Participant Presentations And Session Transcript For June 20


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1

1 UNITED STATES FEDERAL TRADE COMMISSION

2 and

3 UNITED STATES DEPARTMENT OF JUSTICE

4
5
6
7 SHERMAN ACT SECTION 2 JOINT HEARING

8 REFUSALS TO DEAL PANEL

9 TUESDAY, JULY 18, 2006

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11
12
13
14 HELD AT:

15

UNITED STATES FEDERAL TRADE COMMISSION

16 CONFERENCE CENTER CONFERENCE ROOM C

17 601 NEW JERSEY AVENUE, N.W.

18 WASHINGTON, D.C.

19 1:30 P.M. to 5:13 P.M.

20
21
22
23
24 Reported and transcribed by:

25 Sally Jo Bowling

    2

    1 MODERATOR:

    2

    ALDEN F. ABBOTT

    3 Federal Trade Commission

    4

    J. BRUCE McDONALD

    5 Department of Justice

    6
    7 PANELISTS:

    8
    9 William J. Kolasky

    10 R. Hewitt Pate

    11 Robert Pitofsky

    12 Steven C. Salop

    13 Thomas F. Walton

    14 Mark Whitener

    15
    16
    17
    18
    19
    20
    21
    22
    23
    24
    25

    3

    1 C O N T E N T S

    2
    3 Introduction

    4
    5 Presentations:

    6      William J. Kolasky

    7      Robert Pitofsky

    8      R. Hewitt Pate

    9      Steven C. Salop

    10      Thomas F. Walton

    11      Mark Whitener

    12
    13 Moderated Discussion

    14
    15 Adjournment

    16
    17
    18
    19
    20
    21
    22
    23
    24
    25

    4

    1 P R O C E E D I N G S

    2 -  -  -  -  -

    3         MR. ABBOTT: Good afternoon. I'm Alden Abbott,

    4 Associate Director of the Bureau of Competition of the

    5 Federal Trade Commission. I wish to join my

    6 co-moderator, Deputy Assistant Attorney General for

    7 Antitrust, Bruce McDonald, to welcome you to today's

    8 session of the FTC/Justice Department hearings on the

    9 antitrust implications of single firm conduct.

    10         This is the fourth session in the ongoing

    11 hearings. Prior sessions involved an introductory

    12 overview of the topic, and sessions on predatory pricing

    13 and buying.

    14         Before we start, I need to cover a few

    15 housekeeping matters. First, please turn off cell

    16 phones, Blackberries and any other electronic devices.

    17 Second, and most important, the restrooms are outside

    18 the double doors and across the lobby. There are signs

    19 to guide you. Third, in the unlikely event building

    20 alarms go off, please proceed calmly and quickly as

    21 instructed. If we must leave the building, go out the

    22 New Jersey Avenue entrance by the guard's desk, follow

    23 the crowd of FTC employees to a gathering point and

    24 await further instruction. Finally, we request you not

    25 make comments or ask questions during the session.

    5

    1 Thank you.

    2         Now, before turning the podium over to my

    3 colleague, Bruce McDonald, I'll briefly mention, prior

    4 to giving more fullsome introductions, we're honored to

    5 have six of the most distinguished leading lights of

    6 antitrust here today. Bill Kolasky, Wilmer Cutler &

    7 Pickering, former deputy assistant Attorney General;

    8 professor and former dean and FTC chairman Robert

    9 Pitofsky of Georgetown University Law Center, and Arnold

    10 & Porter; Hew Pate, former assistant Attorney General

    11 and currently partner at Hunton & Williams; Professor

    12 Steven Salop, Georgetown University Law Center,

    13 Consultant CRA International, and also an FTC alumnus;

    14 Thomas Walton, director economic policy analysis,

    15 General Motors Corporation, and also an FTC alumnus; and

    16 Mark Whitener, senior counsel, competition law and

    17 policy, General Electric Company, and also an FTC

    18 alumnus. So we see there's a certain FTC flavor to the

    19 distinguished speakers here today, but I won't say

    20 anything more about that.

    21         Bruce?

    22         MR. McDONALD: If counting, there is a distinct

    23 DOJ flavor on the panel, too. Let me say my welcome to

    24 the joint DOJ/FTC single firm conduct hearings. The

    25 hearings opened on June 20 with an overview of the

    6

    1 issues presented by single firm conduct and the

    2 enforcement of Sherman Act Section 2. At the opening

    3 hearings, both FTC Chairman Debbie Majoras and antitrust

    4 AAG Tom Barnett emphasized the challenges in identifying

    5 what conduct threatens long-term harm to competition and

    6 the importance of developing clear rules to guide

    7 business and that both underdeterrence and

    8 overenforcement need to be considered.

    9         Today is our fourth session, and our third day

    10 of hearings. Our topic today is refusals to deal, which

    11 is hard fought ground in the single firm conduct debate.

    12 Our distinguished panel will focus on the circumstances

    13 in which a firm's unilateral refusal to deal with a

    14 competitor violates or should or should not violate

    15 Section 2, addressing issues raised by Colgate, Otter

    16 Tail, Kodak, Aspen, Microsoft and Trinko. The views of

    17 our panelists have been influential in this debate, and

    18 we appreciate the time that they have devoted to these

    19 hearings.

    20         Let me outline the agenda for you this

    21 afternoon. Each of the panelists will take about 15

    22 minutes to outline the issues and things critical, then

    23 we'll take a 15-minute break, and then we'll dig deeper

    24 into a discussion, giving the panelists an opportunity

    25 to respond to each other's presentations and to consider

    7

    1 several propositions and hypotheticals that we hope will

    2 initiate further discussion. The hearing will end at

    3 about 5:00.

    4         Let me turn the podium back to Alden Abbott to

    5 introduce the presenters. Thank you.

    6         MR. ABBOTT: Thank you, Bruce. Our first

    7 speaker, Bill Kolasky, is cochair of Wilmer Hale Cutler

    8 & Pickering, actually Wilmer Cutler Pickering Hale &

    9 Dorr, it's a problem with all of these law firm mergers.

    10 He co-chairs the firm's antitrust and competition

    11 practice group. He's also had a distinguished record of

    12 public service. From September 2001 through December

    13 2002, he served as Deputy Assistant Attorney General for

    14 International Antitrust at the Justice Department, at

    15 which time he spoke out vociferously on the benefits of

    16 an economic approach to antitrust in the international

    17 forum and was very active in helping launch the

    18 International Competition Network. His private practice

    19 covers a full range of antitrust matters and Bill has

    20 also taught antitrust law at American University, and he

    21 speaks regularly on antitrust topics.

    22         Bill?

    23         MR. KOLASKY: Thank you very much, Alden, and

    24 thank you, Bruce, as well, for inviting me to

    25 participate in this. I have to say that it's somewhat

    8

    1 intimidating to be the first speaker in this afternoon's

    2 session, especially given that I think all of the other

    3 members of the panel, and probably most of you in the

    4 audience, have thought longer and harder about these

    5 issues than I have.

    6         The other disadvantage of speaking first, of

    7 course, is that everyone gets the chance to shoot at

    8 what I'm about to say. I do think that I have, perhaps,

    9 one comparative advantage, and only one, I'm going to

    10 try to take full advantage of that, and that is my age,

    11 and therefore, in fact, I've been doing this a lot

    12 longer than most of the people in the room.

    13         I've titled my talk refusals to deal with

    14 rivals, because I want to distinguish very clearly

    15 between refusals to deal with competitors as opposed to

    16 refusals to deal with customers.

    17         Refusals to deal with customers, I think involve

    18 very different competitive concerns. The exclusionary

    19 effects are more likely to be direct and immediate, and

    20 there's a long line of cases running from Lorain Journal

    21 to Dentsply that deal with refusals to deal with

    22 customers. As I understand it, we're not here to

    23 discuss those, we're here today to discuss refusals to

    24 deal with rivals.

    25         In structuring my remarks, I felt that I made

    9

    1 one of the classic rookie mistakes, I have far too many

    2 slides and so I'm going to have to skip around somewhat,

    3 but I wanted to touch on five basic topics. The first

    4 is the pre-Trinko refusal to deal cases. Next I want to

    5 talk briefly about Trinko. Then I want to talk about

    6 the current dialogue that is going on, among others,

    7 between Steve Salop and my partner, Doug Melamed over

    8 the various standards for applying Section 2 generally.

    9 I then want to stake out my own position as to what

    10 analytical framework I think should be applied to

    11 Section 2, and it's basically a step-wise rule reason

    12 approach, applying the California Dental sliding scale.

    13 And then I propose to talk about how they apply to

    14 refusals to deal with rivals.

    15         Focusing first on the pre-Trinko refusal to deal

    16 law, there are basically, I think, four distinct lines

    17 of cases. The first line of cases, and the oldest, are

    18 the vertical integration cases from the 1970s and early

    19 80s. The second line of cases are the essential

    20 facilities cases, largely from the 1980s and early

    21 1990s. The third line of cases are the intellectual

    22 property cases, most recently the Federal Circuit's

    23 decision in CSU. And then finally there is Aspen, which

    24 because it's a Supreme Court case, I think deserves

    25 particular mention and focus.

