Archives For truth on the market

  1. Introduction

For nearly two years, the Global Antitrust Institute (GAI) at George Mason University’s Scalia Law School has filed an impressive series of comments on foreign competition laws and regulations.  The latest GAI comment, dated March 19 (“March 19 comment”), focuses on proposed revisions to the Anti-Unfair Competition Law (AUCL) of the People’s Republic of China, currently under consideration by China’s national legislature, the National People’s Congress.  The AUCL “coexists” with China’s antitrust statute, the Anti-Monopoly Law (AML).  The key concern raised by the March 19 comment is that the AUCL revisions not undermine the application of sound competition law principles in the analysis of bundling (a seller’s offering of several goods as part of a single package sale).  As such, the March 19 comment notes that the best way to avoid such an outcome would be for the AUCL to avoid condemning bundling as a potential “unfair” practice, leaving bundling practices to be assessed solely under the AML.  Furthermore, the March 19 comment wisely stresses that any antitrust evaluation of bundling, whether under the AML (the preferred option) or under the AUCL, should give weight to the substantial efficiencies that bundling typically engenders.

  1. Highlights of the March 19 Comment

Specifically, the March 19 comment made the following key recommendations:

  • The National People’s Congress should be commended for having deleted Article 6 of an earlier AUCL draft, which prohibited a firm from “taking advantage of its comparative advantage position.” As explained in a March 2016 GAI comment, this provision would have undermined efficient contractual negotiations that could benefited consumer as well as producer welfare.
  • With respect to the remaining draft provisions, any provisions that relate to conduct covered by China’s Anti-Monopoly Law (AML) be omitted entirely.
  • In particular, Article 11 (which provides that “[b]usiness operators selling goods must not bundle the sale of goods against buyers’ wishes, and must not attach other unreasonable conditions”) should be omitted in its entirety, as such conduct is already covered by Article 17(5) of the AML.
  • In the alternative, at the very least, Article 11 should be revised to adopt an effect-based approach under which bundling will be condemned only when: (1) the seller has market power in one of the goods included in the bundle sufficient to enable it to restrain trade in the market(s) for the other goods in the bundle; and (2) the anticompetitive effects outweigh any procompetitive benefits.  Such an approach would be consistent with Article 17(5) of the AML, which provides for an effects-based approach that applies only to firms with a dominant market position.
  • Bundling is ubiquitous and widely used by a variety of firms and for a variety of reasons (see here). In the vast majority of cases, package sales are “easily explained by economies of scope in production or by reductions in transaction and information costs, with an obvious benefit to the seller, the buyer or both.”   Those benefits can include lower prices for consumers, facilitate entry into new markets, reduce conflicting incentives between manufacturers and their distributors, and mitigate retailer free-riding and other types of agency problems.  Indeed (see here), “bundling can serve the same efficiency-enhancing vertical control functions as have been identified in the economic literature on tying, exclusive dealing, and other forms of vertical restraints.”
  • The potential to harm competition and generate anticompetitive effects arises only when bundling is practiced by a firm with market power in one of the goods included in the bundle. As the U.S. Supreme Court explained in Jefferson Parrish v. Hyde (1984), “there is nothing inherently anticompetitive about package sales,” and the fact that “a purchaser is ‘forced’ to buy a product he would not have otherwise bought even from another seller” does not imply an “adverse impact on competition.”  Rather, for bundling to harm competition there would have to be an exclusionary effect on other sellers because bundling thwarts buyers’ desire to purchase substitutes for one or more of the goods in the bundle from those other sellers to an extent that harms competition in the markets for those products (see here).
  • Moreover, because of the widespread procompetitive use of bundling, by firms without and firms with market power, making bundling per se or presumptively unlawful is likely to generate many Type I (false positive) errors which, as the U.S. Supreme Court explained in Verizon v. Trinko (2004), “are especially costly, because they chill the very conduct the antitrust laws are designed to protect.”
  1. Conclusion

In sum, the GAI’s March 19 comment does an outstanding job of highlighting the typically procompetitive nature of bundling, and of calling for an economics-based approach to the antitrust evaluation of bundling in China.  Other competition law authorities (including, for example, the European Competition Commission) could benefit from this comment as well, when they scrutinize bundling arrangements.

TOTM is pleased to welcome guest blogger Nicolas Petit, Professor of Law & Economics at the University of Liege, Belgium.

Nicolas has also recently been named a (non-resident) Senior Scholar at ICLE (joining Joshua Wright, Joanna Shepherd, and Julian Morris).

Nicolas is also (as of March 2017) a Research Professor at the University of South Australia, co-director of the Liege Competition & Innovation Institute and director of the LL.M. program in EU Competition and Intellectual Property Law. He is also a part-time advisor to the Belgian competition authority.

Nicolas is a prolific scholar specializing in competition policy, IP law, and technology regulation. Nicolas Petit is the co-author (with Damien Geradin and Anne Layne-Farrar) of EU Competition Law and Economics (Oxford University Press, 2012) and the author of Droit européen de la concurrence (Domat Montchrestien, 2013), a monograph that was awarded the prize for the best law book of the year at the Constitutional Court in France.

One of his most recent papers, Significant Impediment to Industry Innovation: A Novel Theory of Harm in EU Merger Control?, was recently published as an ICLE Competition Research Program White Paper. His scholarship is available on SSRN and he tweets at @CompetitionProf.

Welcome, Nicolas!

On March 14, the U.S. Chamber of Commerce released a report “by an independent group of experts it commissioned to consider U.S. responses to the inappropriate use of antitrust enforcement actions worldwide to achieve industrial policy outcomes.”  (See here and here.)  I served as rapporteur for the report, which represents the views of the experts (leading academics, practitioners, and former senior officials who specialize in antitrust and international trade), not the position of the Chamber.  In particular, the report calls for the formation of a new White House-led working group.  The working group would oversee development of a strategy for dealing with the misuse of competition policy by other nations that impede international trade and competition and harm U.S. companies.  The denial of fundamental due process rights and the inappropriate extraterritorial application of competition remedies by foreign governments also would be within the purview of the working group.

The Chamber will hold a program on April 10 with members of the experts group to discuss the report and its conclusions.  The letter transmitting the report to the President and congressional leadership states as follows:

Today, nearly every nation in the world has some form of antitrust or competition law regulating business activities occurring within or substantially affecting its territory. The United States has long championed the promotion of global competition as the best way to ensure that businesses have a strong incentive to operate efficiently and innovate, and this approach has helped to fuel a strong and vibrant U.S. economy. But competition laws are not always applied in a transparent, accurate and impartial manner, and they can have significant adverse impacts far outside a country’s own borders. Certain of our major trading partners appear to have used their laws to actually harm competition by U.S. companies, protecting their own markets from foreign competition, promoting national champions, forcing technology transfers and, in some cases, denying U.S. companies fundamental due process.

Up to now, the United States has had some, but limited, success in addressing this problem. For that reason, in August of 2016, the U.S. Chamber of Commerce convened an independent, bi-partisan group of experts in trade and competition law and economics to take a fresh look and develop recommendations for a potentially more effective and better-integrated international trade and competition law strategy.

As explained by the U.S. Chamber in announcing the formation of this group,

The United States has been, and should continue to be, a global leader in the development and implementation of sound competition law and policy. . . . When competition law is applied in a discriminatory manner or relies upon non-competition factors to engineer outcomes in support of national champions or industrial policy objectives, the impact of such instances arguably goes beyond the role of U.S. antitrust agencies. The Chamber believes it is critical for the United States to develop a coordinated trade and competition law approach to international economic policy.

The International Competition Policy Expert Group (“ICPEG”) was encouraged to develop “practical and actionable steps forward that will serve to advance sound trade and competition policy.”

