Search Results For "Dr. Miles"

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Steve Cernak, (Partner, Bona Law).]

The antitrust laws have not been suspended during the current COVID-19 crisis. But based on questions received from clients plus others discussed with other practitioners, the changed economic conditions have raised some new questions and put a new slant on some old ones. 

Under antitrust law’s flexible rule of reason standard, courts and enforcers consider the competitive effect of most actions under current and expected economic conditions. Because those conditions have changed drastically, at least temporarily, perhaps the antitrust assessments of certain actions will be different. Also, in a crisis, good businesses consider new options and reconsider others that had been rejected under the old conditions. So antitrust practitioners and enforcers need to be prepared for new questions and reconsiderations of others under new facts. Here are some that might cross their desks.

Benchmarking

Benchmarking had its antitrust moment a few years ago as practitioners discovered and began to worry about this form of communication with competitors. Both before and since then, the comparison of processes and metrics to industry bests to determine where improvement efforts should be concentrated has not raised serious antitrust issues – if done properly. Appropriate topic choice and implementation, often involving counsel review and third-party collection, should stay the same during this crisis. Companies implementing new processes might be tempted to reach out to competitors to learn best practices. Any of those companies unfamiliar with the right way to benchmark should get up to speed. Counsel must be prepared to help clients quickly, but properly, benchmark some suddenly important activities, like methods for deep-cleaning workplaces.

Joint ventures

Joint ventures where competitors work together to accomplish a task that neither could alone, or accomplish it more efficiently, have always received a receptive antitrust review. Often, those joint efforts have been temporary. Properly structured ones have always required the companies to remain competitors outside the joint venture. Joint efforts among competitors that did not make sense before the crisis might make perfect sense during it. For instance, a company whose distribution warehouse has been shut down by a shelter in place order might be able to use a competitor’s distribution assets to continue to get goods to the market. 

Some joint ventures of competitors have received special antitrust assurances for decades. The National Cooperative Research and Production Act of 1993 was originally passed in 1984 to protect research joint ventures of competitors. It was later extended to certain joint production efforts and standard development organizations. The law confirms that certain joint ventures of competitors will be judged under the rule of reason. If the parties file a very short notice with the DOJ Antitrust Division and FTC, they also will receive favorable treatment regarding damages and attorney’s fees in any antitrust lawsuit. For example, competitors cooperating on the development of new virus treatments might be able to use NCRPA to protect joint research and even production of the cure. 

Mergers

Horizontal mergers that permanently combine the assets of two competitors are unlikely to be justified under the antitrust laws by small transitory blips in the economic landscape. A huge crisis, however, might be so large and create such long-lasting effects that certain mergers suddenly might make sense, both on business and antitrust grounds. That rationale was used during the most recent economic crisis to justify several large mergers of banks although other large industrial mergers considered at the same time were abandoned for various reasons. It is not yet clear if that reasoning is present in any industry now. 

Remote communication among competitors

On a much smaller but more immediate scale, the new forms of communication being used while so many of us are physically separated have raised questions about the usual antitrust advice regarding communication with competitors. Antitrust practitioners have long advised clients about how to prepare and conduct an in-person meeting of competitors, say at a trade association convention. That same advice would seem to apply if, with the in-person convention cancelled, the meeting will be held via Teams or Zoom. And don’t forget: The reminders that the same rules apply to the cocktail party at the bar after the meeting should also be given for the virtual version conducted via Remo.co

Pricing and brand Management

Since at least the time when the Dr. Miles Medical Co. was selling its “restorative nervine,” manufacturers have been concerned about how their products were resold by retailers. Antitrust law has provided manufacturers considerable freedom for some time to impose non-price restraints on retailers to protect brand reputations; however, manufacturers must consider and impose those restraints before a crisis hits. For instance, a “no sale for resale” provision in place before the crisis would give a manufacturer of hand sanitizer another tool to use now to try to prevent bulk sales of the product that will be immediately resold on the street. 

Federal antitrust law has provided manufacturers considerable freedom to impose maximum price restraints. Even the states whose laws prevent minimum price restraints do not seem as concerned about maximum ones. But again, if a manufacturer is concerned that some consumer will blame it, not just the retailer, for a sudden skyrocketing price for a product in short supply, some sort of restraints must be in place before the crisis. Certain platforms are invoking their standard policies to prevent such actions by resellers on their platforms. 

Regulatory hurdles

While antitrust law is focused on actions by private parties that might prevent markets from properly working to serve consumers, the same rationales apply to unnecessary government interference in the market. The current health crisis has turned the spotlight back on certificate of need laws, a form of “brother may I?” government regulation that can allow current competitors to stifle entry by new competitors. Similarly, regulations that have slowed the use of telemedicine have been at least temporarily waived

Conclusion

Solving the current health crisis and rebuilding the economy will take the best efforts of both our public institutions and private companies. Antitrust law as currently written and enforced can and should continue to play a role in aligning incentives so we need not rely on “the benevolence of the butcher” for our dinner and other necessities. Instead, proper application of antitrust law can allow companies to do their part to (reviving a slogan helpful in a prior national crisis) keep America rolling.

By Thomas Hazlett

The Apple e-books case is throwback to Dr. Miles, the 1911 Supreme Court decision that managed to misinterpret the economics of competition and so thwart productive activity for over a century. The active debate here at TOTM reveals why.

The District Court and Second Circuit have employed a per se rule to find that the Apple e-books agreement with five major publishers constituted a violation of Section 1 of the Sherman Act. Citing the active cooperation in contract negotiations involving multiple horizontal competitors (publishers) and the Apple offer, which appears to have raised prices paid for e-books, the conclusion that this is a case of horizontal collusion appears a slam dunk to some. “Try as one may,” writes Jonathan Jacobson, “it is hard to find an easier antitrust case than United States v. Apple.”

I’m guessing that that is what Charles Evans Hughes thought about the Dr. Miles case in 1911.

Upon scrutiny, the apparent simplicity in either instance evaporates. Dr. Miles has been revised as per GTE Sylvania, Leegin, and (thanks, Keith Hylton) Business Electronics v. Sharp Electronics. Let’s here look at the pending Apple dispute.

