Omega markets high-end Swiss watches around the world. The watches have a small “Omega Globe Design” logo engraved on the back, a logo which Omega copyrighted in the US. Omega sells the watches in different countries around the globe at prices the local markets will bear, resulting in prices in the US being significantly higher than prices in some other countries, specifically Latin American countries such as Paraguay.  Some watches originally sold to authorized buyers in Paraguay ended up being imported into the US and eventually sold through Costco’s wholesale stores at a roughly 35% discount to Omega’s usual US price target (based on the WSJ article). Omega filed a copyright infringement case against Costco, which Costco won in district court by arguing that the first sale in Paraguay invalidated Omega’s claim under § 109(a). Omega appealed and the 9th Circuit reversed the lower court ruling, finding that the ‘first sale doctrine’ only applies to the first authorized sale within the US, not to foreign sales of foreign goods that are subsequently imported to the US.

The 9th Circuit goes to some lengths in splitting hairs to support its current finding in light of its previously failed ruling in Quality King v. L’anza. In Qualty King, L’anza exported a US-made product with a copyrighted label to sell at a discount in certain foreign markets. When some of the products were imported back into the US without L’anza’s authorization and sold at a discount relative to L’anza’s domestic prices, L’anza filed the same type of claim filed by Omega.  In that case, the 9th Circuit ruled in favor of L’anza, arguing that the § 602 restriction on unauthorized importation was not subject to the first sale doctrine.  The US Supreme Court, however, reversed that decision (see 523 U.S. 135 (1998)), arguing that the ‘first sale doctrine’ applied to L’anza’s initial sale to the foreign distributor(s). In Omega, the 9th Circuit argues that their original interpretation holds despite Quality King because in the Omega case the watches in question were never authorized in a US transaction for sale, whether domestic or foreign.  Now the Supreme Court has another chance to address the 9th Circuit’s reasoning.

I won’t pretend to be a copyright lawyer. Perhaps there are some technical, doctrinal rationalizations around boundaries of authority for US copyright law that might preserve the 9th Circuit’s ruling in Omega. However, the larger question is whether such use (or abuse) of copyright law is reasonable economic policy, particularly in a global marketplace. In that vein, Justice Stevens’ unanimous opinion in Quality King is instructive (with emphasis added):

In construing the statute, however, we must remember that its principal purpose was to promote the progress of the “useful Arts,” U. S.Const., Art. I,§ 8, cl.8, by rewarding creativity, and its principal function is the protection of original works, rather than ordinary commercial products that use copyrighted material as a marketing aid.

It is clear in both Omega and Quality King that the copyrighted logo or design served, at best, as a marketing aid. I say ‘at best’ because the use of the copyright in these particular cases is not about preserving a brand name or image from piracy or unauthorized replication per se, but is simply using US copyright law to enforce larger price differentials across discriminated geographic markets than the global market would otherwise allow.

Don’t get me wrong. I’m not suggesting that manufacturers should not be able to determine the price at which they are willing to sell their products across different markets, and to set prices that reflect local market demand conditions. Price discrimination happens all the time across all sorts of distinguishable margins (e.g., geography, time, gender, age, student-status). The key–and the limit–to price discrimination is the ability of the ‘gray market’ to effectively arbitrage those price differences by purchasing in one (lower value demand) market and reselling the product in another (higher value demand) market. In a global economy, the ability of arbitragers to legally purchase and transport products across geographic regions for resale imposes competitive pricing discipline on global markets. It’s the underlying assumption of what economists refer to as the ‘law of one price’ (subject to a variety of transaction costs, of course).

Instead, I’m simply suggesting that US copyright law was not intended to restrict the workings of the global market in such a way as to arbitrarily inflate the price differentials across markets. From an agnostic perspective, the Supreme Court would seem to concur in their unanimous Quality King ruling (again, emphasis added):

The parties and their amici have debated at length the wisdom or unwisdom of governmental restraints on what is sometimes described as either the “gray market” or the practice of “parallel importation.” In K mart Corp. v. Cartier, Inc., 486 U. S. 281 (1988), we used those terms to refer to the importation of foreign-manufactured goods bearing a valid United States trademark without the consent of the trademark holder. Id., at 285-286.We are not at all sure that those terms appropriately describe the consequences of an American manufacturer’s decision to limit its promotional efforts to the domestic market and to sell its products abroad at discounted prices that are so low that its foreign distributors can compete in the domestic market. But even if they do, whether or not we think it would be wise policy to provide statutory protection for such price discrimination is not a matter that is relevant to our duty to interpret the text of the Copyright Act.