The Report accompanying this letter is the result of ICPEG’s work. Although the U.S. Chamber suggested the project and recruited participants, it made no effort to steer the content of ICPEG’s recommendations.

The Report is addressed specifically to the interaction of competition law and international trade law and proposes greater coordination and cooperation between them in the formulation and implementation of U.S. international trade policy. It focuses on the use of international trade and other appropriate tools to address problems in the application of foreign competition policies through 12 concrete recommendations.

Recommendations 1 through 6 urge the Trump Administration to prioritize the coordination of international competition policy through a new, cabinet-level White House working group (the “Working Group”) to be chaired by an Assistant to the President. Among other things, the Working Group would:

  • set a government-wide, high-level strategy for articulating and promoting policies to address the misuse of competition law by other nations that impede international trade and competition and harm U.S. companies;
  • undertake a 90-day review of existing and potential new trade policy tools available to address the challenge, culminating in a recommended “action list” for the President and Congress; and
  • address not only broader substantive concerns regarding the abuse of competition policy for protectionist and discriminatory purposes, but also the denial of fundamental process rights and the extraterritorial imposition of remedies that are not necessary to protect a country’s legitimate competition law objectives.

Recommendations 7 through 12 focus on steps that should be taken with international organizations and bilateral initiatives. For example, the United States should consider:

  • the feasibility and value of expanding the World Trade Organization’s regular assessment of each member government by the Trade Policy Review Body to include national competition policies and encourage the Organisation for Economic Cooperation and Development (OECD) to undertake specific peer reviews of national procedural or substantive policies, including of non-OECD countries;
  • encouraging the OECD and/or other multilateral bodies to adopt a code enumerating transparent, accurate, and impartial procedures; and
  • promoting the application of agreements under which nations would cooperate with and take into account legitimate interests of other nations affected by a competition investigation.

The competition and trade law issues addressed in the Report are complex and the consequences of taking any particular action vis-a-vis another country must be carefully considered in light of a number of factors beyond the scope of this Report. ICPEG does not take a view on the actions of any particular country nor propose specific steps with respect to any actual dispute or matter. In addition, reasonable minds can differ on ICPEG’s assessment and recommendations. But we hope that this Report will prompt appropriate prioritization of the issues it addresses and serve as the basis for the further development of a successful policy and action plan and improved coordination and cooperation between U.S. competition and trade agencies.

I recently became aware of a decision from the High Court in South Africa that examines an interesting intersection of freedom of expression, copyright and contract. It addresses the issue of how to define the public interest in an environment of relatively unguarded rhetoric about the role of copyright in society that is worth exploring. But first, a quick recap of the relevant facts, none of which were in issue.

A well known filmmaker, Ms. SE Vollenhoven, was hired by South African broadcaster, SABC, to produce a documentary film exposing certain governmental improprieties. In her contract with SABC, Vollenhoven transferred all copyright interests to SABC in exchange for compensation. SABC ultimately decided that it was uncomfortable with the product, and decided against releasing it. Vollenhoven initiated a discussion with SABC in an effort to buy back the rights to the film, but SABC refused, leading SABC to seek an injunction preventing Vollenhoven from engaging in any acts that would infringe their rights in the film.

For the purposes of this analysis, let’s assume that all equities are with Vollenhoven, and that the public would gain from the release of the film. I am not in a position to make such a judgment personally, but certainly my sympathies would be with a filmmaker whose own expressive work is relegated to the dustbins due to a decision by a business partner to keep the film out of the public eye. Her frustration is clearly understandable. Let’s further assume that the government pressured SABC into not releasing the film—not because in fact I assume this, but because it is certainly possible, and I want to examine the copyright questions in a light least hospitable to the assertion of copyright. There is an axiom in legal circles that “bad facts make bad law,” but sometimes bad facts allow us to observe legal principles without artifice or obstruction in ways that are useful for our understanding of fundamental principles of law and justice.

This is just such a case. Much as we might sympathize with Vollenhoven, the arguments presented by her counsel would require us to believe that the rejection of free will that undergirds freedom of contract and self-determination is a legitimate price in the quest for perceived freedom. I believe that is a fundamentally flawed proposition, and that willingness to constrain free will that allows a person to determine the scope of her consent undermines rather than advances the public good. The ends, even assuming that they are noble and just, do not justify a means that eliminates consent while seeking to improve the human condition. Vollenhoven and amici (we will get to them later)  ask us to reject free will to achieve freedom. But there is no freedom at the end of that road. As the Court brilliantly and succinctly observed: “a limitation of freedom is irreconcilable with the right of choice.

There are a number of equitable doctrines under which contracts may be vitiated, for example when they are the result of duress or where the consent required for formation of a contract is found to be absent. But here, no such equitable doctrines would apply. Vollenhoven was an accomplished filmmaker who freely negotiated a contract with SABC for her services. There is no suggestion from any party that the contract was somehow unfair, nor are we talking about the application of a non-negotiated provision of law vesting copyright in an employer or commissioning party. Vollenhoven herself does not assert anything different. Her unhappiness with the result of the contract is understandable, but doesn’t justify the attempt to circumvent it through a novel and dangerous mischaracterization of copyright laws and exceptions thereto.

This is where things get interesting. Since the contract under which SABC obtained the copyright in the documentary was unassailable, Vollenhoven and her supporters determined to “free the film” by asserting an implied exception to copyright laws to permit dissemination of information in the public interest. This took a variety of forms, all of which eventually defaulted to the proposition that the public’s interest in access superseded the copyright owner’s interest in protection. I take particular note of the participation of the Freedom of Expression Institute (FXI) on behalf of Vollenhoven since they most perfectly articulate the position that copyright is a form of censorship, having written in their 2015 copyright reform submission to DTI that: “FXI believes that copyright law and free speech are fundamentally in conflict. It should come as no surprise, at all, that both governments and the private sector use copyright law to suppress speech and dissent.” Vollenhoven’s counsel, as summarized by the Court, argued that the Copyright law exists, inter alia, “to promote the free spread of art, ideas and information, not to hinder it and to regulate copyright so as to enhance a vibrant culture in South Africa. Thus on a purposeful interpretation of the Act, so it is argued, it is not just to protect owners of copyright but to advance the public good.”

The Court was unimpressed, finding that: “There is nothing…to support the meaning of public good relied on by the Respondents. Their construction of public good or welfare is equated to dissemination of ideas and this is nowhere to be found or implied….The view that copyright aims to promote public disclosure and dissemination of works cannot be regarded as a true reflection of the purpose or intent of the Act and is not part of our copyright law. The Respondents’  conception of the purposes of the Copyright Act is overbroad. The Act by no means purports to regulate or promote the free spread of ideas although it undoubtedly is a mechanism by which this result may be effected. It is straining the proper limits of the Act to find some kind of implied condition of dissemination in the conferral of copyright.”

And of course, the Court is absolutely correct–enjoining the distribution of the film doesn’t prevent the distribution of the information/ideas contained therein, only the specific original expression of said ideas. Vollerhoven, or anyone else, remains free to tell stories through separate vehicles. As the Court explained: “[Vollerhoven] concedes readily that the respondents have right to tell the story in a different work and have not attempted to stifle this form of expression. In truth the respondents’ freedom of speech is not impinged at all. What is impinged is the use of the work which the respondents sold to the applicant and were substantially rewarded monetarily. The copyrights are vested by law in the applicants. This cannot be conflated with an infringement of freedom of speech. Vollenhoven shows that she is alive to the distinction between the work and the underlying story or idea and does not shirk from asserting her rights to exploit the story as she is well entitled to do.”

