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Over the last two decades, the United States government has taken the lead in convincing jurisdictions around the world to outlaw “hard core” cartel conduct.  Such cartel activity reduces economic welfare by artificially fixing prices and reducing the output of affected goods and services.  At the same, the United States has acted to promote international cooperation among government antitrust enforcers to detect, investigate, and punish cartels.

In 2017, however, the U.S. Court of Appeal for the Second Circuit (citing concerns of “international comity”) held that a Chinese export cartel that artificially raised the price of vitamin imports into the United States should be shielded from U.S. antitrust penalties—based merely on one brief from a Chinese government agency that said it approved of the conduct. The U.S. Supreme Court is set to review that decision later this year, in a case styled Animal Science Products, Inc., v. Hebei Welcome Pharmaceutical Co. Ltd.  By overturning the Second Circuit’s ruling (and disavowing the overly broad “comity doctrine” cited by that court), the Supreme Court would reaffirm the general duty of federal courts to apply federal law as written, consistent with the constitutional separation of powers.  It would also reaffirm the importance of the global fight against cartels, which has reflected consistent U.S. executive branch policy for decades (and has enjoyed strong support from the International Competition Network, the OECD, and the World Bank).

Finally, as a matter of economic policy, the Animal Science Products case highlights the very real harm that occurs when national governments tolerate export cartels that reduce economic welfare outside their jurisdictions, merely because domestic economic interests are not directly affected.  In order to address this problem, the U.S. government should negotiate agreements with other nations under which the signatory states would agree:  (1) not to legally defend domestic exporting entities that impose cartel harm in other jurisdictions; and (2) to cooperate more fully in rooting out harmful export-cartel activity, wherever it is found.

For a more fulsome discussion of the separation of powers, international relations, and economic policy issues raised by the Animal Science Products case, see my recent Heritage Foundation Legal Memorandum entitled The Supreme Court and Animal Science Products: Sovereignty and Export Cartels.

The Internet is a modern miracle: from providing all varieties of entertainment, to facilitating life-saving technologies, to keeping us connected with distant loved ones, the scope of the Internet’s contribution to our daily lives is hard to overstate. Moving forward there is undoubtedly much more that we can and will do with the Internet, and part of that innovation will, naturally, require a reconsideration of existing laws and how new Internet-enabled modalities fit into them.

But when undertaking such a reconsideration, the goal should not be simply to promote Internet-enabled goods above all else; rather, it should be to examine the law’s effect on the promotion of new technology within the context of other, competing social goods. In short, there are always trade-offs entailed in changing the legal order. As such, efforts to reform, clarify, or otherwise change the law that affects Internet platforms must be balanced against other desirable social goods, not automatically prioritized above them.

Unfortunately — and frequently with the best of intentions — efforts to promote one good thing (for instance, more online services) inadequately take account of the balance of the larger legal realities at stake. And one of the most important legal realities that is too often readily thrown aside in the rush to protect the Internet is that policy be established through public, (relatively) democratically accountable channels.

Trade deals and domestic policy

Recently a letter was sent by a coalition of civil society groups and law professors asking the NAFTA delegation to incorporate U.S.-style intermediary liability immunity into the trade deal. Such a request is notable for its timing in light of the ongoing policy struggles over SESTA —a bill currently working its way through Congress that seeks to curb human trafficking through online platforms — and the risk that domestic platform companies face of losing (at least in part) the immunity provided by Section 230 of the Communications Decency Act. But this NAFTA push is not merely about a tradeoff between less trafficking and more online services, but between promoting policies in a way that protects the rule of law and doing so in a way that undermines the rule of law.

Indeed, the NAFTA effort appears to be aimed at least as much at sidestepping the ongoing congressional fight over platform regulation as it is aimed at exporting U.S. law to our trading partners. Thus, according to EFF, for example, “[NAFTA renegotiation] comes at a time when Section 230 stands under threat in the United States, currently from the SESTA and FOSTA proposals… baking Section 230 into NAFTA may be the best opportunity we have to protect it domestically.”

It may well be that incorporating Section 230 into NAFTA is the “best opportunity” to protect the law as it currently stands from efforts to reform it to address conflicting priorities. But that doesn’t mean it’s a good idea. In fact, whatever one thinks of the merits of SESTA, it is not obviously a good idea to use a trade agreement as a vehicle to override domestic reforms to Section 230 that Congress might implement. Trade agreements can override domestic law, but that is not the reason we engage in trade negotiations.

In fact, other parts of NAFTA remain controversial precisely for their ability to undermine domestic legal norms, in this case in favor of guaranteeing the expectations of foreign investors. EFF itself is deeply skeptical of this “investor-state” dispute process (“ISDS”), noting that “[t]he latest provisions would enable multinational corporations to undermine public interest rules.” The irony here is that ISDS provides a mechanism for overriding domestic policy that is a close analogy for what EFF advocates for in the Section 230/SESTA context.

ISDS allows foreign investors to sue NAFTA signatories in a tribunal when domestic laws of that signatory have harmed investment expectations. The end result is that the signatory could be responsible for paying large sums to litigants, which in turn would serve as a deterrent for the signatory to continue to administer its laws in a similar fashion.

Stated differently, NAFTA currently contains a mechanism that favors one party (foreign investors) in a way that prevents signatory nations from enacting and enforcing laws approved of by democratically elected representatives. EFF and others disapprove of this.

Yet, at the same time, EFF also promotes the idea that NAFTA should contain a provision that favors one party (Internet platforms) in a way that would prevent signatory nations from enacting and enforcing laws like SESTA that (might be) approved of by democratically elected representatives.

A more principled stance would be skeptical of the domestic law override in both contexts.

Restating Copyright or creating copyright policy?

Take another example: Some have suggested that the American Law Institute (“ALI”) is being used to subvert Congressional will. Since 2013, ALI has taken upon itself the project to “restate” the law of copyright. ALI is well known and respected for its common law restatements, but it may be that something more than mere restatement is going on here. As the NY Bar Association recently observed:

The Restatement as currently drafted appears inconsistent with the ALI’s long-standing goal of promoting clarity in the law: indeed, rather than simply clarifying or restating that law, the draft offers commentary and interpretations beyond the current state of the law that appear intended to shape current and future copyright policy.  

It is certainly odd that ALI (or any other group) would seek to restate a body of law that is already stated in the form of an overarching federal statute. The point of a restatement is to gather together the decisions of disparate common law courts interpreting different laws and precedent in order to synthesize a single, coherent framework approximating an overall consensus. If done correctly, a restatement of a federal statute would, theoretically, end up with the exact statute itself along with some commentary about how judicial decisions have filled in the blanks differently — a state of affairs that already exists with the copious academic literature commenting on federal copyright law.

But it seems that merely restating judicial interpretations was not the only objective behind the copyright restatement effort. In a letter to ALI, one of the scholars responsible for the restatement project noted that:

While congressional efforts to improve the Copyright Act… may be a welcome and beneficial development, it will almost certainly be a long and contentious process… Register Pallante… [has] not[ed] generally that “Congress has moved slowly in the copyright space.”

Reform of copyright law, in other words, and not merely restatement of it, was an important impetus for the project. As an attorney for the Copyright Office observed, “[a]lthough presented as a “Restatement” of copyright law, the project would appear to be more accurately characterized as a rewriting of the law.” But “rewriting” is a job for the legislature. And even if Congress moves slowly, or the process is frustrating, the democratic processes that produce the law should still be respected.