    10

    1         In the debate over refusals to deal, I've been

    2 surprised in the recent publications how little

    3 attention has been paid to the vertical integration

    4 cases, which is really where a lot of the law in this

    5 area was first developed. And when you go back and read

    6 those cases, I believe, at least, that the analytical

    7 framework that they used is a surprisingly sound one,

    8 given that these cases were decided largely in the 1970s

    9 and early 80s as we were just emerging from what Doug

    10 Ginsburg refers to as the dark ages of antitrust.

    11         Many of the cases, some of which my firm was

    12 involved in, involved refusals to deal by monopoly

    13 newspapers that were vertically integrating into

    14 distribution. The obvious reason why these papers were

    15 vertically integrating into distribution was to get

    16 around the problem that was created by Albrecht, by the

    17 rule that maximum resale price by principles is per se

    18 unlawful. Since it was obviously efficient to have a

    19 single delivery person covering each block, newspapers

    20 found themselves basically with the situation where they

    21 were dealing with independent dealers, giving those

    22 dealers a monopoly, and they had no way to prevent those

    23 dealers from charging monopoly prices higher than what

    24 the newspaper itself would have charged.

    25         It's not surprising, therefore, that the cases

    11

    1 for the most part ended up with the courts ruling in

    2 favor of the newspapers and upholding their refusal to

    3 continue to deal with independent dealers and vertically

    4 integrating into the distribution themselves.

    5         When you go back and read the cases, and most

    6 notable the Paschall versus Kansas City Star decision,

    7 in 1984, which was an en banc decision of the Eighth

    8 Circuit, what you find is that the courts applied

    9 essentially a Section 1 rule of reason standard in

    10 evaluating these unilateral refusals to deal. In that

    11 sense, I would argue that they are in a way ahead of

    12 their time, because it was really not until the

    13 Microsoft decision in 2001 that a court of appeals here

    14 in the D.C. Circuit affirmatively embraced the rule of

    15 reason as the applicable standard for Section 2.

    16         Applying that Section 1 rule of reason

    17 framework, the Eighth Circuit found that the

    18 anticompetitive effects from the alleged loss of

    19 potential competition as claimed by the plaintiffs were

    20 slight, and that the newspaper had offered several

    21 legitimate business reasons for its decision to

    22 vertically integrate into distribution.

    23         One of the most interesting things about the

    24 case is that the newspaper did not rely on the argument

    25 that I relied on in my opening remarks about this case,

    12

    1 namely the need to get around Albrecht. Instead, the

    2 newspaper focused on the desire to be more responsive to

    3 subscribers and have more uniform pricing in order to

    4 facilitate advertising.

    5         Quite frankly, those are relatively weak

    6 justifications for what the newspaper was doing, and yet

    7 nevertheless the court held without scrutinizing those

    8 justifications very closely, that they outweighed the

    9 rather minimal showing of anticompetitive injury that

    10 the plaintiffs had made.

    11         One of the key factors in causing the court to

    12 reach that decision was its determination -- and this is

    13 consistent with what I said earlier on Albrecht -- that

    14 a vertically integrated newspaper was likely to charge

    15 lower prices than if you had unintegrated monopolists at

    16 both the publication level and the distribution level.

    17         The essential facilities cases, I'm going to

    18 skip over lightly, because others are going to be

    19 speaking about those in more detail. There are two

    20 things that I want to note about them. The mother of

    21 essential facilities cases, at least with respect to

    22 unilateral conduct, is of course the Supreme Court's

    23 decision, Otter Tail. What people often don't comment

    24 on is that that was a decision in the mid-1970s, again,

    25 as we were just emerging from the dark ages, it was a

    13

    1 four to three opinion written by Justice Douglas, who

    2 probably wrote more decisions that antitrust lawyers now

    3 try to distance themselves from than almost any other

    4 Justice.

    5         The other thing that's important about the key

    6 essential facilities cases such as Otter Tail and the

    7 Seventh Circuit's decision in MCI v. AT&T is that these

    8 cases do not involve just a simple refusal to deal by a

    9 monopolist. Rather, they were cases in which the

    10 monopolist had engaged in a whole pattern of conduct

    11 that was designed to exclude rivals from these monopoly

    12 markets.

    13         The next line of cases, as I mentioned, are the

    14 cases involving intellectual property rights, the First

    15 Circuit's decision in Data General, the Ninth Circuit's

    16 decision in Kodak and the Federal Circuit's decision in

    17 CSU. There's been an enormous amount of ink spilled

    18 about these decisions, including a very good article by

    19 Hew Pate, and I'm sure Hew will have something to say

    20 about this line of cases.

    21         The important point, I think, that one draws

    22 from these line of cases is the Second Circuit's

    23 recognition, which was endorsed even by the Ninth

    24 Circuit, that an author's or inventor's desire to

    25 exclude others from the use of copyrighted or patented

    14

    1 work is a presumptively valid business justification for

    2 any immediate harm to consumers that might result from a

    3 refusal to license.

    4         The debate really, then, is between the Ninth

    5 Circuit and the Federal Circuit under what's necessary

    6 to rebut that presumption, with the Federal Circuit

    7 taking probably the most restrictive view that the

    8 presumption is virtually irrebuttable unless there is

    9 additional conduct beyond just the simple refusal to

    10 license, such as an illegal tie, fraud on the Patent &

    11 Trademark Office, or sham litigation. And I think that

    12 is consistent, in fact, with cases like MCI and Otter

    13 Tail, if you go back and read those decisions.

    14         That brings me to Aspen Ski, which was the first

    15 serious effort, I would argue, by the Supreme Court to

    16 deal with the question of what standards should apply to

    17 refusals by monopolists to deal with its rivals, and the

    18 key points here that I want to bring out are that the

    19 Court focused not just on the impact on the rival, but

    20 also on the impact of the refusal on consumers, and the

    21 Court also made it clear that what it was looking at

    22 under Section 2 was whether the defendant was seeking to

    23 exclude rivals on some basis other than efficiency, that

    24 is other than through competition on the merits. And I

    25 think that's a very important strand that needs to be

    15

    1 kept in mind as one thinks about these cases.

    2         The other point that's important to make about

    3 Aspen requires really looking at the facts of the case

    4 and what the conduct was. Again, as in Otter Tail and

    5 MCI, the conduct was not a simple refusal to deal.

    6 There was a lot of other conduct going on there,

    7 including to me most significantly the fact that Ski Co.

    8 discontinued its own three-day, three mountain pass so

    9 that the only way somebody could get a discount on a

    10 multi-day, multi-mountain pass was to buy a six-day

    11 pass, and that meant that if the vacationer wanted to

    12 ski the Highlands, they almost certainly had to pay

    13 twice, both for the day ticket to the Highlands and the

    14 six-day pass to the Highlands. The other thing that's

    15 important is that, while the court described Ski Co.'s

    16 justification as pretextual, the court also gave fairly

    17 close scrutiny to those justifications before reaching

    18 that conclusion.

    19         Trinko, I'm not going to spend very much time

    20 on, because others are going to spend a lot of time on

    21 it. The key message point, of course, is that the Court

    22 appeared to adopt a very restrictive view as to when a

    23 monopolist might have a refusal to deal and cooperate

    24 with its rivals.

    25         Because I'm running out of time, I'm going to

    16

    1 jump ahead to the contending standards. As I say, there

    2 are basically three sets of contending standards out

    3 there now, in this area. One is what I would call the

    4 Section 2 rule of reason approach, taken by the D.C.

    5 Circuit in Microsoft and by the Eighth Circuit in

    6 Paschall, the profit sacrifice or no economic sense test

    7 that Greg Werden from the Justice Department and Doug

    8 Melamed have been advocating and I think Hew from time

    9 to time has advocated it as well, and then finally the

    10 essential facilities doctrine.

    11         Again, because we're running out of time, I'm

    12 going to skip ahead to my proposed synthesis. I come

    13 down, as I think about this, in favor of basically the

    14 Microsoft step-wise rule of reason test for exclusionary

    15 conduct. I think that test involves, as the court said,

    16 basically four steps. First, an examination of whether

    17 the monopolist's conduct, in this case its refusal to

    18 deal, had the requisite anticompetitive effect.

    19         Second, a requirement that the monopolist, if

    20 the plaintiff establishes a prima facie case, proffer

    21 some nonpretextual procompetitive justification for its

    22 action, and if it does so, the burden then slides back

    23 to the plaintiffs to rebut that justification. And it's

    24 only if the plaintiff meets that burden that you move on

    25 to the fourth and final stage, which is balancing.

    17

    1 That's the reason why I don't particularly like to have

    2 this test described as the balancing test, because in

    3 fact, you rarely reach the fourth balancing step in the

    4 test.