The contrary rule argued by her counsel and by FXI is untenable, and would require embracing the perverse logic that the protection of expression is itself a restriction on freedom of expression, a proposition worthy of Wonderland’s Red Queen. If the right of access enjoyed by the public always supersedes the individual’s right to control the uses of her property, then copyright is truly meaningless. FXI’s position essentially acknowledges this. While I think that FXI is mistaken, and fails to capture how copyright serves to democratize the production of original cultural materials for the benefit of society, I will at least give them credit for their directness. Perhaps they believe that state support for the arts is a better tool for sustaining creators. Perhaps they believe in private patronage. But unlike many of their copyright-skeptic peers in the west, they at least own their narrative and don’t feel the need to say that they believe in copyright while rejecting any modality for its protection. It’s a flawed vision that fails to reflect that the interests of the public are served by sustaining creators, and by protecting fundamental human rights in connection with the creation of original works. But it is a vision. Hopefully one that will evolve through an increased recognition that ensuring consent in a technological universe that celebrates lack of permission is central to advancing our humanity and retaining and celebrating our cultural differences.

The antitrust industry never sleeps – it is always hard at work seeking new business practices to scrutinize, eagerly latching on to any novel theory of anticompetitive harm that holds out the prospect of future investigations.  In so doing, antitrust entrepreneurs choose, of course, to ignore Nobel Laureate Ronald Coase’s warning that “[i]f an economist finds something . . . that he does not understand, he looks for a monopoly explanation.  And as in this field we are rather ignorant, the number of ununderstandable practices tends to be rather large, and the reliance on monopoly explanations frequent.”  Ambitious antitrusters also generally appear oblivious to the fact that since antitrust is an administrative system subject to substantial error and transaction costs in application (see here), decision theory counsels that enforcers should proceed with great caution before adopting novel untested theories of competitive harm.

The latest example of this regrettable phenomenon is the popular new theory that institutional investors’ common ownership of minority shares in competing firms may pose serious threats to vigorous market competition (see here, for example).  If such investors’ shareholdings are insufficient to control or substantially influence the strategies employed by the competing firms, what is the precise mechanism by which this occurs?  At the very least, this question should give enforcers pause (and cause them to carefully examine both the theoretical and empirical underpinnings of the common ownership story) before they charge ahead as knights errant seeking to vanquish new financial foes.  Yet it appears that at least some antitrust enforcers have been wasting no time in seeking to factor common ownership concerns into their modes of analysis.  (For example, The European Commission in at least one case presented a modified Herfindahl-Hirschman Index (MHHI) analysis to account for the effects of common shareholding by institutional investors, as part of a statement of objections to a proposed merger, see here.)

A recent draft paper by Bates White economists Daniel P. O’Brien and Keith Waehrer raises major questions about recent much heralded research (reported in three studies dealing with executive compensation, airlines, and banking) that has been cited to raise concerns about common minority shareholdings’ effects on competition.  The draft paper’s abstract argues that the theory underlying these concerns is insufficiently developed, and that there are serious statistical flaws in the empirical work that purports to show a relationship between price and common ownership:

“Recent empirical research purports to show that common ownership by institutional investors harms competition even when all financial holdings are minority interests. This research has received a great deal of attention, leading to both calls for and actual changes in antitrust policy. This paper examines the research on this subject to date and finds that its conclusions regarding the effects of minority shareholdings on competition are not well established. Without prejudging what more rigorous empirical work might show, we conclude that researchers and policy authorities are getting well ahead of themselves in drawing policy conclusions from the research to date. The theory of partial ownership does not yield a specific relationship between price and the MHHI. In addition, the key explanatory variable in the emerging research – the MHHI – is an endogenous measure of concentration that depends on both common ownership and market shares. Factors other than common ownership affect both price and the MHHI, so the relationship between price and the MHHI need not reflect the relationship between price and common ownership. Thus, regressions of price on the MHHI are likely to show a relationship even if common ownership has no actual causal effect on price. The instrumental variable approaches employed in this literature are not sufficient to remedy this issue. We explain these points with reference to the economic theory of partial ownership and suggest avenues for further research.”

In addition to pinpointing deficiencies in existing research, O’Brien and Waehrer also summarize serious negative implications for the financial sector that could stem from the aggressive antitrust pursuit of partial ownership for the financial sector – a new approach that would be at odds with longstanding antitrust practice (footnote citations deleted):

“While it is widely accepted that common ownership can have anticompetitive effects when the owners have control over at least one of the firms they own (a complete merger is a special case), antitrust authorities historically have taken limited interest in common ownership by minority shareholders whose control seems to be limited to voting rights. Thus, if the empirical findings and conclusions in the emerging research are correct and robust, they could have dramatic implications for the antitrust analysis of mergers and acquisitions. The findings could be interpreted to suggest that antitrust authorities should scrutinize not only situations in which a common owner of competing firms control at least one of the entities it owns, but also situations in which all of the common owner’s shareholdings are small minority positions. As [previously] noted, . . . such a policy shift is already occurring.

Institutional investors (e.g., mutual funds) frequently take positions in multiple firms in an industry in order to offer diversified portfolios to retail investors at low transaction costs. A change in antitrust or regulatory policy toward these investments could have significant negative implications for the types of investments currently available to retail investors. In particular, a recent proposal to step up antitrust enforcement in this area would seem to require significant changes to the size or composition of many investment funds that are currently offered.

Given the potential policy implications of this research and the less than obvious connections between small minority ownership interests and anticompetitive price effects, it is important to be particularly confident in the analysis and empirical findings before drawing strong policy conclusions. In our view, this requires a valid empirical test that permits causal inferences about the effects of common ownership on price. In addition, the empirical findings and their interpretation should be consistent with the observed behavior of firms and investors in the economic and legal environments in which they operate.

We find that the airline, banking, and compensation papers [that deal with minority shareholding] fall short of these criteria.”

In sum, at the very least, a substantial amount of further work is called for before significant enforcement resources are directed to common minority shareholder investigations, lest competitively non-problematic investment holdings be chilled.  More generally, the trendy antitrust pursuit of common minority shareholdings threatens to interfere inappropriately in investment decisions of institutional investors and thereby undermine efficiency.  Given the great significance of institutional investment for vibrant capital markets and a growing, dynamic economy, the negative economic welfare consequences of such unwarranted meddling would likely swamp any benefits that might accrue from an occasional meritorious prosecution.  One may hope that the Trump Administration will seriously weigh those potential consequences as it examines the minority shareholding issue, in deciding upon its antitrust policy priorities.

  1. Overview

A‌merica’s antitrust laws have long held a special status in the ‌federal statutory hierarchy.  The Supreme Court of the United States, for example, famously stated that the “[a]ntitrust laws in general, and the Sherman Act in particular, are the Magna Carta of free enterprise.”  Thus, when considering the qualifications of a nominee to the U.S. Supreme Court, the nominee’s views (if any) on antitrust are unquestionably of interest.  Such an assessment is particularly significant today, given the fact that the Court has had only one remaining antitrust expert (Justice Breyer, who taught antitrust at Harvard), since the sad demise of Justice Scalia (author of the landmark Trinko opinion on the limits of monopolization law).

Fortunately, we know a great deal about the antitrust perspective of Judge Neil Gorsuch, President Trump’s first nominee to the Supreme Court.  Judge Gorsuch authored several well-reasoned and highly persuasive antitrust opinions as a Tenth Circuit judge, which show him to be respectful of Supreme Court precedent and fully aware of the nuances of modern antitrust analysis.  This is not surprising, since Judge Gorsuch in recent years has taught antitrust law at the University of Colorado Law School.  In addition, he had exposure to antitrust matters as Principal Deputy Associate Attorney General during the George W. Bush Administration.  What’s more, he worked on major antitrust cases as an associate and then a partner at the Kellogg Huber law firm (see here).  Recent commentaries by highly respected antitrust lawyers on Judge Gorsuch’s antitrust jurisprudence manifest great respect for his mastery of the field (see, for example, here and here) – and put to shame a non-antitrust lawyer’s jejeune and misleading “hit piece” on Judge Gorsuch’s antitrust record (see here) that displays a woeful ignorance of the nature of antitrust analysis (see, for example, Ed Whelan’s devastating critique of that screed, here).

