U.S. antitrust law is designed to protect competition, not individual competitors. That simple observation lies at the heart of the Consumer Welfare Standard that for years has been the cornerstone of American antitrust policy. An alternative enforcement policy focused on protecting individual firms would discourage highly efficient and innovative conduct by a successful entity, because such conduct, after all, would threaten to weaken or displace less efficient rivals. The result would be markets characterized by lower overall levels of business efficiency and slower innovation, yielding less consumer surplus and, thus, reduced consumer welfare, as compared to the current U.S. antitrust system.
The U.S. Supreme Court gets it. In Reiter v. Sonotone (1979), the court stated plainly that “Congress designed the Sherman Act as a ‘consumer welfare prescription.’” Consistent with that understanding, the court subsequently stressed in Spectrum Sports v. McQuillan (1993) that “[t]he purpose of the [Sherman] Act is not to protect businesses from the working of the market, it is to protect the public from the failure of the market.” This means that a market leader does not have an antitrust duty to assist its struggling rivals, even if it is flouting a regulatory duty to deal. As a unanimous Supreme Court held in Verizon v. Trinko (2004): “Verizon’s alleged insufficient assistance in the provision of service to rivals [in defiance of an FCC-imposed regulatory obligation] is not a recognized antitrust claim under this Court’s existing refusal-to-deal precedents.”
Unfortunately, the New York State Senate seems to have lost sight of the importance of promoting vigorous competition and consumer welfare, not competitor welfare, as the hallmark of American antitrust jurisprudence. The chamber on June 7 passed the ill-named 21st Century Antitrust Act (TCAA), legislation that, if enacted and signed into law, would seriously undermine consumer welfare and innovation. Let’s take a quick look at the TCAA’s parade of horribles.
The TCAA makes it unlawful for any person “with a dominant position in the conduct of any business, trade or commerce, in any labor market, or in the furnishing of any service in this state to abuse that dominant position.”
A “dominant position” may be established through “direct evidence” that “may include, but is not limited to, the unilateral power to set prices, terms, power to dictate non-price contractual terms without compensation; or other evidence that a person is not constrained by meaningful competitive pressures, such as the ability to degrade quality without suffering reduction in profitability. In labor markets, direct evidence of a dominant position may include, but is not limited to, the use of non-compete clauses or no-poach agreements, or the unilateral power to set wages.”
The “direct evidence” language is unbounded and hopelessly vague. What does it mean to not be “constrained by meaningful competitive pressures”? Such an inherently subjective characterization would give prosecutors carte blanche to find dominance. What’s more, since “no court shall require definition of a relevant market” to find liability in the face of “direct evidence,” multiple competitors in a vigorously competitive market might be found “dominant.” Thus, for example, the ability of a firm to use non-compete clauses or no-poach agreements for efficient reasons (such as protecting against competitor free-riding on investments in human capital or competitor theft of trade secrets) would be undermined, even if it were commonly employed in a market featuring several successful and aggressive rivals.
“Indirect evidence” based on market share also may establish a dominant position under the TCAA. Dominance would be presumed if a competitor possessed a market “share of forty percent or greater of a relevant market as a seller” or “thirty percent or greater of a relevant market as a buyer”.
Those numbers are far below the market ranges needed to find a “monopoly” under Section 2 of the Sherman Act. Moreover, given inevitable error associated with both market definitions and share allocations—which, in any event, may fluctuate substantially—potential arbitrariness would attend share based-dominance calculations. Most significantly, of course, market shares may say very little about actual market power. Where entry barriers are low and substitutes wait in the wings, a temporarily large market share may not bestow any ability on a “dominant” firm to exercise power over price or to exclude competitors.
In short, it would be trivially easy for non-monopolists possessing very little, if any, market power to be characterized as “dominant” under the TCAA, based on “direct evidence” or “indirect evidence.”
Once dominance is established, what constitutes an abuse of dominance? The TCAA states that an “abuse of a dominant position may include, but is not limited to, conduct that tends to foreclose or limit the ability or incentive of one or more actual or potential competitors to compete, such as leveraging a dominant position in one market to limit competition in a separate market, or refusing to deal with another person with the effect of unnecessarily excluding or handicapping actual or potential competitors.” In addition, “[e]vidence of pro-competitive effects shall not be a defense to abuse of dominance and shall not offset or cure competitive harm.”
This language is highly problematic. Effective rivalrous competition by its very nature involves behavior by a firm or firms that may “limit the ability or incentive” of rival firms to compete. For example, a company’s introduction of a new cost-reducing manufacturing process, or of a patented product improvement that far surpasses its rivals’ offerings, is the essence of competition on the merits. Nevertheless, it may limit the ability of its rivals to compete, in violation of the TCAA. Moreover, so-called “monopoly leveraging” typically generates substantial efficiencies, and very seldom undermines competition (see here, for example), suggesting that (at best) leveraging theories would generate enormous false positives in prosecution. The TCAA’s explicit direction that procompetitive effects not be considered in abuse of dominance cases further detracts from principled enforcement; it denigrates competition, the very condition that American antitrust law has long sought to promote.
Put simply, under the TCAA, “dominant” firms engaging in normal procompetitive conduct could be held liable (and no doubt frequently would be held liable, given their inability to plead procompetitive justifications) for “abuses of dominance.” To top it off, firms convicted of abusing a dominant position would be liable for treble damages. As such, the TCAA would strongly disincentivize aggressive competitive behavior that raises consumer welfare.
The TCAA’s negative ramifications would be far-reaching. By embracing a civil law “abuse of dominance” paradigm, the TCAA would run counter to a longstanding U.S. common law antitrust tradition that largely gives free rein to efficiency-seeking competition on the merits. It would thereby place a new and unprecedented strain on antitrust federalism. In a digital world where the effects of commercial conduct frequently are felt throughout the United States, the TCAA’s attack on efficient welfare-inducing business practices would have national (if not international) repercussions.
The TCAA would alter business planning calculations for the worse and could interfere directly in the setting of national antitrust policy through congressional legislation and federal antitrust enforcement initiatives. It would also signal to foreign jurisdictions that the United States’ long-expressed staunch support for reliance on the Consumer Welfare Standard as the touchtone of sound antitrust enforcement is no longer fully operative.
Judge Richard Posner is reported to have once characterized state antitrust enforcers as “barnacles on the ship of federal antitrust” (see here). The TCAA is more like a deadly torpedo aimed squarely at consumer welfare and the American common law antitrust tradition. Let us hope that the New York State Assembly takes heed and promptly rejects the TCAA.