    5         In applying the step-wise rule of reason under

    6 Section 2, I would argue that the courts should do just

    7 as they do in Section 1, and as I believe they do in

    8 practice under Section 2, and that is apply a sliding

    9 scale. That is to say, as Justice Souter wrote in

    10 California Dental, what is required is an enquiry need

    11 for the case. In other words, the stronger the evidence

    12 of anticompetitive harm, the closer the scrutiny of

    13 proper justifications.

    14         Going back to, I'm not sure how to go to a

    15 previous slide, I want to go back to Microsoft for a

    16 second, because -- I'm sorry about this. I hope I get a

    17 minute for my technological ineptitude. Here we go.

    18         In Microsoft, if you read the decision closely,

    19 you will see that the court, in fact, applied exactly

    20 this kind of a sliding scale. When it came to the

    21 license restrictions that Microsoft imposed on OEMs, the

    22 court subjected Microsoft's proposed justifications to

    23 very close scrutiny. When it came, however, to the

    24 integration of Internet Explorer and Windows, the court

    25 expressed at the very outset of that section of its

    18

    1 opinion a general deference to the dominant firm's

    2 product design decisions, and the only reason it found

    3 Microsoft's conduct unlawful, to the extent it did, is

    4 that Microsoft proffered no justification whatever for

    5 its decisions.

    6         What I found interesting, and I credit this to

    7 one of our summer associates, Tian Mayimin, who is in

    8 the audience today, is how similar the California Dental

    9 sliding scale approach to the rule of reason is to what

    10 the courts do in the constitutional area, both under the

    11 First Amendment, and under equal protection, where over

    12 the years, what began back in the 1960s as a balancing

    13 test, has evolved instead to three different levels of

    14 review, strict scrutiny, intermediate scrutiny, and weak

    15 scrutiny, in which the degree to which the court

    16 subjects the proffered justifications for the

    17 government's action depends on how objectionable the

    18 conduct is in terms of First Amendment principles and/or

    19 equal protection.

    20         And I would suggest that the analogy in the

    21 antitrust area is to the test we use for determining

    22 whether or not the proper justifications justify the

    23 conduct at issue. We often talk about needing to find

    24 that the conduct is reasonably necessary, that's a

    25 relatively tough standard.

    19

    1         A more relaxed standard would be to find that

    2 it's reasonably related, and an even more relaxed

    3 standard would be that it's plausibly related, which is

    4 the standard the Supreme Court adopted in Broadcast

    5 Music in determining whether or not the per se rule

    6 should be applied. I would argue that you could use

    7 that same sliding scale under Section 2, where the

    8 degree of scrutiny depends on the nature of the conduct

    9 in question.

    10         Why do I prefer the rule of reason approach to

    11 the profit sacrifice test? I think basically four

    12 simple reasons. One is that it focuses directly on

    13 competitive effects, whereas the profit sacrifice test

    14 focuses more on the effect on the monopolist, rather

    15 than the effect on consumers. Second, because, as Steve

    16 Salop has pointed out quite persuasively, exclusionary

    17 conduct can be profitable, even in the short-term, and

    18 in fact, if you read the facts of Aspen Ski, I suspect

    19 that even there, Aspen's conduct was profitable in the

    20 short-term, even though it degraded the attractiveness

    21 of its product to the skiers, and that's because it

    22 would have shifted skiers from Highlands to the Aspen

    23 mountains, thereby increasing its revenues, i.e., even

    24 if the total number of skiers coming to the Aspen area

    25 generally declined.

    20

    1         Third, at least as I have read the articles, the

    2 profit sacrifice test, as it has been articulated,

    3 doesn't acknowledge the need to calibrate the degree of

    4 scrutiny of the business justifications based on the

    5 strength of the evidence of competitive injury. Doug

    6 Melamed, for example, has argued that one can look at a

    7 refusal to deal as basically a make-or-buy decision, and

    8 that it should be unlawful if it would be more

    9 profitable for the monopolist to buy the downstream

    10 services than to vertically integrate them. I would

    11 argue that that is too high a degree of scrutiny for the

    12 courts to impose on those kinds of decisions.

    13         And then finally, there is no obvious reason why

    14 courts should be any less able to evaluate competitive

    15 injury and business justifications in a Section 2 versus

    16 a Section 1 setting. What should differ is how strictly

    17 they scrutinize the justifications, not the test that

    18 they apply.

    19         Thank you.

    20         (Applause.)

    21         MR. ABBOTT: Thank you, Bill. Now I have the

    22 honor of introducing Robert Pitofsky, a name known

    23 certainly to all of you and throughout the antitrust

    24 world, former FTC Chairman, Commissioner and Bureau of

    25 Consumer Protection Director, distinguished background

    21

    1 in private practice, currently of counsel at Arnold &

    2 Porter, and of course very distinguished academic,

    3 former NYU law professor, then dean of Georgetown Law

    4 School, currently Sheehy Professor in Antitrust and

    5 Trade Regulation Law at Georgetown University Law

    6 Center. His writings are many. He has co-authored,

    7 Cases and Materials on Trade Regulations, which is in

    8 its fifth edition, one of the most widely used antitrust

    9 and trade regulation case books.

    10         Bob Pitofsky.

    11         (Applause.)

    12         MR. PITOFSKY: Thank you all and good afternoon.

    13 It's great to be back at the FTC, and to see that the

    14 DOJ and the FTC are continuing the tradition of taking

    15 on the toughest issues and addressing them not

    16 necessarily by litigation, but by hearings like this.

    17 And I do regard the definition of exclusion under

    18 Section 2, and refusals to deal in particular, as about

    19 the toughest issues that an antitrust lawyer is required

    20 to face today.

    21         I'm going to do three things here. One, I want

    22 to put refusals to deal in a broader context, and I

    23 believe that's what Trinko's majority opinion was

    24 designed to do. Secondly, I want to say a little bit

    25 about the general universal test that Bill talked about

    22

    1 in such an interesting way. I just have one question,

    2 because I agree with virtually all that he had to say.

    3 And then I'm going to discuss, the antitrust concept of

    4 essential facilities and whether essential facilities is

    5 such an unwise doctrine that it ought to be abolished.

    6         Let's start with Trinko, because I don't think

    7 Trinko is just about the facts of that particular case.

    8 It was a unanimous opinion. I would have voted to

    9 reverse the Second Circuit, too. I had no problem with

    10 the holding. It's the dicta in Trinko that went on and

    11 on and on, and I'm disappointed that other judges on the

    12 court didn't concur separately, and write that they were

    13 not ready to go along with all this additional talk.

    14 More broadly, I think Justice Scalia was saying, very

    15 directly, that he's uncomfortable, he's skeptical about

    16 enforcement of Section 2, and thinks that Section 2,

    17 certainly compared to Section 1 of the Sherman Act,

    18 causes more harm than good. His reasons were that there

    19 are too many false positives, as he put it, in Section

    20 2, that Section 2 enforcement tends to chill the

    21 incentives of aggressive and innovative companies, that

    22 he's uncomfortable with a generalist antitrust court

    23 taking on issues like those raised by Section 2

    24 enforcement, and the remedy, especially with refusal to

    25 deal, is at least difficult and may be impossible.

    23

    1         Let me just go through these. First of all,

    2 what is this false positives thing? I didn't agree with

    3 the Second Circuit either, but I didn't conclude that

    4 Section 2 raised many false positives as a result of

    5 that wrong decision. Is the meaning that lots of

    6 Section 2 cases have been brought by the government and

    7 private parties and have been thrown out on motions to

    8 dismiss, not stating a legitimate case? Well, let's go

    9 back and review the record: Lorain Journal, Walker

    10 Process, Otter Tail, Kodak, Xerox, Aspen, and Intel.

    11 The plaintiff won every one of those Section 2 cases.

    12 Now you might say yes, but they were false positives,

    13 Otter Tail should have been decided the other way. But

    14 the Supreme Court decided Otter Tail in favor of the

    15 plaintiff, and the Court has not subsequently overruled

    16 the decision.

    17         Now there have been mistakes that have been

    18 made, but the idea that there's just constant false

    19 positives in Section 2 enforcement, I don't know where

    20 that's coming from.

    21         Second, Section 2 enforcement chills incentives

    22 for innovative companies. I'm agnostic on that. Maybe

    23 that's true. Just show me the data. Show me anyone who

    24 has done a study which demonstrates that once a company

    25 is aware that it may have to engage in mandatory

    24

    1 licensing, at a reasonable royalty, they cut back on

    2 their investment in innovation. I haven't seen it. But

    3 I'm uncomfortable with all these ex cathedra statements

    4 that that would occur.

    5         Third, uncomfortable because generalist

    6 antitrust judges are deciding these cases? Well, who

    7 are the judges deciding joint venture cases? Merger

    8 cases? Rule of reason cases? They all involve

    9 trade-offs, just like Section 2; they all involve

    10 generalist judges. Up until now, I thought U.S.

