Tad Lipsky on Lessons From the Section 2 Context

totmauthor —  2 August 2013

Tad Lipsky is a partner in the law firm of Latham & Watkins LLP.

The FTC’s struggle to provide guidance for its enforcement of Section 5’s Unfair Methods of Competition (UMC) clause (or not – some oppose the provision of forward guidance by the agency, much as one occasionally heard opposition to the concept of merger guidelines in 1968 and again in 1982) could evoke a much broader long-run issue: is a federal law regulating single-firm conduct worth the trouble?  Antitrust law has its hard spots and its soft spots: I imagine that most antitrust lawyers think they can define “naked” price-fixing and other hard-core cartel conduct, and they would defend having a law that prohibits it.  Similarly with a law that prohibits anticompetitive mergers.  Monopolization perhaps not so much: 123 years of Section 2 enforcement and the best our Supreme Court can do is the Grinnell standard, defining monopolization as the “willful acquisition or maintenance of [monopoly] power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.”  Is this Grinnell definition that much better than “unfair methods of competition”?

The Court has created a few specific conduct categories within the Grinnell rubric: sham petitioning (objectively and subjectively baseless appeals for government action), predatory pricing (pricing below cost with a reasonable prospect of recoupment through the exercise of power obtained by achieving monopoly or disciplining competitors), and unlawful tying (using market power over one product to force the purchase of a distinct product – you probably know the rest).  These categories are neither perfectly clear (what measure of cost indicates a predatory price?) nor guaranteed to last (the presumption that a patent bestows market power within the meaning of the tying rule was abandoned in 2005).  At least the more specific categories give some guidance to lower courts, prosecutors, litigants and – most important of all – compliance-inclined businesses.  They provide more useful guidance than Grinnell.

The scope for differences of opinion regarding the definition of monopolization is at an historical zenith.  Some of the least civilized disagreements between the FTC and the Antitrust Division – the Justice Department’s visible contempt for the FTC’s ReaLemon decision in the early 1980’s, or the three-Commissioner vilification of the Justice Department’s 2008 report on unilateral conduct – concern these differences.  The 2009 Justice Department theatrically withdrew the 2008 Justice Department’s report, claiming (against clear objective evidence to the contrary) that the issue was settled in its favor by Lorain Journal, Aspen Skiing, and the D.C. Circuit decision in the main case involving Microsoft.

Although less noted in the copious scholarly output concerning UMC, disputes about the meaning of Section 5 are encouraged by the lack of definitive guidance on monopolization.  For every clarification provided by the Supreme Court, the FTC’s room for maneuver under UMC is reduced.  The FTC could not define sham litigation inconsistently with Professional Real Estate Investors v. Columbia Pictures Industries; it could not read recoupment out of the Brooke Group v. Brown & Williamson Tobacco Co. definition of predatory pricing.

The fact remains that there has been less-than-satisfactory clarification of single-firm conduct standards under either statute.  Grinnell remains the only “guideline” for the vast territory of Section 2 enforcement (aside from the specific mentioned categories), especially since the Supreme Court has shown no enthusiasm for either of the two main appellate-court approaches to a general test for unlawful unilateral conduct under Section 2, the “intent test” and the “essential facilities doctrine.”  (It has not rejected them, either.)  The current differences of opinion – even within the Commission itself, leave aside the appellate courts – are emblematic of a similar failure with regard to UMC.  Failure to clarify rules of such universal applicability has obvious costs and adverse impacts: creative and competitively benign business conduct is deterred (with corresponding losses in innovation, productivity and welfare), and the costs, delays, disruption and other burdens of litigation are amplified.  Are these costs worth bearing?

Years ago I heard it said that a certain old-line law firm had tightened its standards of partner performance: whereas formerly the firm would expel a partner who remained drunk for ten years, the new rule was that a partner could remain drunk only for five years.  The antitrust standards for unilateral conduct have vacillated for over a century.  For a time (as exemplified by United States v. United Shoe Machinery Corp.) any act of self-preservation by a monopolist – even if “honestly industrial” – was presumptively unlawful if not compelled by outside circumstances.  Even Grinnell looks good compared to that, but Grinnell still fails to provide much help in most Section 2 cases; and the debate over UMC says the same about Section 5.  I do not advocate the repeal of either statute, but shouldn’t we expect that someone might want to tighten our standards?  Maybe we can allow a statute a hundred years to be clarified through common-law application.  Section 2 passed that milepost twenty-three years ago, and Section 5 reaches that point next year.  We shouldn’t be surprised if someone wants to pull the plug beyond that point.

2 responses to Tad Lipsky on Lessons From the Section 2 Context

  1. 

    I don’t understand why Tad failed to discuss the modern approach to monopolization set forth in the DC Circuit’s Microsoft opinion. The court adopted a 4-prong rule of reason approach to the general Grinnell standard for monopolization. With suitable changes to reflect market power instead of monopoly power, this standard could be applied to UMC as well.