The Copyright Act was not intended as a means of allowing a domestic manufacturer to more effectively discriminate between domestic and foreign markets. The question is whether the Court will come to the same conclusion in the case of a foreign manufacturer. Regardless the legal lines, the underlying economic principle is no different in a global economy.

Carlyle Thayer, a veteran Vietnam watcher and professor at the Australian Defense Academy in Canberra, says conservative factions in the ruling Politburo are tightening their grip on the country as Vietnam’s economic worries—especially inflation and fallout from currency devaluations—grow. He says he expects more crackdowns and arrests to come in the run-up to the country’s 2011 Party Congress, a major political event that will aim to map out Vietnam’s political and economic direction for the following five years.  In turn, the crackdowns threaten to curtail investment and economic growth in the country…..

Now, the price-control unit of Vietnam’s Finance Ministry is drafting proposals that, if implemented by the government, would compel private and foreign-owned companies to report pricing structures, according to documents viewed by The Wall Street Journal and corroborated by Vietnamese officials.  In some cases, the proposed rules would allow the government to set prices on a wide range of privately made or imported goods, including petroleum products, fertilizers and milk to help contain inflation as Vietnam continues pumping money into its volatile economy. Typically, the government applies this kind of aggressive measure only to state-owned businesses, and it is unclear whether Vietnam will write the wider rules into law.

Somewhat relatedly, here is one of my favorite papers about the economics of contractual relationships and enforcement institutions in Vietnam (McMillan & Woodruff).

The article, written jointly by a law professor and political science professor, endeavors to explain why the United States is particularly resistant to various efforts at international harmonization of antitrust law. While others have wrangled with this question over the years, none has assessed the question from within the broader political framework in which all relations between nations exist. Our article endeavors to fill this intellectual gap.

Existing efforts to describe or explain the lack of international harmonization have generally focused on the direct economic effects, and the narrow political difficulties, of the harmonization of competition laws through certain international mechanisms, most notably the WTO and the OECD. Largely absent in these accounts is a background theory of international politics against which the practicalities – and the ultimate desirability – of international competition law harmonization can be assessed. Our article presents such a theory. It places the conflict over international competition laws within the larger framework of international relations, and in so doing draws out some novel and important implications of the debate.

An important insight of this Article is that, largely independent of the economic calculus regarding the costs and benefits of entering into a multilateral international antitrust agreement, there is an inherent “transaction benefit” in the act of engaging in political exchange between states. Traditional economic and legal analyses of international relations have focused largely on the choice of organizational form (market exchange (no explicit agreement) versus bilateral versus multilateral institutions) and the likelihood and nature of compliance with each type in the absence of a central enforcement authority. By contrast, we strive here to develop a political theory of international law which accounts on the one hand for the costs of entering into international agreements, but also accounts for the state’s political preference for a specific form of agreement.

The novel implication of this understanding is that, by crafting international agreements in which the other parties are made to alter their domestic institutions as a condition of agreement, the dominant state (here, the United States) receives a credible commitment from the other state as to its willingness to adhere to the terms of the specific agreement under negotiation which, in the absence of centralized enforcement, might not otherwise be forthcoming. Additionally, the alteration of domestic institutions in a manner directed by the dominant state will in and of itself be viewed as a benefit of the agreement. By facilitating domestic normative change, the dominant state will gain a measure of transformative power from the change of domestic institutions. As a result, nations derive political benefits from international agreements in a way that transcends the substance of the agreements themselves.

The process of internationalizing and harmonizing competition law provides fertile ground in which to examine these ideas. Negotiations over antitrust policy are particularly important because as government barriers to trade have fallen they may well be replaced by private barriers. At the same time, as tariff barriers to trade have fallen, governments may resort to the discriminate application of antitrust law to maintain preferred local monopolies, and therefore to make payoffs to politically important constituents. The prospects for the illiberal application of antitrust laws and their economic importance make the debates over their form an issue of abiding concern for the process of global economic liberalization.

Get it while it’s hot!