    11 antitrust was doing a pretty good job, and I'm not

    12 troubled that district judges are making a botch out of

    13 these trials.

    14         On refusal to deal, if you mandate disclosure,

    15 you have not just the decision about mandating, you have

    16 a decision about at what royalty, what terms, what

    17 timing, and so forth. And there's no question, that

    18 complicates this issue immensely. It was worked out in

    19 Aspen Ski, it was worked out in Otter Tail, although

    20 there was a Federal Power Commission at the time Otter

    21 Tail was decided to help to work out the remedy. The

    22 question for me is, given the fact that the remedies in

    23 these cases are difficult, do you throw up your hands

    24 and say, impossible, therefore the monopolist can do

    25 anything it wants, or do you try to work out the best

    25

    1 remedy you can? Sometimes the remedy is easy. Perhaps

    2 the monopolist has already been licensing other people,

    3 but refuses to license potential competitors. It's not

    4 common, but it happens.

    5         Sometimes the monopolist has been selling in

    6 other markets at a price it was comfortable with.

    7 That's the beginning of negotiation for this remedy. I

    8 grant immediately, it's difficult, the question is, does

    9 that mean free reign for the monopolist?

    10         Second, on proposals for a general rule, first

    11 of all, I want to compliment Hew Pate, now Bill Kolasky,

    12 Steve Salop, Doug Melamed, Greg Werden, all of whom are

    13 trying to come up with a rule that lends certainty and

    14 predictability to Section 2 generally and refusals to

    15 deal specifically. But in the end, I think the

    16 balancing test as advocated in Aspen and Microsoft is

    17 where you have to end up. I'm uncomfortable with the

    18 universal rule that focuses on the welfare of the

    19 monopolist. That's the profit sacrifice test. I'm more

    20 concerned about the consumer, not whether the monopolist

    21 sacrificed profits.

    22         On the approach that asks if there was any

    23 plausible economic reason for doing something, you know,

    24 I think lawyers can always come up with a plausible

    25 economic reason. That's not the issue. The issue is

    26

    1 whether that reason is good enough to outweigh the

    2 anticompetitive effects. And that, it seems to me, is

    3 what you have to do.

    4         I would welcome a clearer rule, but in the end,

    5 you have to take into account the redeeming virtues, the

    6 business reasons, the justification, but if the

    7 anticompetitive effects are large and the efficiencies

    8 small, you can't stop with step one, you have to get to

    9 as many steps as you can, and that's the question that I

    10 would like to address to Bill. His third step is: what

    11 was your justification? Suppose the defendant states

    12 it, and then the other side comes in and let's say fails

    13 to show that your justification was not plausible,

    14 substantial, significant -- that is, there was some

    15 justification. Do we stop there? Or do we go on to the

    16 question of maybe you had a good justification, but it

    17 didn't outweigh the anticompetitive effects?

    18         Let me return finally return to the issues

    19 relating to essential facilities. Let me start with the

    20 proposition that the general rule is and must be no

    21 general duty to deal. You don't have to disclose these

    22 kinds of information except under a very rare exception,

    23 and the exception is where a monopolist has a bottleneck

    24 monopoly. The scholars are suppose to all say let's get

    25 rid of the doctrine. That's really not what they say.

    27

    1 They say it should be rare and extremely narrow, that's

    2 Areeda, that's Hovenkamp. I say the same thing. It

    3 should be very rare, and very narrow.

    4         But I think it should be an exception to the

    5 general rule. I think the best summary of the

    6 limitations on essential facility claims is in the MCI

    7 case, which I notice virtually every lower court that

    8 either sustains or overrules the essential facilities

    9 claim, they all use the MCI test. The test is as

    10 follows: one, it only applies to a monopolist; two,

    11 other potential rivals cannot duplicate the facility or

    12 the service. It's not just that it would be hard to

    13 duplicate it, it's they can't do it at all. Three, the

    14 monopolist denies access to the service or the facility;

    15 and four, that it's feasible to make use of the facility

    16 available.

    17         I remember there was a throw-away line in Otter

    18 Tail, and that's not my favorite case in this area, but

    19 there's a throw-away line saying, you know, if you had

    20 said that there's an engineering reason why you couldn't

    21 wheel power to those municipalities, this would be a

    22 different case. The problem with Otter Tail is there

    23 was no plausible explanation except anticompetitive

    24 purpose for refusing to wheel the power.

    25         The EU has added a few additional

    28

    1 qualifications: The refusal to deal must eliminate all

    2 competition, and that the product that the person

    3 seeking access would make is not just a clone of the

    4 first product, I don't think you need those two

    5 additional restrictions, although they do narrow the

    6 doctrine.

    7         I think with the general qualifications stated

    8 in MCI, we're in good shape. And I do want to emphasize

    9 here -- the idea is not that the monopolist is giving

    10 anything away, it's receiving reasonable royalties that

    11 a court or an expert witness figured out was acceptable.

    12         Finally, it has been said that there's Terminal

    13 Railways, there's Otter Tail, there's Associated Press,

    14 and there aren't many cases that address the essential

    15 facility issue. That's just not true. There are scores

    16 of lower court cases, including lower court cases since

    17 Trinko kicked a lot of mud on the essential facilities

    18 doctrine, which have addressed the claim of essential

    19 facilities.

    20         Let me conclude by saying that while Section 2

    21 enforcement is an area that deserves to be addressed, at

    22 least for the time being, I think Aspen Ski is the best

    23 approach to it. It applies a rule of reason, and the

    24 Court looked at and rejected any plausible business

    25 justification. It seems to me a monopolist ought to

    29

    1 have some reason for refusing to do business with a

    2 potential rival. I just don't think of antitrust as

    3 being so narrowly confined when it comes to the market

    4 power of a monopolist. I look forward to the

    5 discussion. Thank you.

    6         (Applause. )

    7         MR. ABBOTT: Well, so far we've heard one

    8 endorsement of the Cal Dental sliding scale approach and

    9 an endorsement of an approach based on Aspen Ski,

    10 variations on balancing approaches, and it will be

    11 interesting to see what our next speaker has to say

    12 about such approaches.

    13         Hew Pate, partner and head of Hunton & Williams'

    14 Global Competition Practice Group, is a former Assistant

    15 Attorney General for antitrust, until relatively

    16 recently. Hew's practice involves all aspects of

    17 competition law, counseling and litigation. Hew has

    18 served as Ewald Distinguished Visiting Professor of Law

    19 at Virginia, from which he graduated first in his class.

    20 Hew clerked for two Supreme Court Justices, Justice

    21 Powell and Justice Kennedy.

    22         Hew?

    23         (Applause.)

    24         MR. PATE: Thank you very much, Alden. It is

    25 great to be here at the Commission's conference facility

    30

    1 for these hearings. I appreciate the opportunity to

    2 take a part in them. I have submitted some written

    3 testimony, which I have prepared on behalf of the United

    4 States Telecom Association. That, as I understand it,

    5 will be available on the website for these hearings. As

    6 to my elaborations on that and what I say in the

    7 exchange, you've just got me, and all the views I

    8 express, both in the written testimony and here, are my

    9 own.

    10         The general point of the testimony I'm going to

    11 give is that independent competition among competitors

    12 who are not relying upon one another for assistance or

    13 even for pulled punches in the competitive process is

    14 what best produces innovative products at low prices.

    15 Government-imposed duties to assist competitors force

    16 courts into setting prices, a task for which they are

    17 not very well equipped, particularly in capital

    18 intensive or high technology fields. The uncertainty

    19 that is caused by indeterminate liability rules and

    20 duties to assist competitors are likely to retard

    21 desirable investment.

    22         And the U.S. system of private litigation, which

    23 uniquely puts decisions on these types of issues in the

    24 hands of general judges, as has been mentioned, and in

    25 the hands of juries, sometimes with very vague

    31

    1 instructions, exacerbates the problem. And I would

    2 suggest that recent experience in the telecommunications

    3 field provides a good illustration of this point.

    4         This testimony, my testimony is first going to

    5 talk about refusals to deal and essential facilities.

    6 The question is where after Trinko these doctrines

    7 should go in the future, and my suggestion is not much

    8 of anywhere. These doctrines inherently generate

    9 uncertainty, they threaten returns on investment, and by

    10 doing so, they discourage investment from taking place.

    11         With respect to refusals to deal, or as I prefer

    12 to think of it, duties to assist competitors, all have

    13 the right to take a different tack. I think in the wake

    14 of Trinko, as we have seen lower courts try to make

    15 sense of, and cabin the Aspen decision, that the time

    16 has come for Aspen to be overruled, and that the law

    17 would be better with it off the books, and that the

    18 Commission and the Division would do a service to the

    19 law by advocating that in their report from these

    20 hearings.

    21         The second major point I want to make, while I

    22 don't at least in this presentation want to debate the

    23 variety of standards, as has been mentioned, I think the

    24 no economic sense test has a good deal to be commended.

