumer welfare is best served by such a rule, as Scalia notes.

    I will be happy to let you have the last word.

  3. 

    RL: Thanks for the comment. I’m confused by the comment about partisan economic theory. In fact, I do not know what you mean. But lets talk about the law first. if you don’t like the Trinko bit — by which I was only referring to the point that the Supreme Court notes that lawful conduct that allows for the charging of a monopoly price — without more — is not an antitrust violation. I do not think it controversial that, e.g., Section 2 states that charging the monopoly price is not a violation. In Trinko, Scalia observes:

    “The mere possession of monopoly power, and the concomitant charging of monopoly prices, is not only not unlawful; it is an important element of the free-market system. The opportunity to charge monopoly prices—at least for a short period is what attracts business acumen in the first place; it induces risk taking that produces innovation and economic
    growth.”

    Or perhaps the Court’s decision in NYNEX, in which it rejected the argument that “consumer injury [that] naturally flowed not so much from a less competitive market for removal services, as from the exercise of market power that is lawfully in the hands of a monopolist, namely, New York Telephone, combined with a deception worked upon the regulatory agency that prevented the agency from controlling New York Telephone’s exercise of its monopoly power” constituted an antitrust injury. Note that that the allegedly exclusionary conduct certainly resulted in an increase in prices. Yet it is not a Section 2 violation. See also the D.C. Circuit in Rambus on these grounds, or my article here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1349969.

    I do not think it controversial as a matter of legal doctrine that a price increase — WITHOUT MORE — does not constitute antitrust injury.

    On to the economics. Here again, I’m not sure what’s partisan. The point about RPM is really basic stuff. It is well established and I do not think controversial as a matter of economics that both collusive and demand-increasing, pro-competitive theories of RPM predict higher prices, but only the former predicts lower output. Indeed, it doesn’t even make sense to talk about “partisan theory” here since it was a comparison of several different potential explanations of RPM. The output point is a test to distinguish between theories that generate different testable implications. Relying on the facts to determine which theory explains the conduct at the case in issue seems, well, not partisan at all with all due respect.

    Let me take that point a bit further. The notion that, e.g. RPM, is generally pro-competitive is NOT a matter of partisan economics. Lets go to the data. Consider recent comprehensive literature surveys from folks very well respected IO economists, including some who have spent significant time at the enforcement agencies, conclude that the best available empirical evidence is that most forms of single firm conduct are predominantly pro-competitive in practice (See great slides here from Lafontaine & Slade, Dan O’Brien or the paper from Froeb, et al.

    Last point — I think calling this a simple battle of competing economic theories obfuscates a really important economic point. The issue Thom raises (and I agree with) with respect to Elhauge’s claim is NOT merely that he’s made some claim that business arrangement X creates consumer welfare losses but everybody else is wrong to think that it does not. The issue is that the theory and evidence suggest that conduct that his rule would condemn, in my view, has been shown in overwhelming fashion to be pro-competitive.

    • 

      The links to the slides above did not come through — but they are all in this post:

      http://truthonthemarket.com/2009/02/18/whats-the-empirical-evidence-on-rpm/

      • 

        Josh, by partisan theory I mean of a theory of a camp of like-minded people of easily identifiable and predictable views. I have never lost a bet on how a conclusion in a post on totm on a theory of antitrust liability (or liability in any other area of law that provides for liability) will turn out. Nothing wrong with that. But you are of a camp that advocates for less intervention in markets and restricting theories of liability.

        Back to Brantley. Observing that mere monopoly pricing does not support section 2 liability does not convince me of the correctness or wisdom of the result in Brantley, a section 1 case.

        Nor is it an answer, in my opinion, to the precise issue we started on–whether or not it is correct at the pleading stage to say there cannot be harm to consumer welfare when there is an allegation of two or more parties engaged in a practice that increases price to consumers. Let’s not go all the way to “no violation” yet. Let’s just focus on the precise issue of whether, in a tying or bundling case, there is well settled legal support for what the 9th said–that increased price and restricted choice are not enough for competitive injury at the pleading stage in a section one case. I don’t think that’s nearly as well settled legally as you do. And I don’t think cases saying no section 2 violation for mere supra-competitive pricing are convincing support here. Now, as Thom and I discussed in an earlier post, whether increased price and reduced choice are enough for competitive injury in a section 1 case is an interesting question. And perhaps a “no” answer will become well settled law. Perhaps Brantley will go up on that issue and the Supreme Court will say that is the law. I just don’t think that is so clearly the law today.

        Back to the section 2 cases saying no section 2 violation for mere supra-competitive pricing for a moment . Isn’t the logic for that rule that section 2 requires some conduct to acquire or maintain the monopoly and mere pricing isn’t that conduct? Which of those cases say(s) the conclusion of no liability results from a lack of injury or harm to consumers? Maybe I’m wrong, but I don’t think those cases are decided on no injury grounds.