The count of newly imposed protectionist policies like antidumping duties and other “safeguard” measures increased by 31% in the first half of 2009 relative to the same period one year ago, which itself is not an alarming number. But many governments take more than a year to make final decisions on such policies after receiving the initial request for protection from a domestic industry. The fact that industry requests for new import restrictions were 34% higher in 2008 relative to 2007 is a worrying trend even though 2007 saw a historical low in such requests. And with the recession continuing, requests for new import restrictions were 19% higher in the first half of 2009 relative to 2008.  This suggests a wave of new protectionist measures may be on the way. While leaders of the Group of 20 large economies unanimously pledged not to resort to protectionism at a Washington summit last November and reaffirmed this in London in April, virtually all of them have slipped at least a little bit.

Free Trade Is the Best Policy

The specter of protectionism is rising.  It is always a dangerous and foolish policy, but it is especially dangerous at a time of economic crisis, when it threatens to damage the world economy.  Protectionism’s peculiar premise is that national prosperity is increased when government grants monopoly power to domestic producers.  As centuries of economic reasoning, historical experience, and empirical studies have repeatedly shown, that premise is dead wrong.  Protectionism creates poverty, not prosperity. Protectionism doesn’t even “protect” domestic jobs or industries; it destroys them, by harming export industries and industries that rely on imports to make their goods.  Raising the local prices of steel by “protecting” local steel companies just raises the cost of producing cars and the many other goods made with steel.  Protectionism is a fool’s game.

But the fact that protectionism destroys wealth is not its worst consequence.  Protectionism destroys peace.  That is justification enough for all people of good will, all friends of civilization, to speak out loudly and forcefully against economic nationalism, an ideology of conflict, based on ignorance and carried into practice by protectionism.

Two hundred and fifty years ago, Montesquieu observed that “Peace is the natural effect of trade. Two nations who differ with each other become reciprocally dependent; for if one has an interest in buying, the other has an interest in selling; and thus their union is founded on their mutual necessities.”

Trade’s most valuable product is peace.  Trade promotes peace, in part, by uniting different peoples in a common culture of commerce – a daily process of learning others’ languages, social norms, laws, expectations, wants, and talents.

Trade promotes peace by encouraging people to build bonds of mutually beneficial cooperation.  Just as trade unites the economic interests of Paris and Lyon, of Boston and Seattle, of Calcutta and Mumbai, trade also unites the economic interests of Paris and Portland, of Boston and Berlin, of Calcutta and Copenhagen – of the peoples of all nations who trade with other.

A great deal of rigorous empirical research supports the proposition that trade promotes peace.

Perhaps the most tragic example of what happens when that insight is ignored is World War II.

International trade collapsed by 70 percent between 1929 and 1932, in no small part because of America’s 1930 Smoot-Hawley tariff and the retaliatory tariffs of other nations.  Economist Martin Wolf notes that “this collapse in trade was a huge spur to the search for autarky and Lebensraum, most of all for Germany and Japan.”

The most ghastly and deadly wars in human history soon followed.

By reducing war, trade saves lives.

Trade saves lives also by increasing prosperity and extending it to more and more people.  The evidence that freer trade promotes prosperity is simply overwhelming. Prosperity enables ordinary men and women to lead longer and healthier lives.

And with longer, healthier lives lived more peacefully, people integrated into the global economy have more time to enjoy the vast array of cultural experiences brought to them by free trade.  Culture is enriched by contributions from around the world, made possible by free trade in goods and in ideas.

Without a doubt, free trade increases material prosperity.  But its greatest gift is not easily measured with money. That greatest gift is lives that are freer, fuller, and far less likely to be scalded or destroyed by the atrocities of war.

Accordingly, we the undersigned join together in a plea to the governments of all nations to resist the calls of the short-sighted and the greedy to raise higher the barriers to trade.  In addition, we call on them to tear down current protectionist barriers to free trade. To each government, we say: let your citizens enjoy not only the fruits of your own fields, factories, and genius, but also those of the entire globe.  The rewards will be greater prosperity, richer lives, and enjoyment of the blessings of peace.

The SO is based on the legal and economic principles established in the judgment of the Court of First Instance of 17 September 2007 (case T-201/04), in which the Court of First Instance upheld the Commission’s decision of March 2004 (see IP/04/382), finding that Microsoft had abused its dominant position in the PC operating system market by tying Windows Media Player to its Windows PC operating system (see MEMO/07/359).