    25 At the Antitrust Modernization Commission, I have

    32

    1 responded to some criticisms and made a general defense

    2 of that test, but for today, I simply want to suggest

    3 that the agencies would do a service by continuing to

    4 push for more objective standards in this area. And to

    5 my mind, while a general balancing test is flexible,

    6 because it can apply in a wide variety of circumstances,

    7 it is inherently lacking in any objective content that

    8 businesses can apply in a predictable manner to make

    9 their decisions. And while there may be different

    10 formulations of it, some variation of a price-cost

    11 comparison in my judgment is going to be necessary if

    12 objectivity is going to be brought to the inquiry.

    13         With respect to the telecommunications industry

    14 experience, I think it does shed some light on whether

    15 duties with forced sharing are likely to produce

    16 desirable results. Telecommunications is an area where

    17 huge capital expenditures and great risk need to be

    18 undertaken to provide the product, and before any

    19 profits can be made. I had a good deal of experience in

    20 this industry in working on DOJ's implementation of the

    21 1996 Act. And my experience there was that the DOJ

    22 staff worked tremendously hard to try to implement that

    23 act. But my experience in that process also left me

    24 convinced that forced sharing of assets with competitors

    25 is not a sound foundation for promoting competition.

    33

    1         As you all you are aware, the unbundling

    2 obligations of the 1996 Act were premised on a so-called

    3 stepping stone theory, the idea that if competitive

    4 local exchange providers were given mandated wholesale

    5 price access to incumbent local exchange providers'

    6 facilities, this would allow so-called CLACs to enter

    7 these markets officially without building facilities,

    8 without undergoing that inherent risk. This would bring

    9 immediate competition of a sort, and importantly, it

    10 would then allow CLACs to build their own facilities so

    11 that facility-based competition could follow thereafter.

    12         A lot of water has gone under the bridge since

    13 the passage of that Act in attempts to administer it. I

    14 think the basic lessons are difficult to deny at this

    15 point. Rather than provide a stepping stone to

    16 independent competition, sharing obligations led to

    17 demands for ever greater and more complicated sharing

    18 obligations, many of which were found unlawful by the

    19 courts in ensuing litigation.

    20         One writer who has actually supported forced

    21 sharing as a part of the antitrust laws recently summed

    22 it up this way: "The 1996 Act is arguably a good

    23 example of the questionable effectiveness of legally

    24 mandated sharing. After eight years, the FCC has failed

    25 to produce a legal system of access, and has instead

    34

    1 furthered a disastrous $50 billion Telecom boom and bust

    2 in local telecommunications."

    3         The experience there, I would suggest, is

    4 illustrative of what happens when -- even when an

    5 agency, but when an agency and parties who can be

    6 protected want to litigate over the agency's rulings and

    7 what the forced sharing obligation will mean, I think

    8 provides an illustration of what is likely to ensue.

    9         I think it also appears clear at this point that

    10 the Act's forced sharing obligation has in many

    11 instances slowed investment that otherwise would have

    12 been made. Bob asked, and other speakers wonder what is

    13 the empirical case for suggesting that incentives would

    14 be chilled. Among one collection of studies, I would

    15 point you to one by Scott Wallsten at the AEI-Brookings

    16 Joint Center For Regulatory Studies, which can be found

    17 on their website, and in summarizing the work in this

    18 area, he suggests that although there are a few

    19 dissenting voices, most economists and most studies

    20 conclude that unbundling obligations in the U.S. reduced

    21 incentives to invest in high-speed Internet

    22 infrastructure. Cable companies which weren't bound by

    23 these sort of unbundling obligations deployed more

    24 quickly. DSL has lagged behind cable in terms of

    25 deployment. That's the opposite situation we see in

    35

    1 many other countries.

    2         The telecommunications industry recently has

    3 rebounded, perhaps not coincidentally, with a diminution

    4 of forced sharing obligations, and where reform of the

    5 1996 Act is headed, is not entirely clear. But I do

    6 think that antitrust generally can learn some lessons

    7 from the experience, and the most important is that

    8 forced sharing discourages and slows innovation.

    9         Second, I certainly do believe that the many

    10 complex and unforeseeable consequences of a forced

    11 sharing regime are extremely difficult to administer.

    12 It may be that in certain circumstances a regulatory

    13 framework can administer forced sharing obligations in

    14 some circumstances, or that a regulatory judgment will

    15 be made that it should, but as a general matter, as a

    16 general antitrust principle, and this is a point Justice

    17 Stewart made in his dissent in Otter Tail, the rare

    18 situations where that would be necessarily are not very

    19 easily translated into a general duty of antitrust to be

    20 applied across all industries. So, certainly in my

    21 judgment, the transaction costs that come with a broad

    22 sharing obligation are likely to outweigh the benefits.

    23         Let me turn to refusals to deal and essential

    24 facilities under the antitrust laws. We've heard some

    25 comment about Trinko, and Aspen, already, and the three

    36

    1 rationales that the Court in Trinko offered for

    2 limiting, very severely, any duty to assist competitors.

    3 The Court did that in granting a motion to dismiss,

    4 holding that the plaintiff's claim in Trinko was so

    5 lacking in traditional antitrust merit that it does not

    6 even require discovery before dismissal of the case.

    7         And the three rationales, as you know, were the

    8 negative incentive effects, both on the incumbent, the

    9 high-market share incumbent, and on potential new

    10 entrants from a sharing rule. Yes, skepticism of

    11 generalist courts and juries' ability to manage sharing

    12 obligations to set terms and prices. And then finally,

    13 this idea of false positives. I think false positives

    14 doesn't necessarily mean that we go to the Supreme Court

    15 or even to lower courts and figure out whether the

    16 defendants or the plaintiffs were winning, or whether

    17 cases were rightly decided, but it does require some

    18 consideration of the duties of those who are charged

    19 with risking capital and conducting business, about

    20 whether, in fact, their potential competitive activities

    21 are chilled by the fear of being embroiled in litigation

    22 under sharing duty types of rules, and for that reason,

    23 I think that the risk of false positives is significant.

    24         As to Aspen, while I think Aspen, as I have said

    25 elsewhere, can be reconciled with a no economic sense

    37

    1 approach to the law and as consistent with it, since

    2 Trinko, a number of courts, and some commentators have

    3 come to view Aspen as standing for the proposition that

    4 once a course of sharing conduct begins, that it

    5 shouldn't be stopped. And if that's what Aspen is going

    6 to stand for, then I think we would all be better off if

    7 the case were overruled.

    8         The reason for that, I think is pretty simple,

    9 that while it is a way to distinguish the fact pattern

    10 in Aspen from the fact pattern in Trinko, there's

    11 nothing in economics that would suggest that the facts

    12 are not likely to change in a pre-existing relationship.

    13 There's no particular reason to believe that a course of

    14 conduct that was once entered into remains efficient

    15 forever.

    16         So, it may be true that a voluntary course of

    17 dealing provides an initial benchmark to set a price

    18 that presumably the parties wouldn't have entered into

    19 the relationship unless it were mutually profitable, all

    20 that's true, and mitigates to some extent the concerns

    21 that were in existence in Trinko, but it does not

    22 eliminate them.

    23         The other serious problem I think with a duty of

    24 continued sharing is that it can prevent voluntary

    25 sharing from taking place in the first place. This is a

    38

    1 point Judge Posner made in the Olympia Equipment Leasing

    2 Company case, a case where Western Union had initially

    3 assisted Olympia, decided to stop, got sued for doing

    4 so, and as Judge Posner put it, if Western Union had

    5 known that it was undertaking a journey from which there

    6 could be no turning back, a journey it could not even

    7 interrupt momentarily, it would have been foolish to

    8 have embarked. And I think that's the real risk of a

    9 developing idea that Aspen stands for the proposition

    10 that you just can't stop sharing if you ever start.

    11         Essential facilities, I won't spend too much

    12 time on. I certainly do not think it adds anything as a

    13 stand-alone theory of liability. I think Professors

    14 Areeda and Hoenkamp said it well, the doctrine is

    15 harmful because, I quote, "Forcing a firm to share its

    16 monopoly is inconsistent with antitrust basic goals for

    17 two reasons. First, consumers are no better off when a

    18 monopoly is shared. Ordinarily a price and output are

    19 the same as they were when one monopolist used the input

    20 alone. And second, the right to share monopoly

    21 discourages firms from developing their own alternative

    22 inputs."

    23         I will conclude, and time is running out, simply

    24 by renewing a call for the agencies to participate in

    25 advocating more objective standards. I think we're at a

    39

    1 high water mark now of criticisms leveled at the

    2 standard-less nature of Section 2 generally. The OECD

    3 competition committee recently issued a background note

    4 that collects a number of these. I recall Elhauge has

    5 described the exclusionary conduct law that exists today

    6 as using a barrage of conclusory labels to cover for a

    7 lack of any well-defined -- for any well-defined

    8 criteria for sorting out desirable from undesirable

    9 conduct. Even Eleanor Fox, with whom I often disagree

    10 on panels like this, states that a number of the

    11 contemporary cases tend to be noncommittal and rely on

    12 obfuscatory language in their use of terms, such as

    13 anticompetitive.