First, the Second Circuit verdict was not only a split decision on application of the per se rule, the dissent ably stated a case for why the Apple e-books deal should be regarded as pro-competitive and, thus, legal.

Second, the price increase cited as determinative occurred in a two-sided market; the fact asserted does not establish a monopolistic restriction of output. Further analysis, as called for under the rule of reason, is needed to flesh out the totality of the circumstances and the net impact of the Apple-publisher agreement on consumer welfare. That includes evidence regarding what happens to total revenues as market structure and prices change.

Third, a new entrant emerged as per the actions undertaken — the agreements pointedly did not “lack…. any redeeming virtue” (Northwest Wholesale Stationers, 1985), the justification for per se illegality. The fact that a new platform — Apple challenging Amazon’s e-book dominance — was both cause and effect of the alleged anti-competitive behavior is a textbook example of ancillarity. The “naked restraints” that publishers might have imposed had Apple not brought new products and alternative content distribution channels into the mix thus dressed up. It is argued by some that the clothes were skimpy. But that fashion statement is what a rule of reason analysis is needed to determine.

Fourth, the successful market foray that came about in the two-sided e-book market is a competitive victory not to be trifled. As the Supreme Court determined in Leegin: A “per se rule cannot be justified by the possibility of higher prices absent a further showing of anticompetitive conduct. The antitrust laws are designed to protect interbrand competition from which lower prices can later result.” The Supreme Court need here overturn U.S. v. Apple as decided by the Second Circuit in order that the “later result” be reasonably examined.

Fifth, lock-in is avoided with a rule of reason. As the Supreme Court said in Leegin:

As courts gain experience considering the effects of these restraints by applying the rule of reason… they can establish the litigation structure to ensure the rule operates to eliminate anticompetitive restraints….

The lock-in, conversely, comes with per se rules that nip the analysis in the bud, assuming simplicity where complexity obtains.

Sixth, Judge Denise Cote, who issued the District Court ruling against Apple, shows why the rule of reason is needed to counter her per se approach:

Here we have every necessary component: with Apple’s active encouragement and assistance, the Publisher Defendants agreed to work together to eliminate retail price competition and raise e-book prices, and again with Apple’s knowing and active participation, they brought their scheme to fruition.

But that cannot be “every necessary component.” It is not in Apple’s interest to raise prices, but to lower prices paid. Something more has to be going on. Indeed, in raising prices the judge unwittingly cites an unarguable pro-competitive aspect of Apple’s foray: It is competing with Amazon and bidding resources from a rival. Indeed, the rival is, arguably, an incumbent with market power. This cannot be the end of the analysis. That it is constitutes a throwback to the anti-competitive per se rule of Dr. Miles.

Seventh, in oral arguments at the Second Circuit, Judge Raymond J. Lohier, Jr. directed a question to Justice Department counsel, asking how Apple and the publishers “could have broken Amazon’s monopoly of the e-book market without violating antitrust laws.” The DOJ attorney responded, according to an article in The New Yorker, by advising that

Apple could have let the competition among companies play out naturally without pursuing explicit strategies to push prices higher—or it could have sued, or complained to the Justice Department and to federal regulatory authorities.

But the DOJ itself brought no complaint against Amazon — it, instead, sued Apple. And the admonition that an aggressive innovator should sit back and let things “play out naturally” is exactly what will kill efficiency enhancing “creative destruction.” Moreover, the government’s view that Apple “pursued an explicit strategy to push prices higher” fails to acknowledge that Apple was the buyer. Such as it was, Apple’s effort was to compete, luring content suppliers from a rival. The response of the government is to recommend, on the one hand, litigation it will not itself pursue and, on the other, passive acceptance that avoids market disruption. It displays the error, as Judge Jacobs’ Second Circuit dissent puts it, “That antitrust law is offended by gloves off competition.” Why might innovation not be well served by this policy?

Eighth, the choice of rule of reason does not let Apple escape scrutiny, but applies it to both sides of the argument. It adds important policy symmetry. Dr. Miles impeded efficient market activity for nearly a century. The creation of new platforms in Internet markets ought not to have such handicaps. It should be recalled that, in introducing its iTunes platform and its vertically linked iPod music players, circa 2002, the innovative Apple likewise faced attack from competition policy makers (more in Europe, indeed, than the U.S.). Happily, progress in the law had loosened barriers to business model innovation, and the revolutionary ecosystem was allowed to launch. Key to that progressive step was the bulk bargain struck with music labels. Richard Epstein thinks that such industry-wide dealing now endangers Apple’s more recent platform launch. Perhaps. But there is no reason to jump to that conclusion, and much to find out before we embrace it.

Mike Sykuta and I recently co-authored a short article discussing the latest evidence on, and proper legal treatment of, minimum resale price maintenance (RPM). Following is a bit about the article (which is available here).

Despite the U.S. Supreme Court’s Leegin decision holding that minimum RPM must be evaluated under antitrust’s Rule of Reason, the battle over the proper legal treatment of the practice continues to rage at both the federal and state levels.

At the federal level, courts, commentators, and regulators have split over what sort of Rule of Reason should apply.  Some, like yours truly, have argued that because RPM is usually pro- rather than anticompetitive, challengers should bear the burden of proving likely anticompetitive effect (at a minimum, the structural prerequisites to such an effect) under a full-blown Rule of Reason.  Others contend that RPM should be assessed using some version of “quick look” Rule of Reason, under which a challenged instance of RPM is presumed anticompetitive if the plaintiff makes some fairly narrow showing (e.g., that consumer prices have risen, or that the RPM was dealer-initiated, or that the RPM is imposed on homogeneous products that are not sold with dealer services that are susceptible to free-riding).

At the state level, a number of states have simply decided not to follow Leegin and to retain, under state antitrust law, the per se rule of Dr. Miles (the 1911 decision overruled by Leegin).  At least nine states have taken this tack.

We advocates of a full-blown Rule of Reason for minimum RPM have generally emphasized two things.  First, we have observed that while the structural prerequisites to RPM’s potentially anticompetitive harms (facilitation of dealer-level or manufacturer-level cartels, or exclusion by a dominant dealer or manufacturer) are rarely satisfied, the necessary conditions for RPM’s procompetitive benefits (avoidance of free-riding, facilitating entry, encouraging non-free-rideable dealer services) are frequently met.  Second, we have shown that the pre-Leegin empirical evidence on RPM’s effects generally confirmed what theory would predict: Most instances of RPM that have been examined closely have proven output-enhancing.