In short, Judge Gorsuch is extremely well-versed in antitrust and thus ideally positioned to make important contributions to the Supreme Court’s antitrust jurisprudence, should he be confirmed.  A quick evaluation of Judge Gorsuch’s decisions in antitrust cases confirms this conclusion.

  1. Judge Gorsuch’s Antitrust Opinions

Let’s take a look at three antitrust opinions authored by Judge Gorsuch, two of which deal with refusals to deal, and one of which concerns municipal antitrust immunity.  All three decisions show an appreciation for the underlying economic efficiency rationale that undergirds modern mainstream antitrust analysis, consistent with Supreme Court case law pronouncements.

a.  Four Corners Nephrology, Associates, PC v. Mercy Medical Center of Durango, 582 F.3d 1216 (10th 2009). To provide Durango, Colorado, residents and Southern Ute Indian tribe members with greater access to kidney dialysis and other nephrology services, Mercy Medical Center, a non-profit hospital, together with the tribe, sought to entice Dr. Mark Bevan to join the hospital’s active staff.  When Dr. Bevan declined, the hospital hired somebody else.  To convince that physician and others to settle in Durango, and aware that starting a nephrology practice was likely to prove unprofitable for the foreseeable future, the hospital and tribe agreed to underwrite up to $2.5 million in losses they expected the practice to incur.  To protect its investment, Mercy made its new practice the exclusive provider of nephrology services at the hospital.

Dr. Bevan sued, contending that Mercy’s refusal to deal with other nephrologists, including himself, amounted to the monopolization, or attempted monopolization, of the market for physician nephrology services in the Durango area.  The district court granted summary judgment to the hospital.

Judge Gorsuch’s Sixth Circuit panel opinion affirmed, for two reasons.  First, he held that the hospital had no antitrust duty to share its facilities with Dr. Bevan at the expense of its own nephrology practice.  It stressed that in demanding access to Mercy’s facilities, Dr. Bevan sought to share, not to undo, the hospital’s putative monopoly.  According to Judge Gorsuch, that is not what the antitrust laws are about:  they seek to advance competition, not advantage competitors.  Judge Gorsuch deftly distinguished the Supreme Court’s 1985 Aspen Skiing decision, which upheld a Sherman Act Section 2 refusal to deal claim based on a monopolist ski resort’s discontinuation of a joint ticketing arrangement with a smaller resort (a decision deemed “at or near the outer boundary of §2 liability” in Justice Scalia’s Trinko opinion).  He noted that defendant terminated a profitable long-term contractual relationship in Aspen Skiing, in order to achieve long-term anticompetitive goals.  In the instant case, however, the hospital was seeking to avoid an unprofitable short-term relationship with the plaintiff doctor – an action consistent with legal competition on the merits, as in TrinkoSecond, Judge Gorsuch held that plaintiff had suffered no antitrust injury, because it was seeking to share in monopoly profits, not to undo a monopoly and thereby benefit consumers.

Judge Gorsuch’s careful reasoning in Four Corners adroitly cabined Aspen Skiing’s problematic reasoning.  Future courts could benefit from his approach to help rein in inappropriate antitrust attacks on refusals to deal that manifest competition on the merits.

b.  Novell, Inc. v. Microsoft Corporation, 731 F.3d 1064 (10th 2013).  Novell produced office software, including WordPerfect, Microsoft Word’s leading rival in word processing applications.  Microsoft initially gave independent software vendors, including Novell, pre-release access to design information which would enable them to produce applications for Windows 95.  Microsoft subsequently changed its policy, however, denying such access prior to the release of Windows 95.  This decision significantly delayed, but did not preclude, third party companies from developing Windows 95 applications.  Novell sued Microsoft, alleging that Microsoft’s actions helped it maintain its monopoly in the market for Intel-compatible personal computer operating systems.  The district court granted judgment for Microsoft as a matter of law, and the Tenth Circuit affirmed.

In his opinion, Judge Gorsuch framed the standard of liability for illegal monopolization under Section 2 of the Sherman Act in a decision-theoretic manner that would gladden the hearts of law and economics mavens:  “the question . . . is whether, based on the evidence and experience derived from past cases, the conduct at issue before us has little or no value beyond the capacity to protect the monopolist’s market power—bearing in mind the risk of false positives (and negatives) any determination on the question of liability might invite, and the limits on the administrative capacities of courts to police market terms and transactions.”

Applying this set of general principles in light of the case law and the facts presented, Judge Gorsuch ably dissected and rejected Novell’s theories of antitrust harm, explaining that Novell’s claims did not squeeze “through the narrow needle of [antitrust] refusal to deal doctrine.”  Specifically, Microsoft’s actions failed to pass Aspen Skiing muster.  Even though “[a] voluntary and profitable relationship clearly existed between Microsoft and Novell[,]. . . Novell . . .  presented no evidence from which a reasonable jury could infer that Microsoft’s discontinuation of this arrangement suggested a willingness to sacrifice short-term profits, let alone in a manner that was irrational but for its tendency to harm competition.”  The court also rejected Novell’s alternative claim of an antitrust violation based on an “affirmative” act of interference with a rival rather than on a refusal to deal.  As Judge Gorsuch explained, “neither Trinko nor Aspen Skiing suggested this is enough to evade their profit sacrifice test, and we refuse to do so either.  Whether one chooses to call a monopolist’s refusal to deal with a rival an act or omission, interference or withdrawal of assistance, the substance is the same”.  Finally, Novell’s third theory, that Microsoft acted deceptively when it gave pretextual reasons for withdrawing key compatibility information from Novell, similarly proved unavailing.  According to Judge Gorsuch, “[deception] . . . wasn’t the cause of Novell’s injury or any possible harm to consumers—Microsoft’s refusal to deal was. . . .  Even if Microsoft had behaved [non-deceptively,] just as Novell sa[id] it should have, it would have helped Novell not at all.”

Novell, like Kay Electric, reflects Judge Gorsuch’s understanding of the importance of curtailing inappropriate antitrust attacks on the right not to deal with competitors.  It also manifests his keen appreciation for protecting a successful firm’s market-driven economic incentives from being undermined by antitrust attacks.  Finally, and most significantly, this decision highlights Judge Gorsuch’s understanding that decision theory is of central importance in administering a rules-based antitrust legal system (see here for a discussion of the role of decision theory in Roberts Court antitrust decisions).

c.  Kay Electric Cooperative v. City of Newkirk, Oklahoma, 647 F.3d 1039 (10th 2011). In this case, the Tenth Circuit, per Judge Gorsuch, reversed and remanded a district court’s dismissal of an antitrust suit filed against a municipal electricity provider.  Kay, an Oklahoma rural electric cooperative, offered to provide electricity to a new jail being built in an area just outside the city boundaries of Newkirk.  The City of Newkirk responded by annexing the area and issuing its own service offer.  As Judge Gorsuch pithily explained, “Kay’s offer was much the better but the jail still elected to buy electricity from Newkirk.  Why?  Because Newkirk is the only provider of sewage services in the area and it refused to provide any sewage services to the jail – that is, unless the jail also bought the city’s electricity.  Finding themselves stuck between a rock and a pile of sewage, the operators of the jail reluctantly went with the city’s package deal.”  Kay responded by suing Newkirk for unlawful tying and attempted monopolization in violation of the Sherman Antitrust Act.  The district court found Newkirk “immune” from liability as a matter of law, and Kay appealed.