Pyrrhic Policy Victories

Attempts to change copyright or entrench liability immunity through any means possible are rational actions at an individual level, but writ large they may undermine the legal fabric of our system and should be resisted.

It’s no surprise why some may be frustrated and concerned about intermediary liability and copyright issues: On the margin, it’s definitely harder to operate an Internet platform if it faces sweeping liability for the actions of third parties (whether for human trafficking or infringing copyrights). Maybe copyright law needs to be reformed and perhaps intermediary liability must be maintained exactly as it is (or expanded). But the right way to arrive at these policy outcomes is not through backdoors — and it is not to begin with the assertion that such outcomes are required.

Congress and the courts can be frustrating vehicles through which to enact public policy, but they have the virtue of being relatively open to public deliberation, and of having procedural constraints that can circumscribe excesses and idiosyncratic follies. We might get bad policy from Congress. We might get bad cases from the courts. But the theory of our system is that, on net, having a frustratingly long, circumscribed, and public process will tend to weed out most of the bad ideas and impulses that would otherwise result from unconstrained decision making, even if well-intentioned.

We should meet efforts like these to end-run Congress and the courts with significant skepticism. Short term policy “victories” are likely not worth the long-run consequences. These are important, complicated issues. If we surreptitiously adopt idiosyncratic solutions to them, we risk undermining the rule of law itself.

The two-year budget plan passed last week makes important changes to payment obligations in the Medicare Part D coverage gap, also known as the donut hole.  While the new plan produces a one-year benefit for seniors by reducing what they pay a year earlier than was already mandated, it permanently shifts much of the drug costs insurance companies were paying to drug makers.  It’s far from clear whether this windfall for insurers will result in lower drug costs for Medicare beneficiaries.

Medicare Part D is voluntary prescription drug insurance for seniors and the permanently disabled provided by private insurance plans that are approved by the Medicare program.  Last year, more than 42 million people enrolled in Medicare Part D plans. Payment for prescription drugs under Medicare Part D depends on how much enrollees spend on drugs.  In 2018, after hitting a deductible that varies by plan, enrollees pay 25% of their drug costs while the Part D plans pay 75%.  However, once the individual and the plan have spent a total of $3,750, enrollees hit the coverage gap that lasts until $8,418 has been spent.  In the coverage gap, enrollees pay 35% of brand drug costs, the Part D plans pay 15%, and drug makers are required to offer 50% discounts on brand drugs to cover the rest.  Once total spending reaches $8,418, enrollees enter catastrophic coverage in which they pay only 5% of drug costs, the Part D plans pay 15%, and the Medicare program pays the other 80%.

The Affordable Care Act (ACA) included provisions to phase out the coverage gap by 2020, so that enrollees will pay only 25% of drug costs from the time they meet the deductible until they hit the catastrophic coverage level.  The budget plan passed last week speeds up this phase out by one year, so enrollees will start paying only 25% in 2019 instead of 2020.  The ACA anticipated that with enrollees paying 25% of drug costs and drug maker discounts of 50%, the Part D plans would pay the other 25%.  However, last week’s budget plan drastically redistributed the payment responsibilities from the Part D insurance plans to drug makers. Under the new plan drug makers are required to offer 70% discounts so that the plans only have to pay 5% of the total drug costs.  That is, the new plan shifts 20% of total drug costs in the coverage gap from insurers to drug makers.

Although the drug spending in each individual’s coverage gap is less than $5,000, with over 42 million people covered, the total spending, and the 20% of spending shifted from insurers to drug makers, is significant.  CMS has estimated that when drug makers’ discounts were only covering 50% of drug spending in the gap, the annual total discounts amounted to over $5.6 billion.  Requiring drug makers to cover another 20% of drug spending will add several billion dollars more to this total.

A government intervention that forces suppliers to cover 70% of the spending in a market is a surprising move for Republicans—supposed advocates of free markets.  Moreover, although reducing prescription drug costs has become a national priority, it’s unclear whether shifting costs from insurers to drug makers will benefit individuals at all.  Theoretically, as the individual Part D plans pay less of their enrollees’ drug costs, they should pass on the savings to enrollees in the form of lower premiums.  However, several studies suggest that enrollees may not experience a net decrease in drug spending.  The Centers for Medicare and Medicaid Services (CMS) has determined that under Medicare Part D, drug makers increase list prices to offset other concessions and to more quickly move enrollees out of the coverage gap where drug makers are required to offer price discounts.  Higher list prices mean that enrollees’ total out-of-pocket drug spending increases; even a 5% cost-sharing obligation in the catastrophic coverage for a high-priced drug can be a significant expense. Higher list prices that push enrollees out of the coverage gap also shift more costs onto the Medicare program that pays 80% of drug costs in the catastrophic coverage phase.

A better, more direct way to reduce Medicare Part D enrollees’ out-of-pocket drug spending is to require point-of-sale rebates.  Currently, drug makers offer rebates to Part D plans in order to improve their access to the millions of individuals covered by the plans.  However, the rebates, which total over $16 billion annually, are paid after the point-of-sale, and evidence shows that only a portion of these rebates get passed through to beneficiaries in the form of reduced insurance premiums.  Moreover, a reduction in premiums does little to benefit those enrolled individuals who have the highest aggregate out-of-pocket spending on drugs. (As an aside, in contrast to the typical insurance subsidization of high-cost enrollees by low-cost enrollees, high-spending enrollees under Medicare Part D generate greater rebates for their plans, but then the rebates are spread across all enrollees in the form of lower premiums).

Drug maker rebates will more directly benefit Medicare Part D enrollees if rebates are passed through at the point-of-sale to reduce drug copays.  Point-of-sale rebates would ensure that enrollees see immediate savings as they meet their cost-sharing obligations.  Moreover, the enrollees with the highest aggregate out-of-pocket spending would be the ones to realize the greatest savings.  CMS has recently solicited comments on a plan to require some portion of drug makers’ rebates to be applied at the point of sale, and the President’s budget plan released yesterday proposes point-of-sale rebates to lower Medicare Part D enrollees’ out-of-pocket spending.  Ultimately, targeting rebates to consumers at the point-of-sale will more effectively lower drug spending than reducing insurance plans’ payment obligations in hopes that they pass on the savings to enrollees.

On January 23rd, the Heritage Foundation convened its Fourth Annual Antitrust Conference, “Trump Antitrust Policy after One Year.”  The entire Conference can be viewed online (here).  The Conference featured a keynote speech, followed by three separate panels that addressed  developments at the Federal Trade Commission (FTC), at the Justice Department’s Antitrust Division (DOJ), and in the international arena, developments that can have a serious effect on the country’s economic growth and expansion of our business and industrial sector.

  1. Professor Bill Kovacic’s Keynote Speech

The conference started with a bang, featuring a stellar keynote speech (complemented by excellent power point slides) by GW Professor and former FTC Chairman Bill Kovacic, who also serves as a Member of the Board of the UK Government’s Competitive Markets Authority.  Kovacic began by noting the claim by senior foreign officials that “nothing is happening” in U.S. antitrust enforcement.  Although this perception may be inaccurate, Kovacic argued that it colors foreign officials’ dealings with the U.S., and continues a preexisting trend of diminishing U.S. influence on foreign governments’ antitrust enforcement systems.  (It is widely believed that the European antitrust model is dominant internationally.)