In recent months, advocates of stricter RPM rules have pointed to an ambitious new study that they say supports their position.  The study authors, University of Chicago economics PhD candidates Alexander MacKay and David Aron Smith, purported to conduct “a natural experiment to estimate the effects of Leegin on product prices and quantity.”  In particular, MacKay & Smith compared post-Leegin changes in price and output levels in states retaining a rule of per se illegality with those in states likely to assess RPM under the Rule of Reason.  Utilizing Nielsen consumer product data for 1,083 “product modules” (i.e., narrowly defined product categories such as “vegetables-broccoli-frozen”), the authors assessed price and output changes between the six month period immediately preceding Leegin (January-June 2007) and the last six months of 2009.

With respect to price changes, MacKay & Smith found that 15% of the product modules exhibited price increases that were higher, by a statistically significant margin, in Rule of Reason states than in per se states.  In only 6.9% of modules were price increases higher, to a statistically significant degree, in per se states than in Rule of Reason states.  With respect to quantity changes, 14.7% of modules saw a statistically significant decrease in quantity in Rule of Reason states versus per se states, whereas only 3% of modules exhibited a statistically significant quantity increase in Rule of Reason states over per se states.  MacKay & Smith thus conclude that greater leniency on minimum RPM is associated with higher prices and lower output levels, a conclusion that, they say, supports the view that RPM is more frequently anticompetitive than procompetitive.

Mike and I contend that the MacKay & Smith study is flawed and does not justify restrictive RPM policies.  First, the study provides very little support for the view that RPM has caused anticompetitive harm within the group of product markets examined.  As an initial matter (and as the authors admit), the study does not demonstrate that actual RPM agreements have caused anticompetitive harm in the post-Leegin era.  To make such a showing, one would have to demonstrate that (1) minimum RPM was actually imposed on a product after the Leegin decision, (2) the RPM policy raised the price of that product from what it otherwise would have been, and (3) the quantity of the product sold fell from what it otherwise would have been.  The authors present no evidence that RPM policies were actually implemented on any of the product categories for which they identified statistically significant price increases and quantity decreases.  As they concede, their study could show only that legal environments treating RPM leniently (not RPM agreements themselves) are conducive to anticompetitive outcomes.

But the authors’ data provide little support for even that claim.  To prove anticompetitive harm stemming from an “RPM-permissive” legal environment, one would have to show that the transition from per se illegality to rule of reason treatment occasioned, for a substantial number of products, both a statistically significant price increase and a statistically significant output reduction on the same product.  An output reduction not accompanied by an increase in price suggests that something besides minimum RPM (or even a “permissive attitude” toward RPM) caused output to fall.  A price increase without a reduction in output is consistent with the view that RPM induced demand-enhancing dealer activities that mitigated the effect of the price increase, albeit by not as much as the producer may have hoped.  (A price increase without an output decrease could also indicate that demand for the product at issue was inelastic, but MacKay & Smith presented no evidence suggesting that demand for any of the product categories exhibiting price increases but not quantity decreases was particularly inelastic.)

According to the authors’ list of “modules with significant price or quantity changes” (Appendix A of their study), only 17 of the 1,083 product categories examined—a mere 1.6%—exhibited both a price increase and a quantity decrease.  And those effects were for categories of products (e.g., barbecue sauces as a whole), not necessarily particular brands of a product (e.g., KC Masterpiece or Sweet Baby Ray’s).  It could well be that within the 1.6% of categories exhibiting both an average price increase and an average output decrease, there were no individual brands exhibiting both effects at once.  Indeed, most of the seventeen product categories involve dealer and manufacturer markets that are neither cartelizable (so neither the dealer nor manufacturer collusion theory of anticompetitive harm could apply) nor dominated by a powerful manufacturer or dealer (so neither the dominant manufacturer nor dominant dealer theory could apply).  To the extent MacKay & Smith’s findings provide any evidence that RPM-permissiveness occasions anticompetitive harm in household consumer products markets, that evidence is awfully thin.

Moreover, in limiting their examination to the product categories included in the Nielsen Consumer Panel Data, MacKay & Smith excluded most products for which one of the procompetitive rationales for minimum RPM—the “avoidance of free-riding” rationale—would apply.  As the authors observe, only about “30% of household consumption is accounted for by the categories in the data.”  That 30% is comprised mainly of groceries, other consumable household products, and small appliances.  The study thus excludes data related to purchases of large appliances, complicated electronics projects, and other relatively expensive products that are frequently sold along with “free-rideable” amenities such as product demonstrations, consumer education, and set-up or repair services.  Because the MacKay & Smith study systematically disregards information on transactions likely to reflect a procompetitive use of minimum RPM, it fails to establish the authors’ conclusion that “the harm to consumers resulting from rule-of-reason treatment of minimum RPM seems to outweigh its benefits.”

In the end, then, Mike and I conclude that the new RPM evidence provides no reason to reject the persuasive theory- and evidence-based arguments in favor of lenient, full-blown Rule of Reason treatment of minimum RPM.  Of course, we welcome comments on our article.

I’ve spent the last few days in DC at the ABA Antitrust Section’s Spring Meeting. The Spring Meeting is the extravaganza of the year for antitrust lawyers, bringing together leading antitrust practitioners, enforcers, and academics for in-depth discussions about developments in the law. It’s really a terrific event. I was honored this year to have been invited (by my old law school classmate, Adam Biegel) to present the “antitrust economics” and “monopolization” sections of the Antitrust Fundamentals session. Former TOTM blogger (now FTC Commissioner) Josh Wright has taught those sections in the past, so I had some pretty big shoes to fill. It was great fun.

Two sessions yesterday really got my blood pumping, albeit for different reasons. The first was a session on counseling clients on RPM after Leegin. Leegin, of course, was the 2007 Supreme Court decision overruling the 1911 Dr. Miles precedent that declared minimum resale price maintenance (RPM) to be per se illegal. Post-Leegin, a manufacturer’s setting of the resale price its downstream dealers may charge is evaluated under the Rule of Reason, at least for purposes of federal antitrust law.

