Justice Scalia, Monopolization, and Economic Efficiency

Alden Abbott —  17 February 2016

The late Justice Antonin Scalia’s magisterial contributions to American jurisprudence will be the source of numerous learned analyses over the coming months.  As in so many other doctrinal areas, Justice Scalia’s opinions contributed importantly to the sound development of antitrust law, and, in particular, to the assessment of monopolization.  His oft-cited 2004 opinion for the U.S. Supreme Court in Verizon v. Trinko, on which I will focus, is particularly noteworthy.

In Trinko, the “dominant” telecommunications carrier Verizon had been required by the Telecommunications Act of 1996 (1996 Act) to make individual elements of its local network available to new competing “local exchange carriers” (LECs) on an “unbundled” cost-based basis.  The Federal Communications Commission (FCC) penalized Verizon for providing inadequate network access to certain competitors, in violation of complex FCC regulations implementing the 1996 Act.  (Although the Supreme Court’s Trinko decision did not explicitly discuss the point, the byzantine 1996 Act interconnection regulations in essence had forced Verizon to provide access to competitors on unfavorable below-cost terms – terms to which no rational profit-maximizing business would have agreed.)  Verizon also faced a class action antitrust suit for anticompetitive monopolization, brought in federal district court by Trinko, a customer of AT&T, which owned one of the LECs.  Trinko complained that Verizon had filled rivals’ orders on a discriminatory basis as part of an anticompetitive scheme to discourage customers from becoming or remaining customers of competitive LECs, thus impeding the competitive LECs’ ability to enter and compete in the market for local telephone service.  In essence, as the Supreme Court put it, “[t]he complaint allege[d] that Verizon denied interconnection services to rivals in order to limit entry.”  The district court dismissed the complaint, the Second Circuit reinstated the antitrust claim, and the Supreme Court granted certiorari.

Justice Scalia’s brilliant Trinko opinion clarified a number of broad issues related to the antitrust analysis of monopolization.

First, it highlighted the importance of weighing error costs, with an emphasis on false positives, in assessing a monopolist’s conduct (case citations omitted):

Against the slight benefits of antitrust intervention here, we must weigh a realistic assessment of its costs. Under the best of circumstances, applying the requirements of §2 “can be difficult” because “the means of illicit exclusion, like the means of legitimate competition, are myriad.” . . . .  The cost of false positives counsels against an undue expansion of §2 liability. One false-positive risk is that an incumbent LEC’s failure to provide a service with sufficient alacrity might have nothing to do with exclusion. Allegations of violations of . . . [1996 Act regulatory] duties are difficult for antitrust courts to evaluate, not only because they are highly technical, but also because they are likely to be extremely numerous, given the incessant, complex, and constantly changing interaction of competitive and incumbent LECs implementing the sharing and interconnection obligations. . . .  [Evaluation of such duties] would surely be a daunting task for a generalist antitrust court.  Judicial oversight under the Sherman Act would seem destined to distort investment and lead to a new layer of interminable litigation, atop the variety of litigation routes already available to and actively pursued by competitive LECs.”

Second, it dispensed with the notion that requirements created by economic regulations automatically impose antitrust duties on a monopolist:

[J]ust as the 1996 Act preserves claims that satisfy existing antitrust standards, it does not create new claims that go beyond existing antitrust standards; that would be equally inconsistent with the saving clause’s mandate that nothing in the Act “modify, impair, or supersede the applicability” of the antitrust laws.

Third, it stressed that aggressive single firm conduct lies at the heart of consumer welfare-oriented competition, that monopolists should be given broad leeway in deciding with whom they wish to deal, and that antitrust should focus primarily on collusion among direct competitors, which is the primary antitrust evil (case citation omitted):

Firms may acquire monopoly power by establishing an infrastructure that renders them uniquely suited to serve their customers.  Compelling such firms to share the source of their advantage is in some tension with the underlying purpose of antitrust law, since it may lessen the incentive for the monopolist, the rival, or both to invest in those economically beneficial facilities.  Enforced sharing also requires antitrust courts to act as central planners, identifying the proper price, quantity, and other terms of dealing–a role for which they are ill-suited.  Moreover, compelling negotiation between competitors may facilitate the supreme evil of antitrust: collusion.  Thus, as a general matter, the Sherman Act “does not restrict the long recognized right of [a] trader or manufacturer engaged in an entirely private business, freely to exercise his own independent discretion as to parties with whom he will deal.”