Judge Gorsuch surveyed the Supreme Court’s confusing case law on state action antitrust immunity, which shields state-sanctioned restraints of trade from Sherman Act scrutiny.  He noted that “though it’s hard to see a way to reconcile all of the [Supreme] Court’s competing statements in this area, we can say with certainty this much – a municipality surely lacks antitrust ‘immunity’ unless it can bear the burden of showing that its challenged conduct was at least a foreseeable (if not explicit) result of state legislation [emphasis in the original].”  The judge brilliantly parsed the “muddled” jurisprudence and found three “bright lines” that were “enough to allow us to dispose of this appeal with confidence.”  First, “a state’s grant of a traditional corporate chapter to a municipality isn’t enough to make the municipality’s subsequent anticompetitive conduct foreseeable.”  Second, “the fact that a state may have authorized some forms of municipal anticompetitive conduct isn’t enough to make all forms of anticompetitive conduct foreseeable [emphasis in the original].”  Third, “when asking whether the state has authorized the municipality’s anticompetitive conduct we look to and preference the most specific direction issued by the state legislature on the subject.”  Applying these rules to the facts at hand (including relevant Oklahoma statutes), the judge concluded “that it quickly becomes clear that Newkirk enjoys no immunity.”

Judge Gorsuch’s Kay Electric opinion displays great facility in reconciling respect for antitrust federalism with the Sherman Act’s goal of rooting out unreasonable constraints on free market competition.  His concise ruling ably cuts through the complexities of the opaque (to be generous) antitrust state action doctrine decisions to identify clear administrable principles that, if broadly adopted, would reduce uncertainty regarding the legal status of anticompetitive municipal conduct.  In short, if Kay Electric is any indication, Judge Gorsuch may be just the jurist needed to bring greater (and badly needed) clarity to the Supreme Court’s treatment of state action controversies.

  1. Conclusion

In sum, Judge Gorsuch’s antitrust opinions reflect a sound grounding in law and economics and decision theory, combined with a respect for Supreme Court precedent, careful attention to traditional judicial craftsmanship, and a respect for the appropriate contours of antitrust federalism.  Accordingly, the Supreme Court’s antitrust jurisprudence would unquestionably benefit by having Judge Gorsuch join the Court.  For this and for so many other reasons (see, for example, here), Judge Gorsuch merits swift confirmation by the Senate.

On February 28, the Heritage Foundation issued a volume of essays by leading scholars on the law and economics of financial services regulatory reform entitled Prosperity Unleashed:  Smarter Financial Regulation.  This Report, which is well worth a read (in particular, by incoming Trump Administration officials and Members of Congress), is available online.

The Report’s 23 chapters, which deal with different aspects of financial markets, reflect 10 core principles:

  1. Private and competitive financial markets are essential for healthy economic growth.
  2. The government should not interfere with the financial choices of market participants, including consumers, investors, and uninsured financial firms. Regulators should focus on protecting individuals and firms from fraud and violations of contractual rights.
  3. Market discipline is a better regulator of financial risk than government regulation.
  4. Financial firms should be permitted to fail, just as other firms do. Government should not “save” participants from failure because doing so impedes the ability of markets to direct resources to their highest and best use.
  5. Speculation and risk-taking are what make markets operate. Interference by regulators attempting to mitigate risks hinders the effective operation of markets.
  6. Government should not make credit and capital allocation decisions.
  7. The cost of financial firm failures should be borne by managers, equity-holders, and creditors, not by taxpayers.
  8. Simple rules—such as straightforward equity capital requirements—are preferable to complex rules that permit regulators to micromanage markets.
  9. Public-private partnerships create financial instability because they create rent-seeking opportunities and misalign incentives.
  10. Government backing for financial activities, such as classifying certain firms or activities as “systemically important,” inevitably leads to government bailouts.

The chapters deal with these specific topics (the following summary draws upon the introduction to the Report):

Chapter 1, “Deposit Insurance, Bank Resolution, and Market Discipline,” explains how government-backed deposit insurance weakens market discipline, increases moral hazard, and leads to higher financial risk than the economy would have otherwise, thus weakening the banking system as a whole.

Chapter 2, “A Simple Proposal to Recapitalize the U.S. Banking System,” follows with a brief look at the failure of the Basel rules and a discussion of how banks’ historical capital ratios—a key measure of bank safety—have fallen as regulations have increased.  The author proposes a regulatory off-ramp, whereby banks could opt out of the current regulatory framework in return for meeting a minimum leverage ratio of at least 20 percent.

Chapter 3, “A Better Path for Mortgage Regulation,” provides a brief history of federal mortgage regulation.  This essay shows that, prior to Dodd–Frank, the preferred federal policy was to protect mortgage borrowers through mandatory disclosure as opposed to directly regulating the content of mortgage agreements.  The author argues that the vibrancy of the mortgage market has suffered because the basic disclosure approach has succumbed to regulation via content restrictions.

Chapter 4, “Money and Banking Provisions in the 2016 Financial CHOICE Act: A Major Step Toward Financial Security,” evaluates the reforms in the CHOICE Act, the first major piece of legislation written to replace large portions of the Dodd–Frank Wall Street Reform and Consumer Protection Act (a far-reaching statute whose provisions are at odds with its name). The author discusses the CHOICE Act’s regulatory off-ramp—and one potential alternative—because a similar approach could be used to implement a broad set of bank regulation reforms.

Chapter 5, “Securities Disclosure Reform,” delves into the law and economics of mandatory disclosure requirements, both in connection with new securities offerings and ongoing disclosure obligations.  The author explains that disclosure requirements have become so voluminous that they obfuscate rather than inform, making it more difficult for investors to find relevant information.

Chapter 6, “The Case for Federal Pre-Emption of State Blue Sky Laws,” recommends improving the efficiency and effectiveness of capital markets through federal pre-emption of state securities “blue sky” laws, which impose state registration requirements on companies seeking to issue securities.  Blue sky laws inefficiently retard the flow of capital from investors to businesses.

Chapter 7, “How to Reform Equity Market Structure: Eliminate ‘Reg NMS’ and Build Venture Exchanges,” tackles the seemingly opaque topic of U.S. equity market structure.  The essay argues that the increasingly fragmented structure of today’s equities markets has been shaped as much, if not more, by legislative and regulatory action than by the private sector.  The author calls on the Securities and Exchange Commission (SEC) to consider rescinding Reg NMS and replacing it with rules (and rigorous disclosure requirements) that allow free and competitive markets to dictate much of market structure.

Chapter 8, “Reforming FINRA,” explains that FINRA, the primary regulator of broker-dealers, is neither a true self-regulatory organization nor a government agency, and that FINRA is largely unaccountable to the industry or to the public.  The chapter broadly outlines alternative approaches that Congress and the regulators can take to fix these problems, and it recommends specific reforms to FINRA’s rule-making and arbitration process.

Chapter 9, “Reforming the Financial Regulators,” argues that financial regulation should establish a framework for financial institutions based on their ability to serve consumers, investors, and Main Street companies.  This view is starkly at odds with the current “macroprudential” trend in financial regulation, which places governmental regulators—with their purportedly greater understanding of the financial system—at the top of the decision-making chain.

Chapter 10, “The World After Chevron,” discusses the Supreme Court’s decision in Chevron U.S.A. Inc. v. Natural Resources Defense Council, a case that has generated considerable controversy among policymakers over the past decade.  The Chevron decision effectively transferred final interpretive authority from the courts to the agencies in any case where Congress did not itself answer the precise dispute.  Reform-minded policymakers have long called on Congress to return that ultimate decision-making authority to the federal courts.