In order to enhance the perceived effectiveness (and prestige) of American antitrust on the global plane, American antitrust enforcers should, according to Kovacic, adopt a positive agenda citing specific priorities for action (as opposed to a “negative approach” focused on what actions will not be taken) – an orientation which former FTC Chairman Muris employed successfully in the last Bush Administration.  The positive engagement themes should be communicated powerfully to the public here and abroad through active public engagement by agency officials.  Agency strengths, such as FTC market studies and economic expertise, should be highlighted.

In addition, the FTC and Justice Department should act more like an “antitrust policy joint venture” at home and abroad, extending cooperation beyond guidelines to economic research, studies, and other aspects of their missions.  This would showcase the outstanding capabilities of the U.S. public antitrust enterprise.

  1. FTC Panel

A panel on FTC developments (moderated by Dr. Jeff Eisenach, Managing Director of NERA Economic Consulting and former Chief of Staff to FTC Chairman James Miller) followed Kovacic’s presentation.

Acting Bureau of Competition Chief Bruce Hoffman began by stressing that FTC antitrust enforcers are busier than ever, with a number of important cases in litigation and resources stretched to the limit.  Thus, FTC enforcement is neither weak nor timid – to the contrary, it is quite vigorous.  Hoffman was surprised by recent political attacks on the 40 year bipartisan consensus regarding the economics-centered consumer welfare standard that has set the direction of U.S. antitrust enforcement.  According to Hoffman, noted economist Carl Shapiro has debunked the notion that supposed increases in industry concentration even at the national level are meaningful.  In short, there is no empirical basis to dethrone the consumer welfare standard and replace it with something else.

Other former senior FTC officials engaged in a discussion following Hoffman’s remarks.  Orrick Partner Alex Okuliar, a former Attorney-Advisor to FTC Acting Chairman Maureen Ohlhausen, noted Ohlhausen’s emphasis on “regulatory humility” ( recognizing the inherent limitations of regulation and acting in accordance with those limits) and on the work of the FTC’s Economic Liberty Task Force, which centers on removing unnecessary regulatory restraints on competition (such as excessive occupational licensing requirements).

Wilson Sonsini Partner Susan Creighton, a former Director of the FTC’s Bureau of Competition, discussed the importance of economics-based “technocratic antitrust” (applied by sophisticated judges) for a sound and manageable antitrust system – something still not well understood by many foreign antitrust agencies.  Creighton had three reform suggestions for the Trump Administration:

(1) the DOJ and the FTC should stress the central role of economics in the institutional arrangements of antitrust (DOJ’s “economics structure” is a bit different than the FTC’s);

(2) both agencies should send relatively more economists to represent us at antitrust meetings abroad, thereby enabling the agencies to place a greater stress on the importance of economic rigor in antitrust enforcement; and

(3) the FTC and the DOJ should establish a task force to jointly carry out economics research and hone a consistent economic policy message.

Sidley & Austin Partner Bill Blumenthal, a former FTC General Counsel, noted the problems of defining Trump FTC policy in the absence of new Trump FTC Commissioners.  Blumenthal noted that signs of a populist uprising against current antitrust norms extend beyond antitrust, and that the agencies may have to look to new unilateral conduct cases to show that they are “doing something.”  He added that the populist rejection of current economics-based antitrust analysis is intellectually incoherent.  There is a tension between protecting consumers and protecting labor; for example, anti-consumer cartels may be beneficial to labor union interests.

In a follow-up roundtable discussion, Hoffman noted that theoretical “existence theorems” of anticompetitive harm that lack empirical support in particular cases are not administrable.  Creighton opined that, as an independent agency, the FTC may be a bit more susceptible to congressional pressure than DOJ.  Blumenthal stated that congressional interest may be able to trigger particular investigations, but it does not dictate outcomes.

  1. DOJ Panel

Following lunch, a panel of antitrust experts (moderated by Morgan Lewis Partner and former Chief of Staff to the Assistant Attorney General Hill Wellford) addressed DOJ developments.

The current Principal Deputy Assistant Attorney General for Antitrust, Andrew Finch, began by stating that the three major Antitrust Division initiatives involve (1) intellectual property (IP), (2) remedies, and (3) criminal enforcement.  Assistant Attorney General Makan Delrahim’s November 2017 speech explained that antitrust should not undermine legitimate incentives of patent holders to maximize returns to their IP through licensing.  DOJ is looking into buyer and seller cartel behavior (including in standard setting) that could harm IP rights.  DOJ will work to streamline and improve consent decrees and other remedies, and make it easier to go after decree violations.  In criminal enforcement, DOJ will continue to go after “no employee poaching” employer agreements as criminal violations.

Former Assistant Attorney General Tom Barnett, a Covington & Burling Partner, noted that more national agencies are willing to intervene in international matters, leading to inconsistencies in results.  The International Competition Network is important, but major differences in rhetoric have created a sense that there is very little agreement among enforcers, although the reality may be otherwise.  Muted U.S. agency voices on the international plane and limited resources have proven unfortunate – the FTC needs to engage better in international discussions and needs new Commissioners.

Former Counsel to the Assistant Attorney Eric Grannon, a White & Case Partner, made three specific comments:

(1) DOJ should look outside the career criminal enforcement bureaucracy and consider selecting someone with significant private sector experience as Deputy Assistant Attorney General for Criminal Enforcement;

(2) DOJ needs to go beyond merely focusing on metrics that show increased aggregate fines and jail time year-by-year (something is wrong if cartel activities and penalties keep rising despite the growing emphasis on inculcating an “anti-cartel culture” within firms); and

(3) DOJ needs to reassess its “amnesty plus” program, in which an amnesty applicant benefits by highlighting the existence of a second cartel in which it participates (non-culpable firms allegedly in the second cartel may be fingered, leading to unjustified potential treble damages liability for them in private lawsuits).

Grannon urged that DOJ hold a public workshop on the amnesty plus program in the coming year.  Grannon also argued against the classification of antitrust offenses as crimes of “moral turpitude” (moral turpitude offenses allow perpetrators to be excluded from the U.S. for 20 years).  Finally, as a good government measure, Grannon recommended that the Antitrust Division should post all briefs on its website, including those of opposing parties and third parties.

Baker and Botts Partner Stephen Weissman, a former Deputy Director of the FTC’s Bureau of Competition, found a great deal of continuity in DOJ civil enforcement.  Nevertheless, he expressed surprise at Assistant Attorney General Delrahim’s recent remarks that suggested that DOJ might consider asking the Supreme Court to overturn the Illinois Brick ban on indirect purchaser suits under federal antitrust law.  Weissman noted the increased DOJ focus on the rights of IP holders, not implementers, and the beneficial emphasis on the importance of DOJ’s amicus program.

The following discussion among the panelists elicited agreement (Weissman and Barnett) that the business community needs more clear-cut guidance on vertical mergers (and perhaps on other mergers as well) and affirmative statements on DOJ’s plans.  DOJ was characterized as too heavy-handed in setting timing agreements in mergers.  The panelists were in accord that enforcers should continue to emphasize the American consumer welfare model of antitrust.  The panelists believed the U.S. gets it right in stressing jail time for cartelists and in detrebling for amnesty applicants.  DOJ should, however, apply a proper dose of skepticism in assessing the factual content of proffers made by amnesty applicants.  Former enforcers saw no need to automatically grant markers to those applicants.  Andrew Finch returned to the topic of Illinois Brick, explaining that the Antitrust Modernization Commission had suggested reexamining that case’s bar on federal indirect purchaser suits.  In response to an audience question as to which agency should do internet oversight, Finch stressed that relevant agency experience and resources are assessed on a matter-specific basis.