The evidence gathered during the investigation leads the Commission to believe that the tying of Internet Explorer with Windows, which makes Internet Explorer available on 90% of the world’s PCs, distorts competition on the merits between competing web browsers insofar as it provides Internet Explorer with an artificial distribution advantage which other web browsers are unable to match. The Commission is concerned that through the tying, Microsoft shields Internet Explorer from head to head competition with other browsers which is detrimental to the pace of product innovation and to the quality of products which consumers ultimately obtain. In addition, the Commission is concerned that the ubiquity of Internet Explorer creates artificial incentives for content providers and software developers to design websites or software primarily for Internet Explorer which ultimately risks undermining competition and innovation in the provision of services to consumers.

What’s going on here? Why Microsoft again when its share in the browser market is shrinking and its already paid the piper more than once? Let’s start with some obvious points by way of background. First, there is virtually no way that Microsoft can win if they fight this — in the sense that the liability determination is a foregone conclusion. Despite all the talk of evidence gathering in the press release, in the context of the analysis in the CFI Windows Media Player decision, I suspect that there is not any evidence that an investigation could generate (including evidence that the conduct significantly improves consumer outcomes) that would allow Microsoft to escape liability. Second, press reports indicate that Microsoft’s new strategy with the EU has been, not to put too fine a point on it, to lay down and wait until the beating stops. Third, the ubiquity of tying arrangements by firms with significant market shares (and those without) implies significant prosecutorial discretion for DG Comp. The presence of a significant number of US based firms in technology markets (e.g. Microsoft, Qualcomm, Intel) has led some to argue that there is some protectionist-based geographical discrimination in the selection of targets. Fifth, it seems quite obvious that DG Comp is trying to send some message with its selection of Microsoft as a target, again, in the same case that the US brought years ago. The interesting part is figuring out what the statement is.

Here are a few theories of what that statement might be:

1. DG Comp is taking the lead as world antitrust enforcer — especially with respect to monopolization
2. Relatedly, the US Section 2 approach and remedies) are insufficient to police global monopolists and, i.e. so weak that Microsoft was able to violate stricter EC law even after the consent decree
3. Protectionism and Public choice: Microsoft is a high profile, U.S. company that will pay the fines (beware Intel, Qualcomm, and other large US firms selling globally with significant shares…)

What’s interesting to me is the timing relative to the incoming Obama antitrust regime. By all accounts, or at least my own (see also here), the U.S. is about to start its most active monopolization enforcement regime in decades. With Professor Elhauge at the controls of the DOJ, I suspect the change in course will be significant and visible. So if (1) is the story, one wonders what sort of competition this might engender, if any, between the US and EU enforcers. Or perhaps the story is not competition but convergence in the US towards EU-style monopolization enforcement? I do think there is something to all three stories. And with respect to (3), yes I know there has been Article 82 enforcement against non-US firms, but I’d like to see shares calculated on a dollar fine basis when the EU is through with Qualcomm and Intel. Mostly, given the prior scuffle between Tom Barnett and Neelie Kroes on the CFI Judgment in the Media Player case, its hard to think that (2) is not a significant part of the story. And perhaps rather than competition with the US, motivation for convergence.

People in the southern French district of Lozeyron are having a hard time swallowing US President George W. Bush’s parting gift: a tripling to 300 percent in import duty on their world-famous Roquefort cheese.

“Tonnes of produce are going to go up in smoke,” protested one of the seven local producers of the distinctive soft blue cheese. It was a hammer blow to the local region, he said.

The swingeing tariff increase, part of a longstanding trade row between the United States and the European Union, has effectively priced them out of the US market, say producers.

It’s both protectionist idocy as well as an affront to cheese lovers everywhere.  Gordon–are you reading this!?!?!

What an ass.  Good riddance.

Defining the market could be tricky. According to Merrill Lynch analysts, Coca-Cola will control 37% of the Chinese juice market with its brands if it succeeds in the acquisition. Coke holds 28% of the overall juice market, but focuses on the lower end with its Minute Maid brand. Huiyuan competes mostly in the high-end juice market, holding a more than 40% market share.

It will be interesting to watch what standards are applied to the merger analysis and what role various non-economic considerations, which have been much discussed in the context of the Chinese AML, will play in practice. But lets not move to quickly to the substantive issues. Perhaps a much larger problem is who is going to actually carry out the analysis. Here’s a troubling line from the WSJ story: “The Ministry of Commerce, which oversees the application of the antimonopoly law, will define the market. Mr. Liu said the ministry’s antitrust office hasn’t been staffed yet.”

On related matters, Steve Dickinson of the China Law Blog has a nice post covering the national security review aspects of application of China’s AML.

In addition, the August 2008 issue of Global Competition Policy magazine includes a symposium on “Assessing China’s Antimonopoly Law.”