Chapter 11, “Transparency and Accountability at the SEC and at FINRA,” describes how these two regulatory bodies—the two mostly responsible for governing the U.S. securities sector—lack the structural safeguards necessary to ensure that they exercise their authority with the consent of the American public.  The chapter provides recommendations for fixing these deficiencies, such as giving respondents a choice of federal court or administrative proceedings with the SEC, and allowing FINRA to exist as a purely voluntary, private industry association.

Chapter 12, “The Massive Federal Credit Racket,” provides an extensive list of the more than 150 federal credit programs that provide some form of government backing.  These programs consist of direct loans and loan guarantees for housing, agriculture, energy, education, transportation, infrastructure, exporting, and small businesses, as well as insurance programs to cover bank and credit union deposits, pensions, flood damage, crop damage, and acts of terrorism.  Government financing programs are often sold to the public as economic imperatives, particularly during downturns, but they are instruments of redistributive policies that mainly benefit those with the most political influence rather than those with the greatest need.

Chapter 13, “Reforming Last-Resort Lending: The Flexible Open-Market Alternative,” proposes a plan to reform the Federal Reserve’s means for preserving liquidity for financial as well as nonfinancial firms, especially during financial emergencies, but also in normal times.  The essay proposes, among other things, to replace the existing Fed framework with a single standing (as opposed to temporary) facility to meet extraordinary as well as ordinary liquidity needs as they arise.  The goal is to eliminate the need for ad hoc changes in the rules governing the lending facility, or for special Fed, Treasury, or congressional action.

Chapter 14, “Simple, Sensible Reforms for Housing Finance,” advocates establishing a national title database to prevent the sort of clerical errors that plagued the foreclosure process during the housing crash of 2007 to 2009.  The author also recommends eliminating government support for all mortgages with low down payments, and for refinancing loans that increase the borrower’s mortgage debt.  Both types of loans encourage households to take on debt rather than accumulate wealth.

Chapter 15, “A Pathway to Shutting Down the Federal Housing Finance Enterprises,” provides an overview of all the federal housing finance enterprises and argues that Congress should end these failed experiments.  The federal housing finance enterprises, cobbled together over the last century, today cover more than $6 trillion (60 percent) of the outstanding single-family residential mortgage debt in the United States.  Over time, the policies implemented through these enterprises have inflated home prices, led to unsustainable levels of mortgage debt for millions of people, cost federal taxpayers hundreds of billions of dollars in bailouts, and undermined the resilience of the housing finance system.

Chapter 16, “Fixing the Regulatory Framework for Derivatives,” discusses government preferences for derivatives and repurchase agreements (repos)—an often ignored but integral part of the many policy problems that contributed to the 2008 crisis.  As the essay explains, the main problem with the pre-crisis regulatory structure for derivatives and repos was that the bankruptcy code included special exemptions (safe harbors) for these financial contracts.  The safe harbors were justified on the grounds that they would prevent systemic financial problems, a theory that proved false in 2008.  The chapter concluded that eliminating all safe harbors for repos and derivatives would affect the market because counterparties would have to account for more risk, a desirable outcome.

Chapter 17, “Designing an Efficient Securities-Fraud Deterrence Regime,” explains that the main flaws in the current approach to securities-fraud deterrence in the U.S., and recommends several reforms to fix these problems.  This essay recommends that the government should credibly threaten individuals who would commit fraud with criminal penalties, and pursue corporations only if their shareholders would otherwise have poor incentives to adopt internal control systems to deter fraud.

Chapter 18, “Financial Privacy in a Free Society,” stresses the importance of maintaining financial privacy—a key component of life in a free society—while policing markets for fraudulent (and other criminal) behavior.  The current U.S. financial regulatory framework has expanded so much that it now threatens this basic element of freedom.  For instance, individuals who engage in cash transactions of more than a small amount automatically trigger a general suspicion of criminal activity, and financial institutions of all kinds are forced into a quasi-law-enforcement role.  The chapter recommends seven reforms that would better protect individuals’ privacy rights and improve law enforcement’s ability to apprehend and prosecute criminals and terrorists.

Chapter 19, “How Congress Should Protect Consumers’ Finances,” provides an overview of consumer financial protection law, and then provide several recommendations on how to modernize the consumer financial protection system.  The goal of these reforms is to fix the federal consumer financial protection framework so that it facilitates competition, consumer protection, and consumer choice.  The authors recommend transferring all federal consumer protection authority to the Federal Trade Commission, the agency with vast regulatory experience in consumer financial services markets.

I will have a bit more to say about my co-authored contribution, “How Congress Should Protect Consumers’ Finances,” in my next post.

Chapter 20, “Reducing Banks’ Incentives for Risk-Taking via Extended Shareholder Liability,” examines changes in shareholder liability that could better align incentives and reduce the moral hazard problems that result in excessively risky financial institutions.  The authors describe how under extended liability, an arrangement common in banking history, shareholders of failed banks have an obligation to repay the remaining debts to creditors.

Chapter 21, “Improving Entrepreneurs’ Access to Capital: Vital for Economic Growth,” shows how existing rules and regulations hinder capital formation and entrepreneurship.  The essay explains that several groups usually support the current complex, expensive, and economically destructive system because excessive regulation helps keep their competitors at bay.  The author describes more than 25 policy reforms to reduce or eliminate state and federal regulatory barriers that hinder entrepreneurs’ access to capital.

Chapter 22, “Federalism and FinTech,” provides an in-depth look at how financial technology or “FinTech” companies are beginning to utilize advances in communications, data processing, and cryptography to compete with traditional financial services providers.  Some of the most powerful FinTech applications are removing geographic limitations on where companies can offer services and, in general, lowering barriers to entry for new firms.  As the essay explaints, this newly competitive landscape is exposing weaknesses, inefficiency, and inequity in the U.S. financial regulatory structure.

Chapter 23, “A New Federal Charter for Financial Institutions,” proposes a new banking charter under which a financial institution would be regulated more like banks were regulated before the modern era of bank bailouts and government guarantees.  Under the proposed charter, which is similar to a regulatory off-ramp approach, banks that choose to fund themselves with higher equity would be faced mostly with regulations that focus on punishing and deterring fraud, and fostering the disclosure of information that is material to investment decisions.  The charter explicitly includes a prohibition against receiving government funds from any source, and even excludes the financial institution from FDIC deposit insurance eligibility.

In conclusion, Prosperity Unleashed sets forth the elements of a legislative and regulatory reform agenda for the financial services sector, which has the potential for stimulating economic growth and innovation while benefiting consumers and businesses alike.  I will have a bit more to say about my co-authored contribution, “How Congress Should Protect Consumers’ Finances,” in my next post.

On February 22, 2017, an all-star panel at the Heritage Foundation discussed “Reawakening the Congressional Review Act” – a statute which gives Congress sixty legislative days to disapprove a proposed federal rule (subject to presidential veto), under an expedited review process not subject to Senate filibuster.  Until very recently, the CRA was believed to apply only to very recently promulgated regulations.  Thus, according to conventional wisdom, while the CRA might prove useful in blocking some non-cost-beneficial Obama Administration midnight regulations, it could not be invoked to attack serious regulatory agency overreach dating back many years.

Last week’s panel, however, demonstrated that conventional wisdom is no match for the careful textual analysis of laws – the sort of analysis that too often is given short-shrift by  commentators.  Applying straightforward statutory construction techniques, my Heritage colleague Paul Larkin argued persuasively that the CRA actually reaches back over 20 years to authorize congressional assessment of regulations that were not properly submitted to Congress.  Paul’s short February 15 article on the CRA (reprinted from The Daily Signal), intended for general public consumption, lays it all out, and merits being reproduced in its entirety:

In Washington, there is a saying that regulators never met a rule they didn’t like.  Federal agencies, commonly referred to these days as the “fourth branch of government,” have been binding the hands of the American people for decades with overreaching regulations. 