  1. International Panel

The last panel of the afternoon, which focused on international developments, was moderated by Cadwalader Counsel (and former Attorney-Advisor to FTC Chairman Tim Muris) Bilal Sayyed.

Deputy Assistant Attorney General for International Matters, Roger Alford, began with an overview of trade and antitrust considerations.  Alford explained that DOJ adds a consumer welfare and economics perspective to Trump Administration trade policy discussions.  On the international plane, DOJ supports principles of non-discrimination, strong antitrust enforcement, and opposition to national champions, plus the addition of a new competition chapter in “NAFTA 2.0” negotiations.  The revised 2017 DOJ International Antitrust Guidelines dealt with economic efficiency and the consideration of comity.  DOJ and the Executive Branch will take into account the degree of conflict with other jurisdictions’ laws (fleshing out comity analysis) and will push case coordination as well as policy coordination.  DOJ is considering new ideas for dealing with due process internationally, in addition to working within the International Competition Network to develop best practices.  Better international coordination is also needed on the cartel leniency program.

Next, Koren Wong-Ervin, Qualcomm Director of IP and Competition Policy (and former Director of the Scalia Law School’s Global Antitrust Institute) stated that the Korea Fair Trade Commission had ignored comity and guidance from U.S. expert officials in imposing global licensing remedies and penalties on Qualcomm.  The U.S. Government is moving toward a sounder approach on the evaluation of standard essential patents, as is Europe, with a move away from required component-specific patent licensing royalty determinations.  More generally, a return to an economic effects-based approach to IP licensing is important.  Comprehensive revisions to China’s Anti-Monopoly Law, now under consideration, will have enormous public policy importance.  Balanced IP licensing rules, with courts as gatekeepers, are important.  Chinese law still has overly broad essential facilities and deception law; IP price regulation proposals are very troublesome.  New FTC Commissioners are needed, accompanied by robust budget support for international work.

Latham & Watkins’ Washington, D.C. Managing Partner Michael Egge focused on the substantial divergence in merger enforcement practice around the world.  The cost of compliance imposed by European Commission pre-notification filing requirements is overly high; this pre-notification practice is not written down and has escaped needed public attention.  Chinese merger filing practice (“China is struggling to cope”) features a costly 1-3 month pre-filing acceptance period, and merger filing requirements in India are particularly onerous.

Jim Rill, former Assistant Attorney General for Antitrust and former ABA Antitrust Section Chair, stressed that due process improvements can help promote substantive antitrust convergence around the globe.  Rill stated that U.S. Government officials, with the assistance of private sector stakeholders, need a mechanism (a “report card”) to measure foreign agencies’ implementation of OECD antitrust recommendations.  U.S. Government officials should consider participating in foreign proceedings where the denial of due process is blatant, and where foreign governments indirectly dictate a particular harmful policy result.  Multilateral review of international agreements is valuable as well.  The comity principles found in the 1991 EU-U.S. Antitrust Cooperation Agreement are quite useful.  Trade remedies in antitrust agreements are not a competition solution, and are not helpful.  More and better training programs for foreign officials are called for; International Chamber of Commerce, American Bar Association, and U.S. Chamber of Commerce principles are generally sound.  Some consideration should be given to old ICPAC recommendations, such as (perhaps) the development of a common merger notification form for use around the world.

Douglas Ginsburg, Senior Judge (and former Chief Judge) of the U.S. Court of Appeals for the D.C. Circuit, and former Assistant Attorney General for Antitrust, spoke last, focusing on the European Court of Justice’s Intel decision, which laid bare the deficiencies in the European Commission’s finding of a competition law violation in that matter.

In a brief closing roundtable discussion, Roger Alford suggested possible greater involvement by business community stakeholders in training foreign antitrust officials.

  1. Conclusion

Heritage Foundation host Alden Abbott closed the proceedings with a brief capsule summary of panel highlights.  As in prior years, the Fourth Annual Heritage Antitrust Conference generated spirited discussion among the brightest lights in the American antitrust firmament on recent developments and likely trends in antitrust enforcement and policy development, here and abroad.

A panelist brought up an interesting tongue-in-cheek observation about the rising populist antitrust movement at a Heritage antitrust event this week. To the extent that the new populist antitrust movement is broadly concerned about effects on labor and wage depression, then, in principle, it should also be friendly to cartels. Although counterintuitive, employees have long supported and benefited from cartels, because cartels generally afford both job security and higher wages than competitive firms. And, of course, labor itself has long sought the protection of cartels – in the form of unions – to secure the same benefits.   

For instance, in the days before widespread foreign competition in domestic auto markets, native unionized workers of the big three producers enjoyed a relatively higher wage for relatively less output. Competition from abroad changed the economic landscape for both producers and workers with the end result being a reduction in union power and relatively lower overall wages for workers. The union model — a labor cartel — can guarantee higher wages to those workers.

The same story can be seen on other industries, as well, from telecommunications to service workers to public sector employees. Generally, market power on the labor demand side (employers) tends to facilitate market power on the labor supply side: firms with market power — with supracompetitive profits — can afford to pay more for labor and often are willing to do so in order to secure political support (and also to make it more expensive for potential competitors to hire skilled employees). Labor is a substantial cost for firms in competitive markets, however, so firms without market power are always looking to economize on labor (that is, have low wages, as few employees as needed, and to substitute capital for labor wherever efficient to do so).

Therefore, if broad labor effects should be a prime concern of antitrust, perhaps enforcers should use antitrust laws to encourage cartel formation when it might increase wages, regardless of the effects on productivity, prices, and other efficiencies that may arise (or perhaps, as a possible trump card to hold against traditional efficiencies justifications).

No one will make a serious case for promoting cartels (although Former FTC Chairman Pertshuk sounded similar notes in the late 70s), but the comment makes a deeper point about ongoing efforts to undermine the consumer welfare standard. Fundamental contradictions exist in antitrust rhetoric that is unmoored from economic analysis. Professor Hovenkamp highlighted this in a recent paper as well:

The coherence problem [in antitrust populism] shows up in goals that are unmeasurable and fundamentally inconsistent, although with their contradictions rarely exposed. Among the most problematic contradictions is the one between small business protection and consumer welfare. In a nutshell, consumers benefit from low prices, high output and high quality and variety of products and services. But when a firm or a technology is able to offer these things they invariably injure rivals, typically smaller or dedicated to older technologies, who are unable to match them. Although movement antitrust rhetoric is often opaque about specifics, its general effect is invariably to encourage higher prices or reduced output or innovation, mainly for the protection of small business. Indeed, that has been a predominant feature of movement antitrust ever since the Sherman Act was passed, and it is a prominent feature of movement antitrust today. Indeed, some spokespersons for movement antitrust write as if low prices are the evil that antitrust law should be combatting.

To be fair, even with careful economic analysis, it is not always perfectly clear how to resolve the tensions between antitrust and other policy preferences.  For instance, Jonathan Adler described the collision between antitrust and environmental protection in cases where collusion might lead to better environmental outcomes. But even in cases like that, he noted it was essentially a free-rider problem and, as with intrabrand price agreements where consumer goodwill was a “commons” that had to be suitably maintained against possible free-riding retailers, what might be an antitrust violation in one context was not necessarily a violation in a second context.  