Fourth, and related to the third point, the opinion largely eviscerated the doctrine that monopolists may be required to grant third party access to a facility deemed “essential”:

We conclude that Verizon’s alleged insufficient assistance in the provision of service to rivals is not a recognized antitrust claim under this Court’s existing refusal-to-deal precedents.  This conclusion would be unchanged even if we considered to be established law the “essential facilities” doctrine crafted by some lower courts, under which the Court of Appeals concluded respondent’s allegations might state a claim. See generally Areeda, Essential Facilities: An Epithet in Need of Limiting Principles, 58 Antitrust L. J. 841 (1989) [arguing against the merits of the essential facilities doctrine]. We have never recognized such a doctrine, see Aspen Skiing Co., 472 U.S., at 611, n. 44; AT&T Corp. v. Iowa Utilities Bd., 525 U.S., at 428 (opinion of Breyer, J.), and we find no need . . . to recognize it . . . here.  It suffices for present purposes to note that . . . where access exists [as in this case], the doctrine serves no purpose.

In sum, Justice Scalia’s Trinko opinion transcends the dispute at hand and creates an efficiency-based, error cost-sensitive touchstone for antitrust monopolization analysis.  Put simply, the opinion teaches that a monopolist should be given broad leeway to innovate aggressively, and should not be condemned under antitrust law merely for acting in a manner that is consistent with its legitimate business interests.  This holds true even if the monopolist is violating some non-antitrust regulatory requirement.  Relatedly, as a general proposition a monopolist should not be required by antitrust law to deal with third parties or to make its facilities available to others.  A failure to heed those propositions would convert antitrust monopolization law into just another regulatory vehicle through which government would be empowered to micromanage business relationships among private parties.  Such a failure would predictably impose substantial economic harm, given its tendency to discourage successful firms from competing aggressively and the sad track record of excessively costly American regulatory micromanagement (see here, for example).  Let us hope that U.S. antitrust enforcers and the federal courts remain mindful of this important teaching, and thereby continue to heed Justice Scalia’s seminal contribution to American antitrust law.

Alden Abbott

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I am a Senior Legal Fellow at the Heritage Foundation. I write on antitrust, domestic and international regulatory policy, and law and economics. I am an Adjunct Faculty Member at George Mason Law School.

4 responses to Justice Scalia, Monopolization, and Economic Efficiency

  1. 
    Robotech_Master 17 February 2016 at 7:59 am

    The funny thing to me is that, going by your post in the Apple antitrust blog symposium, you clearly mean for this precedent to be taken in favor of excusing Apple’s conspiracy with the agency pricing publishers—but it seems even more applicable to the competitor whose “monopoly” Apple and the publishers felt they had to foment a thus-far-found-to-be-illegal conspiracy to compete with. That is to say, Amazon.

    It’s pretty hard to imagine a clearer example of a company “[acquiring] monopoly power by establishing an infrastructure that renders them uniquely suited to serve their customers” than Amazon building an e-book market by selling its Kindles to everyone in sight, and hence effectively rendering them unlikely to buy e-books from anybody else. This could explain why the Department of Justice has been so uninterested in prosecuting them for predatory pricing or any of the other crimes the publishers, the Authors Guild, New America, and Amazon’s various other detractors would lay at its feet.

    • 

      I agree that, based on what I know, there is no reason to challenge Amazon’s initial acquisition of a high market share in the e-books market. But, just as firm A (in this case, Amazon) has the right to acquire substantial market power through competition on the merits, another firm B (in this case, Apple) has every right to devise novel distribution arrangements in an effort to compete effectively with firm A. Saying that firm B’s use of vertical contracts amounted to “foment[ing] . . . an illegal conspiracy” per se assumes a conclusion — a conclusion which Apple and various learned economic analysts would contest. At the very least, then, the proposition that Apple’s contractual framework was anticompetitive needs to be carefully evaluated under the rule of reason, not arbitrarily assumed (which is what application of the per se rule does).

      • 
        Robotech_Master 17 February 2016 at 9:21 am

        If there’s one thing I’ve learned from reading all the different opinions in the blog symposium, it’s that there is an awful lot of subjectivity and room for disagreement in these matters. A number of other legal experts found the lower courts’ decisions to be open and shut, after all.

        That said, I now regret more than ever that I’ll never have the opportunity to read any opinion Scalia might have rendered in this case.

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