    14         So, I think uncertain legal and regulatory

    15 regimes, like limits on investment, are likely to prove

    16 strong deterrents to investment, and innovation.

    17 Certainly the continued reliance in some cases on intent

    18 is one example of the type of subjective standards that

    19 can lead to uncertainty and retard investment.

    20         There is some positive sign, I think, on the

    21 horizon that the Supreme Court may continue to look into

    22 this area in the Weyerhaeuser case that they've granted

    23 recently, where liability was imposed on the basis of

    24 purchasing more saw logs than were needed. I would

    25 suggest that we're really not going to do very well in a

    40

    1 regime where juries make a determination based on what

    2 is right and wrong in log buying, without any more

    3 objective basis for decision.

    4         I'll stop there. As to the empirical basis for

    5 all this, I would simply suggest that if the government

    6 is going to intervene, if it's going to decide to

    7 require sharing of a facility, if it's going to decide

    8 not to use a property rule for determining how assets

    9 are going to be used, but instead use a liability rule

    10 to take from the Doug Melamed paradigm from the famous

    11 law review article he authored with Judge Calabresi a

    12 long time ago, that it ought to have some pretty serious

    13 grounding for believing that the situation is going to

    14 be made better. I don't think right now that an

    15 empirical case can be made that forced sharing, that

    16 this aspect of antitrust used to assist competitors is

    17 going to leave consumers better off. I suggested some

    18 time before I left government that the Modernization

    19 Commission could do a study by trying to look into the

    20 empirical basis for different areas of antitrust.

    21 That's a hard thing to do, as they quickly decided, but

    22 without it, in an area where the economics don't produce

    23 a real consensus, I think the basis for government

    24 intervention is lacking.

    25         Bob asked whether we should just throw up our

    41

    1 hands because it's so difficult. Emil Paulis, who works

    2 at the European Commission, used to make the same

    3 comment after he heard me speak, and he would always

    4 say, well, Hew, you just want to throw the baby out with

    5 the bath water, because the standards are so difficult.

    6 And I always would respond by saying, well, Emil, if

    7 I've got a baby, and I've got to dip it into some bath

    8 water, I would like to have some reason to believe that

    9 the baby is going to be cleaner after I take it out than

    10 it was before I put it in. And I don't think in this

    11 area of the law that we have that.

    12         Thanks, I look forward to the discussion.

    13         (Applause.)

    14         MR. ABBOTT: The people who are standing in the

    15 back, there are some seats up front, so don't be shy,

    16 there are seats. Thanks, Hew.

    17         So, now we have two rational balancers and one

    18 antitrust skeptic, and now we're going to turn to our

    19 first academically trained economist on the panel, Steve

    20 Salop, professor of economics and law at Georgetown

    21 University Law Center, where he teaches antitrust law

    22 and economics, economic reasoning for lawyers, and in

    23 addition maintains an active consulting practice at CRA

    24 International. Steve is no stranger to government,

    25 having worked at the Civil Aeronautics Board, the

    42

    1 Federal Reserve Board and the Federal Trade Commission.

    2 Now I remember him giving tutorials to young staffers on

    3 economics at the FTC, young bright staffers, I was one

    4 of them. And he did a very impressive job in that

    5 regard. Steve has written widely in leading antitrust

    6 journals, on this topic of Section 2, and I, for one,

    7 look forward eagerly to hear his comments.

    8         Steve?

    9         (Applause. )

    10         MR. SALOP: Thank you. I'm really pleased to be

    11 here. I'm thrilled that Bill Kolasky seems to agree

    12 with me. That's one down at Wilmer Cutler and several

    13 to go I guess.

    14         I want to talk a little bit about the general

    15 exclusion standards, but just for a moment, and then go

    16 on and talk about the application of refusals to deal.

    17         As you know, there are two standards that people

    18 have been talking about, what I call the consumer

    19 welfare effects standard, I just want to focus on the

    20 fact that that's really the effective price and quantity

    21 effect, not some complicated balancing, and then the

    22 profit and no economic sense test. I favor the consumer

    23 welfare effect test. You know, it's focused on the goal

    24 of antitrust, it's flexible, it is an enquiry meet for

    25 the case, I agree with Bill on that. It implies a

    43

    1 tailored structural enquiry for each type of

    2 exclusionary conduct.

    3         It's not an open-ended balancing of the sort

    4 that was suggested in Chicago Board of Trade, but rather

    5 there's a series of steps that one must go through and

    6 those series of steps differ for different types of

    7 exclusionary conduct.

    8         For example, I spoke at the -- at this panel the

    9 FTC had last month on timber overbuying and so on, and I

    10 distinguished between predatory overbuying and raising

    11 rivals costs overbuying and depending on the

    12 characterization of the conduct, there was a different

    13 test that was used.

    14         Should be still a different test for predatory

    15 pricing, still a different test for refusals to deal,

    16 still a different set of tests for exclusive dealing,

    17 but all within the umbrella of a focus on consumer

    18 welfare and this consumer welfare approach.

    19         So, I don't think that the consumer welfare

    20 standard leads to balancing. I also don't think it

    21 leads to false positives. Indeed the sacrifice test is

    22 usually criticized for causing false negatives, but as I

    23 discuss in my article, it also causes false positives,

    24 and indeed I'll argue that with refusals to deal, the

    25 sacrifice standard would be more likely to cause false

    44

    1 positives than would the consumer welfare test.

    2         We've talked a little bit about whether the

    3 innovation incentives are a reason to cut back Section

    4 2. I'm going to talk about this before we get to

    5 refusals to deal, but just basically, you know, firms

    6 have incentives to compete, incentives to innovate in

    7 competitive markets. I believe it's the consensus of

    8 economists that innovation incentives are greater in

    9 competitive markets than in monopoly markets,

    10 monopolists have weaker innovation incentives than

    11 competitors. I would cite you to Mike Scherer's

    12 article, which is cited in my antitrust law journal

    13 article. And of course, you know, if a monopolist, if

    14 the dominant firm knocks the entrants out of business,

    15 then it will, of course, reduce the innovation

    16 incentives of the entrants as well.

    17         Well, now, how would you apply this to refusals

    18 to deal? Well, here, you've got the consumer welfare

    19 test, we've got the first -- the profit sacrifice, or

    20 NES test, and then of course per se legality. What I

    21 want to say about this is that the consumer welfare test

    22 and the sacrifice test actually have a lot of

    23 similarities. They both require a price benchmark, and

    24 a lot of people say the price benchmark is the fatal

    25 flaw in anything other than per se legality. I'm going

    45

    1 to explain why I don't think that's true. And I'll also

    2 talk about why I think the sacrifice test is more likely

    3 to lead to false positives, because it does not have any

    4 or may not have any anticompetitive effects prong. And

    5 of course I say legality leads to false negatives.

    6         Okay, so what should the rule be under the

    7 consumer welfare test? I'm going to talk about the

    8 rule. I have a hand-out, which you can pick up at the

    9 break, which sets out the rule I've composed in detail,

    10 but we can talk a little bit about that now.

    11         There will be basically three pieces to it.

    12 First of all you have to show that the defendant has

    13 monopoly power, and that would be monopoly power in the

    14 input market and actual or likely monopoly power in the

    15 output market, so we're talking about a vertically

    16 integrated monopolist.

    17         You would have to show that the plaintiff has

    18 made a genuine offer to buy at or above some benchmark

    19 price, and I'll talk in a bit about how you determine

    20 that benchmark price. So, this is not a matter of

    21 saying that the monopolist has to sell at cost, I'm

    22 going to come up with a benchmark that's going to

    23 compensate the monopolist adequately, and the plaintiff

    24 would have the burden of showing that it made an offer.

    25 So, the plaintiff can't go to the court first, the

    46

    1 plaintiff has to go to the monopolist and try to get the

    2 product, and if it fails, and the defendant, you know,

    3 refuses to deal, then there is at least potential for a

    4 case.

    5         This test I use, which I call a compensation

    6 test, is going to compensate the monopolist for its lost

    7 profits for the customers that it loses to the entrant,

    8 and this is very much a sacrifice test, a no economic

    9 sense test. But under the consumer welfare analysis,

    10 you also require the plaintiff to prove anticompetitive

    11 harm. And that would be during the output market, or

    12 the input market, or some other -- some other market

    13 where the firms are actual or potential competitors.

    14         It's not clear to me that the sacrifice standard

    15 requires this third step, and that's why I think it's

    16 going to lead to false positives. I think it only

    17 requires the first two. Now, if you actually parse the

    18 literature, Greg Werden probably does not have this

    19 third step. He has some type of incipiency standard for

    20 the third step. I think Doug Melamed, I think, adds

    21 this third prong.