Moreover, when the purpose of apparently “collusive” conduct is to actually ensure long term, sustainable production of a good or service (like fish), the behavior may not actually be anticompetitive. Thus, antitrust remains a plausible means of evaluating economic activity strictly on its own terms (and any alteration to the doctrine itself might actually be to prefer rule of reason analysis over per se analysis when examining these sorts of mitigating circumstances).

And before contorting antitrust into a policy cure-all, it is important to remember that the consumer welfare standard evolved out of sometimes good (price fixing bans) and sometimes questionable (prohibitions on output contracts) doctrines that were subject to legal trial and error. This was an evolution that was triggered by “increasing economic sophistication” and as “the enforcement agencies and courts [began] reaching for new ways in which to weigh competing and conflicting claims.”

The vector of that evolution was toward the use of  antitrust as a reliable, testable, and clear set of legal principles that are ultimately subject to economic analysis. When the populists ask us, for instance, to return to a time when judges could “prevent the conversion of concentrated economic power into concentrated political power” via antitrust law, they are asking for much more than just adding a new gloss to existing doctrine. They are asking for us to unlearn all of the lessons of the twentieth century that ultimately led toward the maturation of antitrust law.

It’s perfectly reasonable to care about political corruption, worker welfare, and income inequality. It’s not perfectly reasonable to try to shoehorn goals based on these political concerns into a body of legal doctrine that evolved a set of tools wholly inappropriate for achieving those ends.

Are current antitrust tools fully adequate to cope with the challenges posed by giant online “digital platforms” (such as Google, Amazon, and Facebook)?  Yes.  Should antitrust rules be expanded to address broader social concerns that transcend consumer welfare and economic efficiency, such as income inequality and allegedly excessive big business influence on the political process?  No.  For more details, see my January 23 Heritage Foundation Legal Memorandum entitled Antitrust and the Winner-Take-All Economy.  That Memo concludes:

[T]he U.S. antitrust laws as currently applied, emphasizing sound economics, are fully capable of preventing truly anticompetitive behavior by major Internet platform companies and other large firms. But using antitrust to attack companies based on non-economic, ill-defined concerns about size, fairness, or political clout is unwarranted, and would be a recipe for reduced innovation and economic stagnation. Recent arguments trotted out to use antitrust in such an expansive manner are baseless, and should be rejected by enforcers and by Congress.

On January 23rd, for the fourth consecutive year, The Heritage Foundation will host a one-day antitrust conference that focuses on major thematic developments in domestic and international antitrust policy.  The conference pulls together leaders of the antitrust bar and top current and former Federal Trade Commission (FTC) and Justice Department (DOJ) officials to provide an overarching perspective of antitrust trends that will affect the business community over the next year.

This year’s program, entitled “Trump Antitrust Policy after One Year,” will as usual feature an opening keynote address by former FTC Chairman and scholar extraordinaire Professor Bill Kovacic, followed by three separate panels covering FTC, DOJ, and international developments, respectively.  A light lunch will be served following the FTC panel.  The program will be held in the Allison Auditorium at The Heritage Foundation headquarters in the District of Columbia.

You can find out more about the program, and register to attend, here.  (If you cannot attend in person, you will be able to see it streamed online at https://www.heritage.org/events.)

I hope to see you there!

On December 1, 2017, in granting certiorari in Salt River Project Agricultural Improvement and Power District v. SolarCity Corp., the U.S. Supreme Court agreed to consider “whether orders denying antitrust state-action immunity to public entities are immediately appealable under the collateral-order doctrine.”  At first blush, this case might appear to involve little more than a narrow technical question regarding the availability of interlocutory appeals.  But more fundamentally, this matter may afford the Supreme Court yet another opportunity to weigh in on the essential nature of the antitrust state action doctrine (albeit indirectly), in deciding whether the existence of state action immunity should be decided prior to the litigation of substantive antitrust suits.

Background

The Salt River Power District (SRP) is the only supplier of traditional electrical power in Phoenix, and is a subdivision of the State of Arizona.  SRP has lobbied successfully for special governmental status and has used its longstanding ties to government to advance the interests of its private shareholders.  (This sort of tale comes as no surprise to students of public choice.)  Counsel for respondent SolarCity discussed these ties in their brief opposing certiorari:

[SRP] was created in 1903 to take advantage of a federal law that provided interest-free loans for landowners to build reclamation projects to irrigate their lands.  During the Great Depression, SRP successfully lobbied the Arizona legislature for a law denominating it a political subdivision of Arizona so the landowners who ran SRP could avoid income taxes and sell tax-free bonds. . . .  Arizona denominates SRP a public entity, but as th[e] [U.S. Supreme] Court . . . explained [in a 1981 case involving [the right of local non-landowner residents to vote on SRP policy determinations], SRP and organizations like it are “essentially business enterprises, created by and chiefly benefitting a specific group of landowners.” . . . .  Among other things, SRP lacks “the crucial powers of sovereignty typical of a general purpose unit of government” and SRP’s electric business does not implicate any traditional sovereign power. . . . 

SRP’s retail electric business is unregulated. The business answers only to its own self-interested Board, not a public utility commission or any similar independent body. . . .   42 (ER55). SRP is thus free to serve private, not public interests. . . .  SRP takes profits from electricity sales and uses them to subsidize irrigation and canal water so that, for example, certain agricultural interests can farm cheaply by a city in the desert. . . . 

 In short, [as the Supreme Court explained in 1981,] SRP makes money from electric customers and pays out dividends in the form of irrigating “private lands for personal profit.”

 

SolarCity sells and leases rooftop solar-energy panels in Arizona.  It alleges that SRP used its special government subsidies to drive it out of the market for the supply of those panels to customers in the SRP district area.  Specifically, according to counsel for SolarCity:

As solar generation increased in popularity and efficiency, SRP started to view solar as a long-term competitive threat to its electricity sales and profits. . . .  Facing competition for the first time ever, SRP had a choice between competing in the market or using its monopoly power to exclude competition. . . .  SRP first attempted to compete on the merits by developing its own solar offerings. . . .  However, consumers continued to prefer SRP’s solar competitors. . . .  Then, rather than offer consumers a better product or value, SRP used its unregulated market power to impose terms that lock customers into remaining what SRP calls “requirements” customers—those who satisfy all their electric needs from, and deal exclusively with, SRP. . . .

SRP’s plan [which imposed a large penalty on any customer who obtained power from its own solar system] worked. . . .  The new requirements it mandated for its customers had a drastic anticompetitive effect. . . .  New rooftop solar applications—from customers of any firm, not just SolarCity—dropped by about 96 percent. . . .  SolarCity was forced to stop selling in SRP territory and to relocate employees.