        I took your starting post to claim that Brantley was easily decided and clearly what the law already is. As I said, I don’t think the law is that clear today. I think your claim is an indication of the partisanship. I think you’re really advocating for what you think the law should be, not what it actually is. And again, there is nothing wrong with advocating your views. I enjoy that. I’m obviously advocating mine, and I’m obviously advocating in part for a more expansive role for antitrust law here. I’m also advocating for letting juries decide more cases. There probably aren’t many readers here who are new to this field or who don’t already have a leaning on this one way or the other. But if there are any, in fairness, I think it’s helpful for them to consider that there actually is debate on the economic theories and policy and that what Brantley says is not actually well settled law yet.

        On your last point–that you and and others of your camp believe there are good arguments and strong evidence that Elhauge’s position is wrong because the practice actually is good for consumers. OK, but that doesn’t mean your camp is right and Elhauge (and others who think he’s on to something) are wrong. It means there is disagreement and a debate. I don’t think the debate is over. I don’t think the economics are that settled. I don’t think the law is settled enough to decide cases like Brantley at the pleading stage. And I really do think it is helpful to ask consumers what they think about the practice. What law, econ, and/or law and econ profs think is best for consumers isn’t always what consumers think is best for consumers. Royal

  4. 

    What about the allegation of increased price? You acknowledged that allegation, but then you glossed right over it. Isn’t an allegation of increased price the same as an allegation of restricted output? Wouldn’t increased price and resticted output count as objective reduction of consumer welfare? How do you know that this is just about reduced choice when there is also an allegation of increased price? How can you say at the pleading stage that the allegation of increased price is not an allegation of reduced consumer welfare?

    • 

      RL: No, an allegation of an increased price is not the same as an allegation of restricted output. Consider, e.g., an allegation that some vertical restraint increased prices (say, RPM). It is well known that both the anticompetitive and pro-competitive theories of RPM predict an increase in price but only the former involve a reduction in consumer welfare (and output). So, no, they are not the same thing. Further, US antitrust law is very clear in many contexts that the mere allegation of higher prices (see, e.g. Trinko, Nynex) is not sufficient to create antitrust injury. If the complaint included allegations that there was conduct that foreclosed rivals such that it would deprive them of minimum efficient scale, thus resulting in an increase in price and reduction in market output — well, that would do it. But the point is that they could not and did not.

      • 

        Josh, respectfully, I think you’re mixing partisan economic theory with legal doctrine. Trinko holds that a regulated monopolist has no duty to deal with rivals. Trinko declines to extend the Aspen Skiing duty to cooperate with or sell to rivals. Trinko talks about regulators being there to protect consumers from harm in the case of a regulated monopolist. But I don’t see the holding (or passage) in Trinko that says increased price is not consumer harm or antitrust injury. Really, the only reference I see in Trinko to a section 1 case like Brantley is the passage on how we should be more suspicious of arrangments involving two or more firms–as with the arrangment in Brantley.

        Certainly some economic theory–theory with which, in this instance, you obviously agree–argues that sometimes increased price is not consumer harm. Other theory–Elhauge, for example– says the practice at issue in Brantly can hurt consumers. What I think you’re really saying is that you’re happy that your preferred economic theory is being used as a “decider” here. And that’s great, I guess. Would it be as OK if economic theory from the other camp were the “decider”?

        12(b)(6) decisions shouldn’t be about either side’s economic theory; that’s not how cases like this should get decided. No disrespect, but economic theory from either partisan camp is not a substitute for conclusive evidence. There is a plausible allegation of increased price. That could mean consumer harm. Don’t take my word on that; ask some consumers about that. And there also was the allegation of reduced consumer choice, which alone, may not be sufficient. But together with a plausible allegation of increased price, that should be enough to move on into discovery and the summary judgment stage.

        Worry about false positives doesn’t motivate me either. There isn’t conclusive evidence in Brantley. I’d be happy with allowing the opportunity to marshal evidence, and then, if there is evidence, to let a jury decide–maybe a jury with some consumers on it. Royal

  5. 
    Rafael Rivera 16 June 2011 at 8:59 am

    The introduction of a consumer choice standard to antitrust jurisprudence is, as Bork famously put it, akin to playing tennis with the net down-that is, the standard is inherently vague and is apt to render less business certainty. And because it indirectly permits courts to consider other subjective values when determining antitrust liability, it lacks the sophistication with which allocative efficiency provides firms and courts. Another concern as to the workability of this standard is that it seems likely courts would have trouble differentiating between valid consumer choice claims (whatever this means) and ones masked as such but in fact are nothing more than inefficient firms unable to compete in a market. Indeed, such conditions would seem ripe for systematic error. This is all to say that absent verifiable foreclosure or other anticompetitive harms, the concerns of a consumer choice standard seems to outweigh any potential consumer benefits.

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