    22         In which market do I have to show

    23 anticompetitive effects? Well, that's going to depend

    24 on the case. But, you know, a refusal to deal could

    25 cover up, you know, a naked noncompete. For example,

    47

    1 you know, a contemporary example might be suppose

    2 Halliburton, which has a monopoly over certain

    3 transportation services in Iraq, suppose it says to a

    4 firm, I will only provide you transportation services in

    5 Iraq which you need in order to sell other commodities

    6 to the armed forces, I will only provide that input to

    7 you if you promise not to compete with me in providing

    8 oil field services in Louisiana.

    9         Well, that's a refusal to deal, the harm would

    10 not be in the geographic market in whatever Halliburton

    11 competes in in Iraq, but rather some other unrelated

    12 market. So, it's possible that this litigation could be

    13 brought here.

    14         Or, you know, more generally, if it's not the

    15 input or output market, it's going to be a complementary

    16 product, it's going to be a complementary product

    17 market.

    18         So, notice, this consumer welfare test, it's not

    19 an open-ended Chicago Board of Trade inquiry, have to

    20 show market power, have to show anticompetitive effects

    21 in a particularized way, and you have to show that the

    22 price offered by the plaintiff meets the compensation

    23 test.

    24         Okay. Well, the real issue is, what about this

    25 price benchmark? This is where the controversy is. And

    48

    1 there are several candidates, as Hew pointed out.

    2 There's the prior price paid by the plaintiff, as in the

    3 case of Aspen. It could be the price charged to other

    4 buyers, which also was an issue in Aspen, where they

    5 were willing to deal with other mountains in other ski

    6 resorts. Or there could be some benchmark, if the first

    7 two don't work, either because there's no course of --

    8 previous course of dealing, or because of some reason

    9 they're not appropriate, and I agree with you that they

    10 may not be appropriate, then you need another benchmark

    11 and the benchmark that I've come up with is a benchmark

    12 I call protected profits benchmark, and it's a price

    13 that compensates the defendant for the monopoly profits

    14 lost to plaintiff from losing -- from customers that

    15 shift from the defendant to the plaintiff.

    16         I'll give you an example. So, it is a sacrifice

    17 test, it is giving the defendant the monopoly profits

    18 that it's earned, and I think that's a key issue. You

    19 might want to adjust this benchmark. For example,

    20 suppose dealing with the plaintiff raises the

    21 defendant's production costs. Well then you would have

    22 to take that into account in setting the benchmark.

    23 Suppose the plaintiff creates real reputational

    24 free-riding, you know, suppose it says, well, we've

    25 used -- we've used this input that we got from GE, and

    49

    1 suppose their product is no good, and that hurts GE's

    2 reputation, well that could would be a reason why GE

    3 should be permitted not to deal with them or charge them

    4 a higher price.

    5         And lastly, suppose the monopoly, we've been

    6 acting up until now that these monopolies are attained

    7 legitimately. If they're not obtained legitimately,

    8 then it's not clear that you want to give someone

    9 protection from the monopolist. Not clear that you

    10 would worry so much about protecting those monopoly

    11 profits or protecting the incentives.

    12         Finally, the other adjustment I would make is

    13 this is a rule intended to generate negotiation, so if

    14 the defendant just has a flat refusal to deal, a

    15 non-negotiable refusal to deal, or only makes sham

    16 offers, as they did in Aspen, then the burden is going

    17 to shift to the defendant to show that the plaintiff's

    18 price offer was good.

    19         So, for example, in Aspen, it's not as if

    20 Highlands said, I'll pay you ten cents for the daily

    21 tickets, and Ski Co. said, no, no, no, I want $44,

    22 that's much more reasonable, and Highlands said, I'm

    23 going to sue you. It wasn't like that at all. In fact,

    24 Highlands made an offer, in fact the retail price, but

    25 Ski Co. made a counteroffer designed for Highlands to

    50

    1 turn down. I mean, it was not a real counteroffer, it

    2 was one that Highlands would be forced to reject. So, I

    3 place some burden on the defendant in those

    4 circumstances.

    5         Okay, so how do you calculate this? Well, this

    6 is the part with the math, but as I tell my law

    7 students, this is not really math, it's just shorthand,

    8 it's just abbreviations. So, my benchmark has two

    9 important properties to it. One is it compensates the

    10 defendant for the monopoly profits that it loses on the

    11 customers that it loses to the plaintiff. However, it

    12 does not get compensation for price competition that's

    13 induced by entry by a firm that has lower costs or

    14 superior product.

    15         So, I'm compensating them for their monopoly

    16 profits they have, but I'm not allowing them to deter

    17 entry by a more efficient competitor, one that has lower

    18 costs or a better product. Where did I get the standard

    19 from? Well, I didn't invent it. This goes way back.

    20 It's called the efficient components pricing standard,

    21 first started in the late 70s or early 80s. It's been

    22 referred to in the context and there's been a lot of

    23 commentary on this basic standard by people, among

    24 others, John Vickers, who just left heading up the OFT

    25 in Europe.

    51

    1         The way you calculate this, this benchmark

    2 price, is the monopolist's input cost, plus it gets its

    3 margin, plus its margin times the fraction of the

    4 plaintiff's customers that get diverted from the

    5 monopolist. This is not -- it's not a lot of letters,

    6 it looks like algebra, but it's not really so

    7 complicated.

    8         So, let me give you an example to show that, and

    9 I'll use -- suppose the Trinko case were not in the

    10 context of regulation, how would you, you know, how

    11 would you use this protected profit standard? Well,

    12 here's the data. Suppose Verizon's incremental cost of

    13 providing DSL, wholesale DSL, suppose that were $10.

    14 Suppose Verizon's margin on retail DSL, their monopoly

    15 margin, suppose that were $50. And suppose that if

    16 Verizon sells wholesale DSL to AT&T, half the customers

    17 AT&T gets will come out of the hide of Verizon, and the

    18 other half will come from cable and dial-up. And yes, I

    19 know Verizon provides dial-up in its own territory, but

    20 they probably don't make much money there, so I am just

    21 leaving that out for now. But if you will, you could

    22 make it more complicated to take into account the

    23 dial-up margin, but I think Verizon probably sells at a

    24 negative margin on dial-up anyway.

    25         So, under these circumstances, half of AT&T's

    52

    1 retail DSL customers are going to come out of Verizon,

    2 half are going to come out of the hide of Comcast, Time

    3 Warner and so on. So, this diversion rate would be 50

    4 percent. Diversion rate, you know, it's something we

    5 use in mergers all the time.

    6         What would be the benchmark price? It would be

    7 $35. Verizon's $10 cost, plus they get a monopoly

    8 margin of $50, they lose that monopoly margin on half

    9 their customers, so half of $50 is $25, you have to

    10 compensate them for those expected losses, that gives us

    11 $35. Okay?

    12         If AT&T were going to get all its customers out

    13 of the hide of Verizon, then the benchmark would be a

    14 lot higher, it would be $60, Verizon would have to be

    15 compensated for its costs, plus the margin that it lost.

    16 Okay? Not so difficult to do this at all.

    17         Under this standard, and this is another sort of

    18 key aspect, I probably should have put it on the

    19 previous slide. The entrant will not be able to succeed

    20 in the market under this standard, unless it has lower

    21 costs or a superior product for at least some consumers.

    22 So, this is not a prescription for inducing inefficient

    23 entry, the only kind of entry that gets induced as a

    24 result of this test is efficient entry, and therefore I

    25 think it meets the -- I think it meets the standard.

    53

    1         So, for that reason, I think this, you know,

    2 this consumer welfare standard, look at how much the

    3 plaintiff has to prove. Monopoly power in the input

    4 market, you know, if the entrant's got an alternative,

    5 then they're out. The defendant has to have actual or

    6 potential monopoly power in the output market, or else

    7 the plaintiff loses.

    8         A lot of things for plaintiffs to prove. It's

    9 got to prove that the price offered exceeds the test, a

    10 test that I don't think is very difficult for a firm,

    11 certainly not a firm like Verizon, to calculate. I

    12 don't think it's hard for any firm.

    13         This is the same sort of data we routinely use

    14 for merger analysis, and that a firm needs to run its

    15 own business. A firm needs to know its margin. And in

    16 fact, it can look up its margin, it can ask the CFO for

    17 their margin, it's on the profit and loss statement and

    18 should be on the profit and loss statement for each

    19 division. And they just need to know the extent to

    20 which they compete with the plaintiff.

    21         And the plaintiff here also has to prove

    22 anticompetitive effects. So, there's big barriers for

    23 the plaintiff here. So, this is not -- this is not a

    24 standard that's going to lead to overwhelming amount of

    25 litigation.