SolarCity sued SRP for Sherman Antitrust Act violations in Arizona federal district court.  SRP moved to dismiss under the antitrust state action doctrine, which (as Professor Herbert Hovenkamp puts it) “exempts qualifying state and local government regulation from federal antitrust [law], even if the regulation at issue compels an otherwise clear violation of the law.”  The district court denied the motion to dismiss, and the Ninth Circuit affirmed.  The Ninth Circuit panel opinion (Judge Michelle Friedland, joined by Judges Alex Kozinski and Ronald Lee Gilman) assessed the applicability of the “collateral order doctrine,” which allows an appeal of a non-final district court decision if it is:  (1) conclusive; (2) addresses a question separate from the merits of the underlying case; and (3) raises “some particular value of a high order” that will evade effective review if not considered immediately.  The Ninth Circuit emphasized the Supreme Court’s teaching that the collateral order doctrine is a “narrow exception” that must be “strictly applied.”  It concluded that, “because the state-action doctrine is a defense to liability and not an immunity from suit, the collateral-order doctrine does not give us jurisdiction here [footnotes omitted].”

In its brief supporting its writ of certiorari, SRP stressed that an interlocutory appeal was justified here because“[a] denial of state-action immunity, like a denial of state sovereign immunity, offends state sovereignty, dignity, and autonomy. . . .  [T]he decision below threatens the dignity and autonomy of the states, as well as the division of regulatory power between the state and federal governments, by allowing a political subdivision of a state to be subjected to prolonged litigation for engaging in conduct that was clearly authorized by the state.”

In short, the Supreme Court has been asked to take fundamental federalism principles into account in weighing the applicability of the collateral order doctrine.

Discussion

Set aside for the moment the narrow question of the applicability of specific collateral order doctrine criteria in this case.   Assuming the validity of the facts summarized above, this matter highlights the always-present anticompetitive potential of enabling private parties to exercise monopoly power under the mantle of state authority.  Let us briefly examine, then, key state action principles that apply to essentially private conduct that seeks to shelter under a governmental cloak.

Commendably, in Midcal and 324 Liquor, the Supreme Court made it clear that the state action doctrine does not enable state governments to directly authorize purely private actors to violate the Sherman Act, free from state oversight.  But should an entity such as SRP that is in essence an unregulated for-profit private enterprise, acting in an anticompetitive fashion, be free to undermine the competitive process (benefiting from government subsidies to boot) merely because a century-old state law characterized it as a state political subdivision?

The “spirit” of recent Supreme Court jurisprudence suggests that the answer should be no, and that the Court may be willing to look beyond the formality of a legislative designation (in this case, “state political subdivision”) to questions of political accountability.  In 2015, In North Carolina Dental Board, the Court rejected the claim that state action immunity applied to the self-interested actions of a state dental regulatory board stacked with dentists (the board barred competition from non-dentists in tooth whitening).  In so doing, the Court held that entities designated as state agencies are not exempt from active supervision when they are controlled by market participants, because immunizing such entities from federal antitrust challenge would pose the risk of self-dealing that the Court had warned against in prior decisions, such as Midcal.

A legal formalist might respond that a mere state board is of a lesser dignity than a state political subdivision, such as SRP, which directly exercises state sovereign power, and, as such, is not subject to “active supervision” requirements.  Functionally, however, SRP acts in all respects like a private company, except that it benefits from certain special state subsidies that assist it in undermining competition.  Recognizing that reality, the Court might be willing to say that it will look beyond formal legislative designations to the actual role of a state entity in deciding whether it is, or is not, engaging in “sovereign action.”  (State instrumentalities engaging in classic sovereign functions, such as a state supreme court or state treasury department, would not raise this sort of problem.)

More specifically, the Court might wish to consider whether federal antitrust law should be applicable when a state instrumentality that does not have the attributes of a classic private business – such as a state owned-controlled- and operated electric company, for example – engages in business activity and uses its governmental ties to subvert competition.  Such a company might, for instance, predate against competing private companies by pricing below its own cost to drive out and keep out rivals, relying on taxpayer funding to support its activities.  Activity of this sort could be made subject to a “market participant exception” to the state action doctrine (at the very least requiring state active supervision), as recommended by the Federal Trade Commission’s 2004 State Action Task Force Report.  Such an exception, which has not yet been specifically addressed by the Supreme Court, would reduce the returns to anticompetitive business activity engaged in by privileged “state” agents, thereby promoting commercial freedom and vibrant markets.  And, as two learned commentators recently pointed out, it would not offend federalism principles that underlie the antitrust state action doctrine (footnote references deleted):

[T]he state does not act within its sovereign prerogative when engaged in economic conduct.  It cannot be that the government is truly exercising sovereign powers when acting in the same way as its private citizens.  Thus, restricting the prerogative of state and local governments to engage in economic conduct does not abrogate sovereign immunity.  Therefore, the federalism concerns underpinning the . . . [state action] immunity doctrine are not in play when the State acts as an ordinary market-participant on equal-footing with private citizens.

The policy and federalism justifications for denying state action immunity to an unsupervised state agency acting as a commercial operator would apply “in spades” to SRP, which, as has been seen, in all material respects looks like a purely private actor.

Let’s return now to the specific question before the Supreme Court.  While state action doctrinal issues (including, of course, a possible market operator exception) are not directly presented in the SRP v. SolarCity case, they may well flavor the approach the Court takes in determining the availability of interlocutory appeals of state action immunity denials.  The clear and ringing invocation of federalism principles in petitioners’ brief for certiorari suggests a possible doctrinal hook.  In particular, the Court might determine that respect for the dignity and role of states as coordinate sovereigns compels a finding that denials of antitrust state action immunity should be subject to immediate review.

A ruling that state action questions should be decided “up front” might, however, prove a pyrrhic victory for petitioners.  Counsel for respondents have ably pointed out the quintessentially private commercial nature of SRP’s activities, which could amply support a judicial finding of no state action immunity – whether based on the somewhat novel “market participant” exception or because of inadequate state supervision.

Conclusion

The Supreme Court’s decision in SPR v. SolarCity will determine the narrow issue of the availability of interlocutory appeals to an antitrust defendant that is denied a dismissal on antitrust state action grounds.  A holding that authorizes such appeals also would have the incidental salutary effect of furthering efficiency, by eliminating a significant source of costly uncertainty affecting the litigation of cases that fall under the shadow of the “state action” umbrella.

More broadly, the facts in SPR v. SolarCity highlight a potential future clarification of the antitrust state action doctrine – establishment of a clear “market participant” exception to state action immunity.  Such an exception commendably would promote effective market processes without offending federalism.  It would also tend to diminish returns to (and thereby weaken incentives to engage in) rent seeking by those firms that seek to obtain a business advantage through special government privilege, rather than through competition on the merits.

Last week, several major drug makers marked the new year by announcing annual increases on list prices.  In addition to drug maker Allergan—which pledged last year to confine price increases below 10 percent and, true to its word, reported 2018 price increases of 9.5 percent—several other companies also stuck to single-digit increases.   Although list or “sticker” prices generally increased by around 9 percent for most drugs, after discounts negotiated with various health plans, the net prices that consumers and insurers actually pay will see much lower increases. For example, Allergan expects that payors will only see net price increases of 2 to 3 percent in 2018.

However, price increases won’t generate the same returns for brand drug companies that they once did.  As insurers and pharmacy benefit managers consolidate and increase their market share, they have been able to capture an increasing share of the money spent on drugs for themselves. Indeed, a 2017 report found that, of the money spent on prescription drugs by patients and health plans at the point of sale, brand drug makers only realized 39 percent.  Meanwhile, supply-chain participants, such as pharmacy benefit managers, realized 42 percent of these expenditures.  What’s more, year-after-year, brand drug makers have seen their share of these point-of-sale expenditures decrease while supply-chain entities have kept a growing share of expenditures for themselves.