While it was a 5-4 decision, the holding of Leegin is hardly controversial among antitrust scholars. Chicago School and neo-Chicago scholars like myself, Harvard School scholars like Herb Hovenkamp, and even post-Chicago scholars like Einer Elhauge are in agreement that RPM is not always or almost always anticompetitive and thus ought to be analyzed under the Rule of Reason. (Indeed, Elhauge queried: “The puzzle is what provoked a vigorous dissent from Justice Breyer, one of the world’s most sophisticated antitrust justices…”). There’s simply no doubt about Leegin among those who have studied RPM most closely: it was correctly decided.

It was most disheartening, then, to hear a group of esteemed panelist opine that Leegin hasn’t really changed the advice one should give clients considering RPM policies. It’s still wise, the panelists stated, to advise manufacturing clients to avoid RPM and instead to implement either (1) so-called Colgate policies where the manufacturer simply announces and follows a unilateral policy of not selling to dealers who discount, or (2) consignment arrangements where the manufacturer doesn’t sell its product to dealers but instead enlists them as its sales agents and retains title to its product until the product is sold to the end-user consumer. The former approach avoids RPM liability because there is no “agreement” concerning resale prices; the latter, because there is technically no “resale.” Both approaches, though, involve costly and cumbersome methods by which manufacturers may exert control over the resale prices of their products. (See, e.g., golf club manufacturer Ping’s now-classic discussion of the difficulties involved in implementing a Colgate policy.)  So why counsel clients to adopt Colgate policies and consignment/agency arrangements when RPM is now adjudged under the Rule of Reason?

Because of the states — a number of them, at least. Maryland has adopted an explicit Leegin-repealer; California’s Cartwright Act uses language that appears to declare RPM to be per se illegal; and the Supreme Court of Kansas recently held that RPM is per se illegal under that state’s predictably unenlightened antitrust laws.  (Sorry Kansas folk. Proud Mizzou Tiger here.) In addition, a number of states lack statutes or court decisions harmonizing state antitrust law with federal precendents, and at least six have rejected certain federal precedents –chiefly, Illinois Brick — even without statutory repealers. How those states will treat RPM post-Leegin is anybody’s guess. (For an exhaustive and regularly updated list of state law treatment of RPM, see this helpful article and chart by Michael Lindsay.)

So what’s behind states’ hostility toward RPM?  At yesterday’s RPM session, California Senior Assistant Attorney General Kathleen Foote suggested that state attorneys general tend to oppose RPM because they are particularly concerned about consumer protection and because states have had actual experience with RPM under the so-called “Fair Trade” laws that for several decades allowed states to create antitrust immunity for RPM arrangements.  The empirical evidence of conditions under Fair Trade, Ms. Foote says, establishes that RPM leads to higher consumer prices and therefore tends to be anticompetitive.

But these arguments, each of which was considered and rejected in Leegin, have been soundly refuted.  A heightened concern for consumer protection in no way supports adherence to Dr. Miles, for manufacturers generally have an incentive to impose RPM only when doing so benefits consumers.  The retail mark-up — the difference between the price the retailer pays and that which it charges to consumers — is the “price” manufacturers effectively pay for product distribution.  Like consumers, they have no incentive to raise that price (i.e., to increase the mark-up through imposition of RPM) unless doing so generates retailer services that are worth more to consumers than the incremental retail mark-up.  Only then would RPM enhance a manufacturer’s profits, but in that case, it also enhances overall consumer surplus.  In short, manufacturer and consumer interests are generally aligned when it comes to RPM.

With respect to Fair Trade, Ms. Foote was playing a little fast and loose.  The Fair Trade laws did not, like Leegin, simply declare RPM arrangements not to be per se illegal; rather, they said that such arrangements were per se legal.  Hardly anyone doubts that RPM arrangements may sometimes be harmful and should be scrutinized.  But under Leegin — unlike under Fair Trade — anticompetitive instances of RPM (those that facilitate manufacturer or retailer collusion or serve as exclusionary devices for dominant manufacturers or retailers) may be condemned.  Thus, the fact that states witnessed consumer harm under Fair Trade’s regime of per se legality says nothing about how consumers will fare under Leegin’s Rule of Reason.

Finally, Ms. Foote’s reasoning that RPM is anticompetitive because the evidence shows it tends to raise prices is fallacious.  Of course RPM raises prices.  It is, after all, the imposition of a price floor.  But that price effect is beside the point.  Each one of the procompetitive, output-enhancing justifications for RPM assumes an increase in consumer prices.  The key is that the increase in retail mark-up will induce dealer services that consumers value more than the amount of the mark-up and will thereby enhance overall sales.  The fact that RPM raises prices, then, is a red herring.

If legislators, courts, and enforcement officials in states like California, Maryland, and Kansas can’t understand these fairly simple points (yes, I realize I’m asking a lot of the Kansans), then the promise of Leegin may go unfulfilled.  It was pretty clear from yesterday’s session that legal advice — and, accordingly, manufacturer practice — will look much as it did pre-Leegin unless the states get their act together.  That’s pretty depressing.

Fortunately, the session following the RPM session was a good bit more promising.  The highlight was a speech by FTC Commissioner Wright, in which he laid out his intentions to promote a more principled understanding of Section 5 of the FTC Act and to pursue the “low-hanging fruit” (his words) of public restraints.  Both developments would be warmly welcomed.

Commissioner Wright maintains that the promise of Section 5 (which enables the FTC, but not private parties, to enjoin unfair methods of competition that do not necessarily constitute antitrust violations) will remain unfulfilled until the FTC lays out the guiding and limiting principles that will govern its use of the provision.  He’s right.  Absent such articulated principles, use of Section 5 could well end up the way Robert Bork once described mid-20th Century antitrust, which he likened to a frontier sheriff who “did not sift the evidence, distinguish between suspects, and solve crimes, but merely walked the main street and every so often pistol-whipped a few people.” The evidence-based principles Commissioner Wright proposes to develop would avoid the frontier sheriff problem by bringing predictability and fairness to the Commission’s implementation of its Section 5 authority.