All the while, Congress sat idly by and let these agencies assume their new legislative role.  What if Congress could not only reverse this trend, but undo years of burdensome regulations dating as far back as the mid-1990s?  It turns out it can, with the Congressional Review Act. 

The Congressional Review Act is Congress’ most recent effort to trim the excesses of the modern administrative state.  Passed into law in 1996, the Congressional Review Act allows Congress to invalidate an agency rule by passing a joint resolution of disapproval, not subject to a Senate filibuster, that the president signs into law. 

Under the Congressional Review Act, Congress is given 60 legislative days to disapprove a rule and receive the president’s signature, after which the rule goes into effect.  But the review act also sets forth a specific procedure for submitting new rules to Congress that executive agencies must carefully follow. 

If they fail to follow these specific steps, Congress can vote to disapprove the rule even if it has long been accepted as part of the Federal Register.  In other words, if the agency failed to follow its obligations under the Congressional Review Act, the 60-day legislative window never officially started, and the rule remains subject to congressional disapproval. 

The legal basis for this becomes clear when we read the text of the Congressional Review Act. 

According to the statute, the period that Congress has to review a rule does not commence until the later of two events: either (1) the date when an agency publishes the rule in the Federal Register, or (2) the date when the agency submits the rule to Congress.

This means that if a currently published rule was never submitted to Congress, then the nonexistent “submission” qualifies as “the later” event, and the rule remains subject to congressional review.

This places dozens of rules going back to 1996 in the congressional crosshairs.

The definition of “rule” under the Congressional Review Act is quite broad—it includes not only the “junior varsity” statutes that an agency can adopt as regulations, but also the agency’s interpretations of those laws. This is vital because federal agencies often use a wide range of documents to strong-arm regulated parties.

The review act reaches regulations, guidance documents, “Dear Colleague” letters, and anything similar.

The Congressional Review Act is especially powerful because once Congress passes a joint resolution of disapproval and the president signs it into law, the rule is nullified and the agency cannot adopt a “substantially similar” rule absent an intervening act of Congress.

This binds the hands of federal agencies to find backdoor ways of re-imposing the same regulations.

The Congressional Review Act gives Congress ample room to void rules that it finds are mistaken.  Congress may find it to be an indispensable tool in its efforts to rein in government overreach.

Now that Congress has a president who is favorable to deregulation, lawmakers should seize this opportunity to find some of the most egregious regulations going back to 1996 that, under the Congressional Review Act, still remain subject to congressional disapproval.

In the coming days, my colleagues will provide some specific regulations that Congress should target.

For a more fulsome exposition of the CRA’s coverage, see Paul’s February 8 Heritage Foundation Legal Memorandum, “The Reach of the Congressional Review Act.”  Hopefully, Congress and the Trump Administration will take advantage of this newly-discovered legal weapon as they explore the most efficacious means to reduce the daunting economic burden of federal overregulation (for a subject matter-specific exploration of the nature and size of that burden, see the most recent Heritage Foundation “Red Tape Rising” report, here).

  1. Background

Some of the most pernicious and welfare-inimical anticompetitive activity stems from the efforts of firms to use governmental regulation to raise rivals’ costs or totally exclude them from the market (see, for example, here).  The surest cure to such economic harm is, of course, the elimination or reform of anticompetitive government laws and regulations, but that is hard to do, given the existence of well-entrenched interest groups who have an interest in lobbying to protect their special legally-bestowed privileges.

A somewhat different potential limitation on effective competition associated with government arises from the invocation of governmental processes – in particular, judicial and regulatory filings and petitions – to harm competitors and maintain a protected position in the marketplace.  Dealing effectively with this problem presents its own set of difficulties.  Protecting the right to seek governmental redress consistent with existing rules is a key part of our system of limited government and the rule of law.  Indeed, the First Amendment to the U.S. Constitution specifically protects “the right of the people . . . to petition the Government for a redress of grievances”, indicating that government must tread carefully indeed before taking any action that could be deemed as a curtailment of such petitioning.  This has particular salience for antitrust, as Scalia Law School Professor David Bernstein has explained in The Heritage Guide to the Constitution:

[T]he right to petition . . . continues to have some independent weight.  Most importantly, under the Noerr-Pennington doctrine, an effort to influence the exercise of government power, even for the purpose of gaining an anticompetitive advantage, does not create liability under the antitrust laws.  Eastern Railroad Presidents Conference v. Noerr Motor Freight, Inc. (1961); United Mine Workers of America v. Pennington (1965). The Supreme Court initially adopted this doctrine under the guise of freedom of speech, but it more precisely finds its constitutional home in the right to petition. Unlike speech, which can often be punished in the antitrust context, as when corporate officers verbally agree to collude, the right to petition confers absolute immunity on efforts to influence government policy in a noncorrupt way.

The Noerr-Pennington doctrine does not, however, totally preclude antitrust enforcers from scrutinizing filings designed to undermine competition.  If a private party is using petitioning as a mere “sham” to impose harm on competitors, without regard to the merits of its claims, Noerr immunity does not apply.  In California Motor Transport v. Trucking Unlimited, 404 U.S. 508 (1972), the Supreme Court held that access to the courts and administrative agencies is an aspect of the right to petition, and hence Noerr’s protection generally extends to administrative and judicial proceedings, as well as to efforts to influence legislative and executive action.  Nevertheless, in so holding, the California Motor Transport Court determined that Noerr did not shield defendants’ intervention in licensing proceedings involving their competitors, because the intervention did not stem from a good faith effort to enforce the law, but rather was solely aimed at imposing costs on and harassing the competitors.  Subsequently, however, in Professional Real Estate Investors v. Columbia Pictures Industries, 508 U.S. 49 (1993) (PRE), the Supreme Court clarified that a high hurdle must be surmounted to demonstrate that petitioning through litigation is a “sham,” namely that (1) the lawsuit in question is “objectively baseless” (“no reasonable litigant could realistically expect success on the merits”) and (2) the suit must reflect a subjective intent to use the governmental process – as opposed to the outcome of that process – as an anticompetitive weapon.

In 2006, the U.S. Federal Trade Commission (FTC) issued a staff report on how to maximize competition values embodied in the antitrust laws while fully respecting the core values identified in Noerr when analyzing three types of conduct:  filings that seek only a ministerial government response, material misrepresentations, and repetitive petitioning.  More specifically, the report recommended that the FTC seek appropriate opportunities, in litigation or amicus curiae filings, to:  (1) clarify that conduct protected by Noerr does not extend to filings, outside of the political arena, that seek no more than a ministerial government act; (2) clarify that conduct protected by Noerr does not extend to misrepresentations, outside of the political arena, that involve material misrepresentations to government bodies in the regulatory context (such as government standard setting and drug approval proceedings, for example); and (3) clarify that conduct protected by Noerr does not extend to patterns of repetitive petitioning, outside of the political arena, filed without regard to merit that employ government processes, rather than the outcome of those processes, to harm competitors in an attempt to suppress competition.

Since the issuance of the 2006 staff report, however, the FTC has not aggressively pursued litigation to narrow the scope of the Noerr doctrine (perhaps reflecting at least in part the difficulties attending the bringing of good cases, in light of PRE’s requirements).  Rather, the Commission’s efforts to curb antitrust immunity have centered primarily on constraining the reach of the “state action” doctrine (anticompetitive conduct flying under the color of state authority), an area in which it has achieved some notable successes (see, for example, here).   

  1. The FTC’s February 2017 Shire Viropharma Injunctive Action

There is at least one indication, however, that the FTC may be turning anew to the problem of anticompetitive petitioning.  On February 7, 2017, the Commission filed a complaint in federal district court charging Shire ViroPharma Inc. (ViroPharma) with violating the antitrust laws by abusing government processes to delay generic competition to its branded prescription drug, Vancocin HCl Capsules.  The complaint alleges that because of ViroPharma’s actions, consumers and other purchasers paid hundreds of millions of dollars more for their medication.