Brand drug makers have also experienced a dramatic decline in the return on their R&D investment.  A recent Deloitte study reports that, for the large drug makers they’ve followed since 2010, R&D returns have dropped from over 10 percent to under 4 percent for the last two years.  The ability of supply-chain entities to capture an increasing share of drug expenditures is responsible for at least part of drug makers’ decreasing R&D returns; the study reports that average peak sales for drugs have slowly dropped over time, mirroring drug maker’s decreasing share of expenditures.  In addition, the decline in R&D returns can be traced to the increasing cost of bringing drugs to market; for the companies Deloitte studied, the cost to bring a drug to market has increased from just over $1.1 billion in 2010 to almost $2 billion in 2017.

Brand drug makers’ decreasing share of drug expenditures and declining R&D returns reduce incentives to innovate.  As the payoff from innovation declines, fewer companies will devote the substantial resources necessary to develop innovative new drugs.  In addition, innovation is threatened as brand companies increasingly face uncertainty about the patent rights of the drugs they do bring to market.  As I’ve discussed in a previous post,  the unbalanced inter partes review (IPR) process created under the Leahy-Smith America Invents Act in 2012 has led to significantly higher patent invalidation rates.  Compared to traditional district-court litigation, several pro-challenger provisions under IPR—including a lower standard of proof, a broader claim construction standard, and the ability of patent challengers to force patent owners into duplicative litigation—have resulted in twice as many patents deemed invalid in IPR proceedings.  Moreover, the lack of a standing requirement in IPR proceedings has given rise to “reverse patent trolling,” in which entities that are not litigation targets, or even participants in the same industry, threaten to file an IPR petition challenging the validity of a patent unless the patent holder agrees to specific settlement demands.  Even supporters of IPR proceedings recognize the flaws with the system; as Senator Orrin Hatch stated in a 2017 speech: “Such manipulation is contrary to the intent of IPR and the very purpose of intellectual property law. . . I think Congress needs to take a look at it.” Although the constitutionality of the IPR process is currently under review by the U.S. Supreme Court, if the unbalanced process remains unchanged, the significant uncertainty it creates for drug makers’ patent rights will lead to less innovation in the pharmaceutical industry.  Drug makers will have little incentive to spend billions of dollars to bring a new drug to market when they cannot be certain if the patents for that drug can withstand IPR proceedings that are clearly stacked against them.

We are likely to see a renewed push for drug pricing reforms in 2018 as access to affordable drugs remains a top policy priority.  Although Congress has yet to come together in support of any specific proposal, several states are experimenting with reforms that aim to lower drug prices by requiring more pricing transparency and notice of price increases.  As lawmakers consider these and other reforms, they should consider the current challenges that drug makers already face as their share of drug expenditures and R&D returns decline and patent rights remain uncertain.  Reforms that further threaten drug makers’ financial incentives to innovate could reduce our access to life-saving and life-improving new drugs.

Introduction and Summary

On December 19, 2017, the U.S. Court of Appeals for the Second Circuit presented Broadcast Music, Inc. (BMI) with an early Christmas present.  Specifically, the Second Circuit commendably affirmed the District Court for the Southern District of New York’s September 2016 ruling rejecting the U.S. Department of Justice’s (DOJ) August 2016 reinterpretation of its longstanding antitrust consent decree with BMI.  Because the DOJ reinterpretation also covered a parallel DOJ consent decree with the American Society of Composers, Authors, and Publishers (ASCAP), the Second Circuit’s decision by necessary implication benefits ASCAP as well, although it was not a party to the suit.

The Second Circuit’s holding is sound as a matter of textual interpretation and wise as a matter of economic policy.  Indeed, DOJ’s current antitrust leadership, which recognizes the importance of vibrant intellectual property licensing in the context of patents (see here), should be pleased that the Second Circuit rescued it from a huge mistake by the Obama Administration DOJ in the context of copyright licensing.

Background

BMI and ASCAP are the two leading U.S. “performing rights organizations” (PROs).  They contract with music copyright holders to act as intermediaries that provide “blanket” licenses to music users (e.g., television and radio stations, bars, and internet music distributors) for use of their full copyrighted musical repertoires, without the need for song-specific licensing negotiations.  This greatly reduces the transactions costs of arranging for the playing of musical works, benefiting music users, the listening public, and copyright owners (all of whom are assured of at least some compensation for their endeavors).  ASCAP and BMI are big businesses, with each PRO holding licenses to over ten million works and accounting for roughly 45 percent of the domestic music licensing market (ninety percent combined).

Because both ASCAP and BMI pool copyrighted songs that could otherwise compete with each other, and both grant users a single-price “blanket license” conveying the rights to play their full set of copyrighted works, the two organizations could be seen as restricting competition among copyrighted works and fixing the prices of copyrighted substitutes – raising serious questions under section 1 of the Sherman Antitrust Act, which condemns contracts that unreasonably restrain trade.  This led the DOJ to bring antitrust suits against ASCAP and BMI over eighty years ago, which were settled by separate judicially-filed consent decrees in 1941.

The decrees imposed a variety of limitations on the two PROs’ licensing practices, aimed at preventing ASCAP and BMI from exercising anticompetitive market power (such as the setting of excessive licensing rates).  The decrees were amended twice over the years, most recently in 2001, to take account of changing market conditions.  The U.S. Supreme Court noted the constraining effect of the decrees in BMI v. CBS (1979), in ruling that the BMI and ASCAP blanket licenses did not constitute per se illegal price fixing.  The Court held, rather, that the licenses should be evaluated on a case-by-case basis under the antitrust “rule of reason,” since the licenses inherently generated great efficiency benefits (“the immediate use of covered compositions, without the delay of prior individual negotiations”) that had to be weighed against potential anticompetitive harms.

The August 4, 2016 DOJ Consent Decree Interpretation

Fast forward to 2014, when DOJ undertook a new review of the ASCAP and BMI decrees, and requested the submission of public comments to aid it in its deliberations.  This review came to an official conclusion two years later, on August 4, 2016, when DOJ decided not to amend the decrees – but announced a decree interpretation that limits ASCAP’s and BMI’s flexibility.  Specifically, DOJ stated that the decrees needed to be “more consistently applied.”  By this, the DOJ meant that BMI and ASCAP should only grant blanket licenses that cover all of the rights to 100 percent of the works in the PROs’ respective catalogs (“full-work licensing”), not licenses that cover only partial interests in those works.  DOJ stated:

Only full-work licensing can yield the substantial procompetitive benefits associated with blanket licenses that distinguish ASCAP’s and BMI’s activities from other agreements among competitors that present serious issues under the antitrust laws.

The New DOJ Interpretation Was Bad as a Matter of Policy

DOJ’s August 4 interpretation rejected industry practice.  Under it, ASCAP and BMI were only allowed to offer a license covering all of the copyright interests in a musical competition, even if the license covers a joint work.

For example, consider a band of five composer-musicians, each of whom has a fractional interest in the copyright covering the band’s new album which is a joint work.  Prior to the DOJ’s new interpretation, each musician was able to offer a partial interest in the joint work to a performance rights organization, reflecting the relative shares of the total copyright interest covering the work.  The organization could offer a partial license, and a user could aggregate different partial licenses in order to cover the whole joint work.  Following the new interpretation, however, BMI and ASCAP could not offer partial licenses to that work to users.  This denied the band’s individual members the opportunity to deal profitably with BMI and ASCAP, thereby undermining their ability to receive fair compensation.