Even more exciting were Commissioner Wright’s remarks on public restraints.  Without doubt, competition-reducing laws and regulations are responsible for the destruction of vast amounts of consumer welfare.  State action immunity and other legal hurdles, though, make it difficult to police welfare-reducing public restraints.

But litigation isn’t the only weapon in the FTC’s arsenal.  As Commissioner Wright observed, the FTC is uniquely positioned to advocate for the removal of competition-destructive public restraints.  I was heartened to learn that the Commission recently helped persuade Colorado officials not to impose regulations that would have squelched Uber, a smart phone application that is creating much-needed competition in the taxi and private car service market.  It also took the side of the angels in St. Joseph Abbey case, helping to persuade the Fifth Circuit to strike protectionist regulations that reduced competition among casket sellers in Louisiana.  Commissioner Wright also noted that the FTC’s recent victory in the Phoebe Putney case, which narrowed somewhat the scope of state action immunity, will allow it to pursue more public restraints by state and sub-state governmental entities.  This all bodes well for consumers.

So here’s an idea for the FTC: How about using some of that advocacy prowess to convince the anti-Leegin states to bring their RPM doctrine into conformity with federal law?  It might be tough — and Kansas may be beyond help — but I’m confident that Commissioner Wright and his colleagues could help the anti-Leegin states see that they’re not helping consumers by clinging to moth-eaten Dr. Miles.  Instead, they’re just guaranteeing more jobs for lawyers charged with crafting and implementing Colgate policies, consignment relationships, etc.

What do the midterm election results mean for antitrust, if anything?  According to the American Antitrust Institute, not much:

Despite predictions that the new Congress will result in a dramatically changed climate for business, the American Antitrust Institute (AAI) predicts that the election will have relatively little impact on the enforcement of the nation’s antitrust laws.  “Reasonably strong enforcement of the antitrust laws can be expected to continue to contribute to the reinvigoration of our economy over the years ahead,” said Bert Foer, president of the AAI.

Foer suggests five reasons why U.S. competition policy enforcement will stay its course following the election: (1) the appointees in charge of policy at both the Federal Trade Commission and the Department of Justice Antitrust Division are expected to remain in place; (2) their policies to date have been of a moderate nature, not breaking in substantial ways with previous  administrations; (3) a bipartisan but conservative blue ribbon commission established by Congress recently concluded that major changes in the law are not needed; (4) enforcement by private plaintiffs will continue to account for more than 95 percent of antitrust cases;  and (5) antitrust  continues to serve the vast majority of businesses as well as consumers as a fundamental protection against anticompetitive practices.

I disagree — at least in one sense.  Hold aside the fairly obvious point that antitrust policies at the Federal Trade Commission, with the aggressive use and interpretation of Section 5 and the recent settlement with Intel, have not been moderate and have certainly deviated from the practices of previous administrations.  One of the more interesting developments in the antitrust world over the past few years has been Congressional activity surrounding antitrust enforcement in response to developments in antitrust jurisprudence, particularly at the Supreme Court.  For example, Congress has entertained or is entertaining (at least) the following pieces of legislation: a Twombly repealer, a Dr. Miles repealer, legislation prohibiting reverse payment settlements, the repeal of various antitrust exemptions, and even an odd argument from the Federal Trade Commission that it should be exempt from the requirements of Trinko.  This is quite a bit of legislative activity for antitrust (see related thoughts from Thom here), which raises the interesting question of whether the shift in Congress means anything for antitrust?

I think so.  I suspect that one’s priors on the likelihood of Twombly or Leegin repealers must be revised downward in light of the elections.  I suspect that it is now highly unlikely that we will see significant antitrust legislation in the next few years.  Given the level of antitrust buzz in Congress over the past few years, that seems like a development worth noting and keeping an eye on.

 

See Update Below.

The Supreme Court’s ruling in PSKS v. Leegin Creative Leather Products, which reversed Dr. Miles and ended the per se rule for minimum resale price maintenance, remanded the case to the district court to consider claims under the new rule of reason analysis.  On remand, PSKS filed a second amended complaint alleging that independent retailers were involved in the enforcement of Leegin’s RPM scheme and that Leegin (as a participant at the retail level) agreed on the price of Brighton goods.   The second amended complaint also asserted Brighton goods as a single brand market.

The district  court dismissed the second amended complaint.  Recently, the Fifth Circuit affirmed dismissal on the grounds that the plaintiffs did not define a plausible relevant market.  The two candidate market definitions were the “retail market for Brighton’s women’s accessories” and the “wholesale sale of brand-name women’s accessories to independent retailers.”  The Fifth Circuit also rejected PSKS’s claim that Brighton goods constitute a single brand market.

According to this WSJ story, the plaintiffs appear to be ready to petition for certiorari not in order to encourage the Court to revisit its earlier decision, but on the grounds that the Fifth Circuit ruling closes the door to all challenges to RPM schemes under the rule of reason:

Supreme Court losers like Kay’s Kloset—which went out of business after lower courts dismissed its claim against the Brighton Inc. accessories line—rarely get a second glance from the justices. But the boutique has enlisted a prominent advocate, Einer Elhauge, a Harvard law professor who says he is so concerned with the lower court decisions that he took the case pro bono.

Consumer advocates condemned the 2007 ruling, which split 5-4 along the Supreme Court’s conservative-liberal divide, as sure to drive up prices. Mr. Elhauge defends the high court’s decision, but he says that the lower courts took it too far, depriving retailers of the chance to challenge manufacturers.

An appeals court ruling against Kay’s Kloset “is not just a problem for vertical price-fixing law but also for antitrust law generally,” he said, warning that it would “drastically restrict” any attempt to scrutinize the details of an allegedly anticompetitive action.

There are two key features of the Fifth Circuit decision.  One is that it rejects the notion that Brighton goods are a so-called “single brand market.”  The Fifth Circuit panel writes:

The court also correctly rejected the claim that Brighton goods constitute their own market.  In rare circumstances, a single brand of a product or service can constitute a relevant market for antitrust purposes.  See Eastman Kodak v. Image Tech Servs., 504 US 451, 481-82 (1992).  But that possibility is limited to situations in which consumers are “locked in” to a specific brand of the product.  There is no structural barrier to the interchangeability of Brighton products with goods produced by competing manufacturers, nor as PSKS alleged any such structural barriers.