Vancocin Capsules are used to treat C.difficile-associated diarrhea, or CDAD, a sometimes life-threatening bacterial infection. According to the complaint, Vancocin Capsules are not reasonably interchangeable with any other medications used to treat CDAD, and no other medication constrained ViroPharma’s pricing of Vancocin Capsules. After ViroPharma acquired the rights to Vancocin Capsules in 2004, it raised the price of the drug significantly and continued to do so through 2011.

The FTC alleges that to maintain its monopoly, ViroPharma waged a campaign of serial, repetitive, and unsupported filings with the U.S. Food and Drug Administration (FDA) and courts to delay the FDA’s approval of generic Vancocin Capsules, and exclude competition. According to the FTC, ViroPharma submitted 43 filings with the FDA and filed three lawsuits against the FDA between 2006 and 2012. The FTC asserts that the number and frequency of ViroPharma’s petitioning at the FDA are many multiples beyond that by any drug company related to any other drug.  The FTC further claims that ViroPharma knew that it was the FDA’s practice to refrain from approving any generic applications until it resolved all pending relevant “citizen petition” filings.  According to the FTC, Viropharma intended for its serial filings to delay the approval of generics, and thus forestall competition and price reductions.

The FTC seeks a court order permanently prohibiting ViroPharma from submitting repetitive and baseless filings with the FDA and the courts, and from similar and related conduct as well as any other necessary equitable relief, including restitution and disgorgement.

  1. Conclusion

Win or lose, the FTC is to be commended for seeking a federal court clarification of what constitutes “baseless” petitioning for purposes of Noerr.  As numerous scholars have pointed out, the Noerr “petitioning” doctrine is riddled with confusion (see, for example, here), and Supreme Court attention to this topic may once again be ripe.  The most cost-effective way to reduce the economic burden of anticompetitive petitioning, however, may be not through litigation, which is time-consuming and uncertain (although it may play a useful role), but rather through regulatory reform that reduces the opportunities for manipulating overly complex regulatory systems in an anticompetitive fashion.  Stay tuned.

 

The Legatum Institute (Legatum) is “an international think tank based in London and a registered UK charity [that] . . . focuses on understanding, measuring, and explaining the journey from poverty to prosperity for individuals, communities, and nations.”  Legatum’s annual “Legatum Prosperity Index . . . measure[s] and track[s] the performance of 149 countries of the world across multiple categories including health, education, the economy, social capital, and more.”

Among other major Legatum initiatives is a “Special Trade Commission” (STC) created in the wake of the United Kingdom’s (UK) vote to leave the European Union (Brexit).  According to Legatum, “the STC aims to present a roadmap for the many trade negotiations which the UK will need to undertake now.  It seeks to re-focus the public discussion on Brexit to a positive conversation on opportunities, rather than challenges, while presenting empirical evidence of the dangers of not following an expansive trade negotiating path.”  STC Commissioners (I am one of them) include former international trade negotiators and academic experts from Australia, New Zealand, Singapore, Switzerland, Canada, Mexico, the United Kingdom and the United States (see here).  The Commissioners serve in their private capacities, representing their personal viewpoints.  Since last summer, the STC has released (and will continue to release) a variety of papers on the specific legal and economic implications of Brexit negotiations, available on Legatum’s website (see here, here, here, here, and here).

From February 6-8 I participated in the inaugural STC Conference in London, summarized by Legatum as follows:

During the Conference the[] [STC Commissioners] began to outline a vision for Britain’s exit from the European Union and the many trade negotiations that the UK will need to undertake. They discussed the state of transatlantic trade, the likely impact of the Trump administration on those ties as well as the NAFTA [North American Free Trade Agreement among the United States, Canada, and Mexico) renegotiation, the prospects for TTIP [Transatlantic Trade and Investment Partnership negotiations between the United States and the European Union, no longer actively being pursued] and the resurrection of TPP [Trans-Pacific Partnership negotiations between the United States and certain Pacific Rim nations, U.S. participation withdrawn by President Trump] the future of the WTO [World Trade Organization] and the opportunities for Britain to pursue unilateral, plurilateral and multilateral liberalisation. A future Prosperity Zone between like-minded countries was repeatedly highlighted as a key opportunity for post-Brexit Britain to engage in a high-standards, growth-creating trade agreement.

The Commissioners spoke publicly to a joint meeting attended by the House of Commons and the House of Lords as well as the International Trade Committee in the House of Commons and at a public event hosted at the Legatum Institute where they shared their expertise and recommendations for the UK’s exit strategy.

The broad theme of the STC Commissioners’ presentations was that the Brexit process, if handled appropriately, can set the stage for greater economic liberalization, international trade expansion, and heightened economic growth and prosperity, in the United Kingdom and elsewhere.  In particular, the STC recommended that the UK Government pursue four different paths simultaneously over the next several years, in connection with its withdrawal from the European Union:

  1. Work to further lower UK trade barriers beyond the levels set by the UK’s current World Trade Organization (WTO) commitments, by pledging to apply a tariff for some products below its WTO “bound” tariff rate commitments to levels well below the “Common External Tariff” rates the UK currently applies to non-EU imports as an EU member; and by unilaterally liberalizing other aspects of its trade policy, in areas such as government procurement, for example.
  2. Propose plurilateral free trade agreements between the UK and a few like-minded nations that have among the world’s most free and open economies, such as Australia, New Zealand, and Singapore; and work to further liberalize global technical standards through active participation in such organizations as the Basel Convention (cross-boundary hazardous waste disposal) and IOSCO (international securities regulation).
  3. Propose bilateral free trade agreements between the UK and the United States, Switzerland, and perhaps other countries, designed to expand commerce with key UK trading partners, as well as securing a comprehensive free trade agreement with the EU.
  4. Unilaterally reduce UK regulatory burdens without regard to trade negotiations as part of a domestic “competitiveness agenda,” involving procompetitive regulatory reform and the elimination of tariff to the greatest extent feasible; a UK Government productivity commission employing cost-benefit analysis could be established to carry out this program (beginning in the late 1980s, the Australian Government reduced its regulatory burdens and spurred economic growth, with the assistance of a national productivity commission).

These “four pillars” of trade-liberalizing reform are complementary and self-reinforcing.  The reduction of UK trade barriers should encourage other countries to liberalize and consider joining plurilateral free trade agreements already negotiated with the UK, or perhaps consider exploring their own bilateral trade arrangements with the UK.  Furthermore, individual nations’ incentives to gain greater access to the UK market through trade negotiations should be further enhanced by the unilateral reduction of UK regulatory constraints.

As trade barriers drop, UK consumers (including poorer consumers) should perceive a direct benefit from economic liberalization, providing political support for continued liberalization.  And the economic growth and innovation spurred by this virtuous cycle should encourage the European Union and its member states to “join the club” by paring back common external tariffs and by loosening regulatory impediments to international competition, such as restrictive standards and licensing schemes.  In short, the four paths provide the outlines for a “win-win” strategy that would be beneficial to the UK and its trading partners, both within and outside of the EU.

Admittedly, the STC’s proposals may have to overcome opposition from well-organized interest groups who would be harmed by liberalization, and may be viewed with some skepticism by some risk averse government officials and politicians.  The task of the STC will be to continue to work with the UK Government and outside stakeholders to convince them that Brexit strategies centered on bilateral and plurilateral trade liberalization, in tandem with regulatory relief, provide a way forward that will prove mutually beneficial to producers and consumers in the UK – and in other nations as well.

Stay tuned.