That is not a criticism of the new competition rules in either country – both are modernising laws on which the legal profession has been consulted. If enforced both promptly and evenhandedly, strong antitrust laws will mark a step towards competitive capitalism, rather than crony capitalism, in both countries. Local consumers will benefit. 

On international deals, however, China and India (and the US and European Commission) should leave mergers to the one jurisdiction best placed to handle them. If a merged company would have $200m sales and a 5 per cent market share in India, but $10bn sales and a 30 per cent share in the US, it is obvious who should take the lead. A forum to co-ordinate regulators – the International Competition Network – already exists. China should join it.

I’m pleased to see the FT calling attention to this issue.   Its an important one.  Perhaps one the most important on the antitrust enforcement policy landscape.  Joining the ICN and the international antitrust community more broadly is one way to generate cooperation and avoid bad outcomes.  But count me a skeptic with respect to the proposition that assigning jurisdiction to the competition policy agency with the greatest dollar value interest in the activity at issue will solve the problem.  The problem of mitigating the costs of multiple international competition agencies is a complex one with a lot of moving parts (Chairman Kovacic’s recent speech is a must-read on these issues).

I’ve argued previously that the policy discussion ought not emphasize “convergence or divergence per se, but jurisdictional competition combined with facilitation of superior substantive analytical norms.”  In other words, lets talk about getting optimal substantive standard adopted, say what we mean when we use code words like “convergence” (e.g. in the U.S. this appears to mean, movement to the standards adopted by our courts, and in particular, the Supreme Court), and respectfully but firmly and consistently hold competition agencies accountable for their decisions and enforcement philosophies.  This means that there is a lot of work to be done by economists and lawyers in figuring out the competitive effects of various forms of conduct, both in theory and testing these theories with data, in order to come to some sort of agreement about the design of optimal standards with sensitivity to important institutional differences between countries.

To be sure, jurisdictions will disagree about the state of the evidence of strength of opposing theories.  Differences in legal institutions and history will also drive divergence.   The optimal level of divergence is not zero.  But the substantial current level of divergence, in my view, could be reduced to the benefit of consumers with international agreement on a few important and (to my mind at least) not-so-controversial principles, e.g. the adoption of the error-cost framework as an appropriate lens through which to evaluate optimal antitrust rules.  The ICN and the international antitrust community can and do make substantial efforts to instigate this type of discussion and so must be, along with other institutions which facilitate cooperation, part of the solution.  But my sense is that the current debates focus too little on the actual state of economic theory and evidence and too much on everything else.

In other events on the “convergence” landscape, I recently attended a conference at Stanford (sponsored by SIEPR, Stanford Law School and Hoover) on the Modernization of Antitrust Law-Private and Public Enforcement and Abuses – Europe and the US where I spoke on a panel discussing issues of transatlantic convergence (and lack thereof) with respect to single firm conduct and abuse of dominance (sorry, I can’t find an online version of the agenda to link to). I must admit that I typically find discussions of the “convergence issue” in competition policy underwhelming as they seem to systematically resort to the types of open-ended and meaningless slogans Kovacic discusses in his paper, avoiding a frank and rigorous assessment of the true costs and benefits of both convergence and divergence of competition systems. However, I’m very pleased to report that the SIEPR conference panel discussing these issues (which was moderated by Roger Noll and including presentations by Tim Bresnahan (Stanford economics) and Matthew Bennett (OFT) and comments from Michael Topper and myself) surpassed my expectations (largely due to the quality of exchange between presenters, discussants and the audience in the open Q&A session).

For what its worth, my brief comments emphasized: (1) carefully distinguishing between convergence at the agency and court level, (2) sensitivity to the relationship between institutional design and convergence/ divergence, and (3) a possibility not frequently discussed in the convergence literature on single firm conduct policies in the EU and US: that the US policies will look more like the EU and not the other way around. On the third point, one would be hard pressed to find an invocation of the benefits of convergence by a U.S. commentator or agency official that does not implicitly assume that convergence means Article 82 looks more like Section 2 in the future. While there are other recent examples available that also threaten this possibility, I discussed recent U.S. antitrust enforcement in the standard setting context as an example of an area where this sort of “reverse” convergence might be occurring. The lesson, of course, is of the “be careful what you wish for” variety. The appropriate focus should not be convergence or divergence per se, but jurisdictional competition combined with facilitation of superior substantive analytical norms.