As the two PROs warned, this approach, if upheld, would “cause unnecessary chaos in the marketplace and place unfair financial burdens and creative constraints on songwriters and composers.”  According to ASCAP President Paul Williams, “It is as if the DOJ saw songwriters struggling to stay afloat in a sea of outdated regulations and decided to hand us an anchor, in the form of 100 percent licensing, instead of a life preserver.”  Furthermore, the president and CEO of BMI, Mike O’Neill, stated:  “We believe the DOJ’s interpretation benefits no one – not BMI or ASCAP, not the music publishers, and not the music users – but we are most sensitive to the impact this could have on you, our songwriters and composers.”

The PROs’ views were bolstered by a January 2016 U.S. Copyright Office report, which concluded that “an interpretation of the consent decrees that would require 100-percent licensing or removal of a work from the ASCAP or BMI repertoire would appear to be fraught with legal and logistical problems, and might well result in a sharp decrease in repertoire available through these [performance rights organizations’] blanket licenses.”  Regrettably, during the decree review period, DOJ ignored the expert opinion of the Copyright Office, as well as the public record comments of numerous publishers and artists (see here, for example) indicating that a 100 percent licensing requirement would depress returns to copyright owners and undermine the creative music industry.

Most fundamentally, DOJ’s new interpretation of the BMI and ASCAP consent decrees involved an abridgment of economic freedom.  It further limited the flexibility of copyright music holders and music users to contract with intermediaries to promote the efficient distribution of music performance rights, in a manner that benefits the listening public while allowing creative artists sufficient compensation for their efforts.  DOJ made no compelling showing that a new consent decree constraint was needed to promote competition (100 percent licensing only).  Far from promoting competition, DOJ’s new interpretation undermined it.  DOJ micromanagement of copyright licensing by consent decree reinterpretation was a costly new regulatory initiative that reflected a lack of appreciation for intellectual property rights, which incentivize innovation.  In short, DOJ’s latest interpretation of the ASCAP and BMI decrees was terrible policy.

The New DOJ Interpretation Ran Counter to International Norms

The new DOJ interpretation had unfortunate international policy implications as well.  According to Gadi Oron, Director General of the International Confederation of Societies of Authors and Composers (CISAC), a Paris-based organization that regroups 239 rights societies from 123 countries, including ASCAP, BMI, and SESAC, the new interpretation departed from international norms in the music licensing industry and have disruptive international effects:

It is clear that the DoJ’s decisions have been made without taking the interests of creators, neither American nor international, into account. It is also clear that they were made with total disregard for the international framework, where fractional licensing is practiced, even if it’s less of a factor because many countries only have one performance rights organization representing songwriters in their territory. International copyright laws grant songwriters exclusive rights, giving them the power to decide who will license their rights in each territory and it is these rights that underpin the landscape in which authors’ societies operate. The international system of collective management of rights, which is based on reciprocal representation agreements and founded on the freedom of choice of the rights holder, would be negatively affected by such level of government intervention, at a time when it needs support more than ever.

The New DOJ Interpretation Was Defective as a Matter of Law, and the District Court and the Second Circuit So Held

As I explained in a November 2016 Heritage Foundation commentary (citing arguments made by counsel for BMI), DOJ’s new interpretation not only was bad domestic and international policy, it was inconsistent with sound textual construction of the decrees themselves.  The BMI decree (and therefore the analogous ASCAP decree as well) did not expressly require 100 percent licensing and did not unambiguously prohibit fractional licensing.  Accordingly, since a consent decree is an injunction, and any activity not expressly required or prohibited thereunder is permitted, fractional shares licensing should be authorized.  DOJ’s new interpretation ignored this principle.  It also was at odds with a report of the U.S. Copyright Office that concluded the BMI consent decree “must be understood to include partial interests in musical works.”  Furthermore, the new interpretation was belied by the fact that the PRO licensing market has developed and functioned efficiently for decades by pricing, collecting, and distributing fees for royalties on a fractional basis.  Courts view such evidence of trade practice and custom as relevant in determining the meaning of a consent decree.

The district court for the Southern District of New York accepted these textual arguments in its September 2016 ruling, granting BMI’s request for a declaratory judgment that the BMI decree did not require Decree did not require 100% (“full-work”) licensing.  The court explained:

Nothing in the Consent Decree gives support to the Division’s views. If a fractionally-licensed composition is disqualified from inclusion in BMI’s repertory, it is not for violation of any provision of the Consent Decree. While the Consent Decree requires BMI to license performances of those compositions “the right of public performances of which [BMI] has or hereafter shall have the right to license or sublicense” (Art. II(C)), it contains no provision regarding the source, extent, or nature of that right. It does not address the possibilities that BMI might license performances of a composition without sufficient legal right to do so, or under a worthless or invalid copyright, or users might perform a music composition licensed by fewer than all of its creators. . . .

The Consent Decree does not regulate the elements of the right to perform compositions. Performance of a composition under an ineffective license may infringe an author’s rights under copyright, contract or other law, but it does not infringe the Consent Decree, which does not extend to matters such as the invalidity or value of copyrights of any of the compositions in BMI’s repertory. Questions of the validity, scope and limits of the right to perform compositions are left to the congruent and competing interests in the music copyright market, and to copyright, property and other laws, to continue to resolve and enforce. Infringements (and fractional infringements) and remedies are not part of the Consent Decree’s subject-matter.

The Second Circuit affirmed, agreeing with the district court’s reading of the decree:

The decree does not address the issue of fractional versus full work licensing, and the parties agree that the issue did not arise at the time of the . . . [subsequent] amendments [to the decree]. . . .

This appeal begins and ends with the language of the consent decree. It is a “well-established principle that the language of a consent decree must dictate what a party is required to do and what it must refrain from doing.” Perez v. Danbury Hosp., 347 F.3d 419, 424 (2d Cir. 2003); United States v. Armour & Co., 402 U.S. 673, 682 (1971) (“[T]he scope of a consent decree must be discerned within its four corners…”). “[C]ourts must abide by the express terms of a consent decree and may not impose additional requirements or supplementary obligations on the parties even to fulfill the purposes of the decree more effectively.” Perez, 347 F.3d at 424; see also Barcia v. Sitkin, 367 F.3d 87, 106 (2d Cir. 2004) (internal citations omitted) (The district court may not “impose obligations on a party that are not unambiguously mandated by the decree itself.”). Accordingly, since the decree is silent on fractional licensing, BMI may (and perhaps must) offer them unless a clear and unambiguous command of the decree would thereby be violated. See United States v. Int’l Bhd. Of Teamsters, Chauffeurs, Warehousemen & Helpers of Am., AFLCIO, 998 F.2d 1101, 1107 (2d Cir. 1993); see also Armour, 402 U.S. at 681-82.

Conclusion

The federal courts wisely have put to rest an ill-considered effort by the Obama Antitrust Division to displace longstanding industry practices that allowed efficient flexibility in the licensing of copyright interests by PROs.  Let us hope that the Trump Antitrust Division will not just accept the Second Circuit’s decision, but will positively embrace it as a manifestation of enlightened antitrust-IP policy – one in harmony with broader efforts by the Division to restore sound thinking to the antitrust treatment of patent licensing and intellectual property in general.