Nor does Brighton constitute its own submarket.  Although a recognized submarket doctrine exists, such markets must exist within broader economic markets.  And the requirements for pleading a submarket are no different from those for pleading a relevant broader market.

The court goes on to reject the “wholesale sale” in “women’s accessories” market as inadequately plead.  The second key feature of the Fifth Circuit decision is that it, like most rule of reason cases, imposes a clear market power requirement.

Reading between the lines of Professor Elhauge’s concern that the Fifth Circuit ruling creates issue beyond vertical price-fixing arrangements, I suspect that the concern is the rejection of the single brand as a plausible relevant market — and not the market power requirement, which is completely standard in vertical rule of reason cases.  Of course, we’ll have to wait to see the petition to evaluate the arguments.  [SEE UPDATE BELOW]

But Post-Kodak, lower courts all over the country have rejected single brand claims in another vertical context, aftermarket tying arrangements.  In that sense, the Fifth Circuit decision is one of many that systematically and uniformly reject single brand markets.  For example, Kobayashi and Wright show that lower courts have rejected over 90 percent of these claims at the motion to dismiss or summary judgment level.  Since those cases were pre-Twombly, it is not surprising to see the rejection of single brand claims — which often do not make economic sense in differentiated product markets where products compete vigorously against one another and firms also have some degree of economic market power — at the pleading stage.   I do not think that such a ruling threatens the ability of plaintiffs, in the appropriate case with appropriate evidence, to bring a rule of reason RPM case.  Further, there does not appear to be much for the Supreme Court to do here.

UPDATE: Thanks to a reader for a copy of the PSKS petition.  There is a lot to absorb and evaluate here — though the key arguments appear to revolve around the distinction between market power and monopoly power and single brand markets.  More on this later.

Danny Sokol posted his blog’s list of top antitrust publications for the year.  The big winners were Einer Elhauge, Bundled Discounts, and the Death of the Single Monopoly Profit Theory, 123 Harvard Law Review 397 (2009), and Nathan Miller, Strategic Leniency and Cartel Enforcement, American Economic Review.  In the holiday rush,  I forget to send in my votes.  Sorry about that Danny.  With the normal caveats that I’m sure I’m leaving off some articles I’m just forgetting about at the moment, that the list is entirely subjective, and that the methodological sophistication of the list is essentially equivalent to trying to remember articles and find links while counting with my fingers, here are my top 10 for 2009:

  1. William Kovacic, The Federal Trade Commission at 100: Into Our Second Century (Jan 2009)
  2. Nathan Miller, Strategic Leniency and Cartel Enforcement, American Economic Review, Vol 99, No. 3 (2009), 750-568
  3. Benjamin Klein, Competitive Resale Price Maintenance in the Absence of Free-Riding (forthcoming, Antitrust Law Journal)
  4. Paul Seabright, The Undead? A Comment on Professor Elhauge’s Paper,  5 (2) Competition Policy International 277 (2009)
  5. Bruce Kobayashi and Joshua D. Wright, Federalism, Substantive Preemption, and the Limits of Antitrust: An Application to Patent Holdup, 5 Journal of Competition Law and Economics 469 (2009).
  6. Dennis Carlton, Why We Need To Measure the Effect of Merger Policy and How to Do It, 5(1) Competition Policy International 77 (2009)
  7. Thomas Lambert, Dr. Miles is Dead. Now What?: Structuring a Rule of Reason for Minimum Resale Price Maintenance, 50 WILLIAM AND MARY LAW REVIEW 1937 (2009).
  8. Daniel A. Crane, Chicago, Post-Chicago and Neo-Chicago, 76 University of Chicago Law Review (2009)
  9. William Page and Seldon J. Childers, Measuring Compliance with Compulsory Licensing Remedies in the American Microsoft Case, 76 ANTITRUST L.J. 239 (2009)
  10. Alan Devlin, The Stochastic Relationship between Patents and Antitrust, 5(1) Journal of Competition Law and Economics 75 (2009).

Chairman Kovacic’s FTC at 100 Report (all 200 or so pages) is not traditional academic scholarship as such, but is a must read material for anybody who does serious thinking about antitrust institutions and enforcement a legal or economic perspective and so I wanted to call some attention to it here.

What have I left off?

And if I don’t hear from you before then, Happy New Year!

The law and economics of RPM have been a frequent topic of discussion here for Thom and I especially, ranging from the empirical evidence on RPM, to competitive resale price maintenance without free riding, to the inappropriate use of the term “price-fixing” by journalists some who should know better to describe RPM,  to the Commission’s recent musical instruments investigation, and of course, Leegin.

Thom’s latest entry into the RPM wars deserves a close read by all who are interested in this subject.  Dr. Miles Is Dead, Now What?  Structuring a Rule of Reason for Minimum Resale Price Maintenance is now available in published form in the William and Mary Law Review (SSRN version available here).  Thom crafts a rule of reason approach to for evaluating RPM in a Post-Leegin (for now!) world.  Thom, I hope that you’ll be submitting this for the record to the FTC hearings.  My testimony at the FTC hearings took an approach very similar to Thom’s in attempting to structure a rule of reason inquiry around the available theory and evidence on competitive effects of vertical restraints and RPM specifically.

In any event, as the RPM battles rages on (and I hope it does, as the consumer welfare upside for the pending legislation is likely negative in my view), Thom’s article is worth the investment.

A new law in Maryland will take effect on October 1 and will re-instate the Dr. Miles rule for minimum RPM. The Wall Street Journal reports that it is a “move that could lead to lower prices for consumers across the country.” I doubt it. There are quite a few reasons to believe that shifts back to Dr. Miles will not result in lower retail prices, much less higher output (recall that the price effects are less interesting here from a consumer welfare perspective because both cartel theories and pro-competitive theories under which RPM facilitates demand-enhancing promotional services predict upward price movement). For instance, the most likely outcome of the move to per se illegality (whether at the state or federal level through legislation) is that firms contract around the rule with more costly contractual arrangements or vertical integration. To the extent that these alternative arrangements are indeed less efficient, those costs will be passed on to consumers. And of course, the empirical evidence tells us that RPM is generally output-enhancing, not anticompetitive.

Nonetheless, I suspect the WSJ article is right that we will see a number of states moving this direction. When the dust settles, and the state and federal legislation passes, I’d be willing to wager that the evidence will continue to show that prohibitions on RPM do not generate lower prices or higher output. Coincidentally, I will be a panelist at the May 21st FTC Hearings on Resale Price Maintenance discussing rule of reason analysis of RPM post-Leegin along with a representative of the Maryland State AG’s office amongst others.

Ill preview my prepared remarks here a few days in advance.

RPM Workshop Testimony

Josh Wright —  20 May 2009

I’ll be testifying tomorrow at the Federal Trade Commission hearings on Resale Price Maintenance.   My panel will focus on rule of reason analysis of RPM Post-Leegin.  There is a bit of awkwardness testifying about different modes of rule of reason analysis with legislation that would restore the Dr. Miles per se rule pending, but it strikes me as a valuable exercise nonetheless.  The early afternoon panel looks very interesting and focuses on the legal and business history of RPM.   I do not have a written statement for my prepared remarks, but you can see my slides here.

UPDATE: In response to Thom’s query in the comments, I thought the panel went pretty well.  It was fun, anyway.  The panel split time discussion the merits of the pending legislation that would restore the per se rule and whether some “inherently suspect” truncated liability approach placing the burden on defendants to justify their use of minimum RPM was appropriate.  Five of the eight panelists were in favor of the per se rule with three dissenting for various reasons, including my own view that economic learning in the form of theoretical and empirical knowledge about vertical restraints and RPM more specifically simply did not satisfy the standard that the restraint always or almost always reduces output or harms competition.  Much of the discussion of the underlying economics, in my view, revealed a general suspicion not just of RPM but of the promotional services it is designed to induce.  In other words, a few panelists argued that even if RPM did facilitate the supply of promotional services by resolving incentive conflicts (I’m not sure how well the proponents of the per se rule understand the Klein & Murphy model), we should be skeptical of any sort of promotion that manufacturers have to pay for.  Taken seriously, that view would be fairly dangerous and easily expanded to per se rules for exclusive territories, advertising, slotting contracts, and other forms of promotion.  All in all, it was a fun panel and a lively discussion.  I largely stuck to the same mantra: the theory and evidence does not support application of the per se rule, and to the extent that one believes that we know even less than the literature suggests or does not trust the results in the literature, that is not an argument in favor of per se treatment.

Varney on RPM

Josh Wright —  4 March 2009

I just saw this very good piece in The Deal from Sean Gates and Tej

During her tenure at the FTC, Varney advocated greater enforcement against vertical restraints. In a speech before the American Bar Association in early 1995, she explained her thoughts on resale price maintenance cases: “Our enforcement agenda today is that resale price maintenance agreements are unlawful per se and the commission will enforce the law in this area.” This was a clear change from Reagan administration antitrust enforcement. Even though the Supreme Court had long held RPM to be per se unlawful, the Reagan administration enforcers did not challenge these types of restraints. In fact, they did not bring a single pure vertical restraint challenge.

True to her word, Varney joined in several important RPM challenges, including cases that expanded the scope of the per se rule in RPM cases. In a case against American Cyanamid, Varney joined the majority in inferring the existence of a per se illegal RPM agreement despite the fact that the defendants had never announced resale prices nor sought a commitment from distributors to sell at or above a certain price level. In a case against Reebok, Varney joined the Commission in condemning an RPM policy, enjoining Reebok from using “structured terminations” to effect RPM even though such terminations “falls into the ‘gray’ area of RPM jurisprudence.” Varney also joined in a number of other cases challenging vertical price fixing agreements.

The Bush administration, however, did not bring a single challenge to an RPM policy. Instead, the Bush administration urged the Supreme Court to overturn the per se rule against RPM, which the Court did in Leegin Creative Products v. PSKS Inc. Since then, there has been much speculation regarding when, under a rule of reason analysis, RPM is unlawful. Given her prior positions in this area, Varney’s antitrust division may lead the charge in testing the boundaries set in Leegin by bringing challenges to vertical price restraints.

If past is prologue, Varney’s appointment suggests that Obama is looking to make good on his campaign promise to pursue a more aggressive and active antitrust enforcement agenda.

Varney’s speeches are available here. And I’ve previously noted my disappointment about a recent statement from the future AAG that “there is no such thing as a false positive.” Here is a speech from 1996 on vertical restraints. It is difficult to know what to make of the speech in terms of predictive power since it was made during the Dr. Miles era. Though my own view is that P(Dr. Miles Return) = .53. But it will be interesting to watch. As readers of the TOTM know, my own view on RPM is that the theoretical and empirical evidence do not warrant an aggressive antitrust enforcement approach.

I want to second Josh’s commendation of Ben Klein’s submission to the recent FTC Hearings on Resale Price Maintenance. Klein’s paper, which bears the same title as this post, is lucidly written (blissfully free of equations, Greek letters, etc.) and makes a point that, at this juncture in antitrust’s history, is absolutely crucial.

In the pre-Leegin era, commentators who were critical of Dr. Miles‘s per se rule (including yours truly) usually emphasized the so-called free-rider rationale for minimum RPM. According to that rationale, manufacturers frequently set minimum resale prices for their products in order to encourage demand-enhancing point-of-sale services upon which retailers could free-ride. Golf club manufacturer Ping, for example, tried to control its dealers’ resale prices because it wanted dealers to expend great effort helping customers find the perfect set of highly customizable clubs. It worried that the ability to compete on resale price would lead some dealers to cut their own customizing services (and thus their costs), direct their customers to high-service dealers for the necessary customization, and then offer a discount to those customers on the clubs selected by the high service (and thus higher cost) dealers, who couldn’t afford to match the discount. If such free-riding were pervasive, Ping dealers would eventually stop providing the sort of customizing services that enhance demand for Ping clubs.

In the pre-Leegin era, it made sense for critics of Dr. Miles to emphasize the free-rider rationale because (1) it’s easy to explain, and (2) it applies often enough that we can say with confidence that RPM — often motivated by a desire to avoid free-riding on output-enhancing services — is not “always or almost always anticompetitive.” That, of course, is all we Dr. Miles critics needed to establish in order to undermine the per se rule against minimum RPM. (Per se illegality is appropriate only for practices that are always or almost always anticompetitive.)

It’s now a new day in antitrust. Dr. Miles is dead, and the key question for courts, commentators, and the regulatory agencies is how particular instances of RPM should be evaluated to determine their legality. Answering that question requires more than a simple showing that RPM can, under a fairly common set of circumstances, lead to higher output. Indeed, if our rule of reason focuses exclusively on the free-rider rationale for RPM, it may well lead to condemnation of procompetitive instances of RPM in circumstances in which the free-rider rationale does not apply. For example, the highly influential Areeda-Hovenkamp treatise proposes a rule of reason that would automatically condemn RPM arrangements on “homogeneous products,” for which there are unlikely to be any point-of-sale services that are susceptible to free-riding. (See par. 1633c of the Second Edition.) The assumption here is that RPM’s only significant procompetitive effect is the elimination of free-riding.

Fortunately, the Supreme Court’s Leegin decision recognized that RPM may be output enhancing even in the absence of free-riding. The Court explained (page 12):

Resale price maintenance can also increase interbrand competition by encouraging retailer services that would not be provided even absent free riding. It may be difficult and inefficient for a manufacturer to make and enforce a contract with a retailer specifying the different services the retailer must perform. Offering the retailer a guaranteed margin and threatening termination if it does not live up to expectations may be the most efficient way to expand the manufacturer’s market share by inducing the retailer’s performance and allowing it to use its own initiative and experience in providing valuable services.

The idea here — developed fully in Klein & Murphy (1988) — is that RPM, which guarantees retailers a healthy margin on sales of the product at issue, can be used to generate retailer services that are hard to secure contractually. Exhaustively specifying ex ante all the services a retailer should provide would be quite difficult for a manufacturer. In addition, monitoring and enforcing a dealer’s performance obligations along multiple service dimensions would require substantial effort. RPM coupled with a liberal right of termination can provide an alternative means of securing the retailer services(attractive product placement, etc.) that enhance demand for the manufacturer’s products. If the manufacturer generally observes its retailers’ performance, retains an unfettered right to terminate underperformers, and provides an attractive retail margin as an incentive to avoid termination, then the manufacturer can motivate its retailers to provide demand-enhancing point of sale services without specifying them exhauastively.

While the Leegin majority nicely explained how RPM can be used to enhance demand-enhancing retailer services even when those services are not subject to free-riding, it failed to address one crucial question: Why would a manufacturer need to use RPM to encourage these services, since retailers themselves would also benefit from increasing the sales of their manufacturers’ products?

Justice Breyer pounced on this omission in his Leegin dissent. Referring to the majority’s contention that RPM “may be the most efficient way to expand the manufacturer’s market share by inducing the retailer’s performance and allowing it to use its own initiative and experience in providing valuable services,” Justice Breyer stated (pages 14-15):

…I do not understand how, in the absence of free-riding (and assuming competitiveness), an established producer would need resale price maintenance. Why, on these assumptions, would a dealer not “expand” its “market share” as best that dealer sees fit, obtaining appropriate payment from consumers in the process? There may be an answer to this question. But I have not seen it.

Klein’s submission to the FTC’s RPM hearings provides a straightforward answer to Justice Breyer’s question. RPM may be necessary, Klein contends, because a manufacturer and its dealers often have divergent incentives when it comes to services that expand demand for the manufacturer’s products. Frequently, a manufacturer will stand to gain much more from its dealers’ promotional efforts than the dealers themselves. Thus, “RPM plus a liberal right of termination” may be needed to incentivize dealers to provide the services that will maximize sales of the manufacturer’s products. Klein points to three commonly present economic factors that create the sort of incentive divergence that warrants RPM:

(1) Manufacturers often enjoy a larger per-unit profit margin than do their retailers. Because manufacturers’ products tend to be more highly differentiated than the services retailers provide, and because the ability to charge prices in excess of one’s costs is a function of the uniqueness of whatever one is providing, manufacturers will generally earn higher per-unit profits on their products than will the retailers who resell those products. Accordingly, manufacturers stand to gain more from incremental sales of their products than do their retailers, and they may therefore need a way to give their retailers an extra incentive to promote their products.

(2) Many manufacturer-specific retailer promotional efforts lack significant inter-retailer demand effects. While some retailer promotional efforts, such convenient free parking or extended store hours, would provide competitive benefits for both the manufacturers whose products are carried by the retailer and the retailer itself, other retailer promotional efforts, such as prominent placement of the manufacturer’s product within the “impulse buy” section of the retailer’s store, would really benefit only the manufacturer without enhancing demand for the retailer’s services over those of its competitors. Absent some nudge from the manufacturer, retailers won’t be adequately incentivized to perform these sorts of services. RPM can provide the needed nudge.

(3) Manufacturer-specific retailer promotional efforts may cannibalize a multi-brand retailer’s sales of other brands. Many retailer services that would promote a manufacturer’s brand of a product would merely reduce the retailer’s sales of competing brands of the same product and would thus provide little, if any, net benefit to the retailer. Granting favored shelf space to one brand, for example, may require moving a competing brand to less favorable shelf space, thus reducing the sales of that brand. A manufacturer can induce its retailers to provide it with “cannibalizing” promotional services by employing RPM to guarantee the retailer a higher markup on sales of the manufacturer’s brand.

These sources of divergence between manufacturers’ and retailers’ incentives are discussed in more detail in Josh’s 2007 collaboration with Klein, The Economics of Slotting Contracts, 50 J. L. & Econ. 421 (2007). Taken together, the various sources of divergence make it in the interest of many manufacturers to adopt some sort of RPM policy, even when the product at issue is not one that is sold along with services that are susceptible to free-riding. The RPM policies manufacturers adopt to address incentive divergence enhance the manufacturers’ overall output and should thus be assumed to be procompetitive. Accordingly, liability rules such as that proposed in the Areeda-Hovenkamp treatise, which maintains that “[p]roduct homogeneity is an easily observable fact that is inconsistent with known legitimate uses of RPM” (Par. 1633c, at 334 (2d ed.)), are unsound and should be rejected.