    54

    1         Now, this is the standard, how do we deal, what

    2 do we have to say about Trinko? Well, Trinko raises a

    3 number of cautions that have been discussed by the

    4 earlier speakers. They pointed out that there's no

    5 general Sherman Act duty to deal, and they said forced

    6 share, I guess red flags is my term, the justice

    7 division did not use the term red flags, but it raises a

    8 number of red flags. Lessens investment incentives,

    9 requires courts to act as central planners, that's the

    10 red flag. And the compelling negotiation can facilitate

    11 collusion. All of this adds up to the concern with

    12 false positives.

    13         Well, let me go through these and look at these

    14 in a little more detail. Well, first of all, the no

    15 general Sherman Act duty to deal, that's true. I teach

    16 antitrust, every antitrust professor knows that. I wish

    17 that in the Trinko opinion, however, they had quoted

    18 Colgate correctly. They said Colgate stands for no duty

    19 to deal. The proper quote says, i.e., in the absence of

    20 any purpose to create a monopoly, there's no duty to

    21 deal. So, Colgate is limited and in that Justice Scalia

    22 tried to change the meaning of Colgate.

    23         So, what about these more detailed questions?

    24 Well, first is this investment incentives, this has been

    25 alluded to by several speakers. I think the first

    55

    1 point, the key point is the benchmark price compensates

    2 the defendant for the monopoly profits that it loses on

    3 customers that it loses to the plaintiff. So, in terms

    4 of reducing their investment incentives, we're making,

    5 and I thought Hew was exactly right, it is a liability

    6 standard. It's making them whole on the profits they

    7 lose, on the customers that they would lose to the

    8 plaintiff.

    9         But there's other reasons why I think it will

    10 not reduce investment incentive. First of all, Scalia

    11 worries about reducing the entrant's investment

    12 standards, that the entrant would otherwise enter the

    13 input market on its own. But that is a very weak

    14 statement. I mean, you don't get into one of these

    15 cases unless the defendant's got monopoly power in the

    16 input market, and what we mean by monopoly power is

    17 durable monopoly power. What we mean by durable

    18 monopoly power is that there are high barriers to entry.

    19         So, unlikely that the plaintiff otherwise would

    20 have entered the input market. It also means you can't

    21 get into the -- you can't enter one market at a time,

    22 you're unlikely to see leapfrog competition. Secondly,

    23 we know the competitive markets increase the defendant's

    24 innovation incentives. Monopolists have weaker

    25 innovation incentives than do competitors and, you know,

    56

    1 I mean, the telephone companies have a million excuses

    2 for why they never innovate, and we have just heard some

    3 others.

    4         I think that -- but I think if they had faced

    5 more competition, they would have stronger innovation.

    6 They are certainly innovated in trying to come in to

    7 compete with cable, where they don't have -- where

    8 Telecom is not -- where telephone companies do not have

    9 a monopoly.

    10         Of course entering the output market will

    11 increase the entrant's innovation incentives. And

    12 finally, and this is I think a key point, and I think in

    13 Bill Kolasky's list of cases, Kodak was conveniently

    14 left out. In Trinko, Kodak doesn't get mentioned.

    15 Well, one very important point that was made in the

    16 Kodak opinion is that you can't call the entrant a free

    17 -rider if they only enter one market rather than all of

    18 them.

    19         Kodak says that this understanding of

    20 free-riding is an argument made by -- made by Kodak, and

    21 the Supreme Court said, this understanding of

    22 free-riding has no support in the case law. So, you

    23 know, I think that argument just does not add up.

    24         The courts as central planners, I'm running out

    25 of time, so let me go quickly. You know, I guess the

    57

    1 point I've been making all along is this isn't so hard.

    2 Market prices often provide a good benchmark. I think

    3 this protected profits compensation benchmark is not too

    4 difficult to evaluate, and then the other point I want

    5 to make here is, you know, if antitrust withdraws, it's

    6 not clear that we're going to have laissez faire. This

    7 has not been the way the United States economy has

    8 worked.

    9         When antitrust fails, we often get real formal

    10 public utility commission regulation, real central

    11 benefits, and so I just want to raise the question about

    12 whether we're really going to get ourselves into the

    13 federal operating system commission if antitrust drops

    14 out. And of course the essential facility doctrine fits

    15 in here.

    16         Okay, finally is this issue about facilitating

    17 collusion. I think that one is really silly. You know,

    18 if you believed -- if you believed this argument that

    19 letting people negotiate is going to facilitate

    20 collusion, well then we also prohibit voluntary dealing,

    21 we also prohibit joint ventures, we also prohibit patent

    22 settlements, which we know from the FTC experience are

    23 sometimes used to strike noncompetition agreements.

    24         It's also, you know, the refusal to deal can be

    25 used, if it's a threatened refusal to deal, can be used

    58

    1 to facilitate collusion. I'll sell to you, but only if

    2 you promise not to compete with me. So, I think that

    3 the -- that effect put out that dicta by the Trinko

    4 court was really they -- it's either insignificant or

    5 goes the other way.

    6         Finally, I want to raise the question of if we

    7 go down Hew's route for per se legality, where are we

    8 going to stop? I note that's perhaps not a question

    9 that Hew is worried about, but it's a question that I'm

    10 worried about. If it's per se illegal -- per se legal

    11 to refuse to deal with firms that compete with you, then

    12 what about exclusive dealing? Why isn't that, per se,

    13 legal, either with respect to whether if the firm wants

    14 to buy stuff from you, sell it to your competitors, or

    15 if they want to buy from your competitors? What about

    16 the tie-in? Why doesn't it make tie-in per se legal,

    17 because that's just basically refusal to deal. What

    18 about noncompetition agreements? What if a firm says,

    19 like in my little Halliburton example, we're going to

    20 compete with you in some unrelated market, and they say,

    21 well, in that case, I'm not going to sell to you. Well,

    22 that would be -- that would be per se legal.

    23         And finally, what if they use a refusal to deal

    24 in order to force the firm to raise prices, either in

    25 the market -- the output market that we're talking about

    59

    1 or some other market. Would that also be per se legal

    2 for them to make that argument? So, I would be quite

    3 concerned about that.

    4         I'm out of time, thank you very much.

    5         (Applause.)

    6         MR. ABBOTT: Thank you, Steve, for presenting an

    7 attempt to establish an administrative rule that will

    8 undoubtedly bring forth some more discussion about the

    9 rule that might apply in evaluations under the rule of

    10 reason.

    11         Now we have another economist who is going to

    12 take a crack at this difficult set of topics. Tom

    13 Walton, director of economic policy analysis, General

    14 Motors Corporation, in which position he oversees the

    15 analysis of costs, current and prospective governmental

    16 policies and regulations, and their implications for

    17 General Motors. Tom Walton received a Ph.D. in

    18 economics from UCLA, was assistant professor at NYU,

    19 before joining GM, and served briefly as special advisor

    20 for regulatory affairs at the FTC. He's vice chair of

    21 the Business Research Advisory Counsel for the U.S.

    22 Bureau of Labor Statistics in Washington, D.C.

    23         Tom?

    24         (Applause.)

    25         MR. WALTON: Thank you very much. I'm going to

    60

    1 try a little bit of a change of pace to give you an idea

    2 of what it's like to be inside the fish bowl of

    3 competition.

    4         Well, it all began back in 1963 when the Federal

    5 Trade Commission launched its first investigation into

    6 the manufacturing and distribution practices of the

    7 major auto makers with regard to the production and sale

    8 of their single source crash parts. Now, these are the

    9 parts that are most frequently damaged in the event of

    10 auto accidents, and which also happen to be single

    11 source. They include radiators, bumpers, fenders,

    12 grills, all the sheet metal. They don't include glass,

    13 because glass is multiple source.

    14         At that time, Chrysler, Ford and GM, the major

    15 manufacturers at that time, distributed these parts

    16 exclusively through our franchised auto dealers. Our

    17 franchised line-make auto dealers. That's an important

    18 distinction. For example, Chevrolet parts we

    19 distributed exclusively through Chevrolet. If an

    20 independent body shop wanted to buy a part, it could

    21 only get a Chevrolet brand part at Chevrolet, they could

    22 not get it at Pontiac, for example.

    23         Insurance companies instigated the

    24 investigations. Congressional investigators had been

    25 constantly pressing them to reduce their auto insurance

    61

    1 premiums. Insurance had a pretty good handle on the

    2 labor rate at the auto shops, both at the auto dealers

    3 and the independents, but they wanted to set up

    4 independent warehouse distributors or wholesale

    5 distributors so they could get similar concessions on

    6 parts. They brought along with them the lobbying arm of

    7 the independent body shops, or IBSs, as they called

    8 themselves. They complained that GM and other auto

    9 manufacturers, everyone used the same system at the

    10 time, were discriminating against them because they --

    11 because in the case of the independent body shop, they

    12 had to buy the part from the dealer at a mark-up, or

    13 have the dealer provide the part directly from the

    14 manufacturer, General Motors or another manufacturer at

    15 wholesale.

    16         Of course, the auto dealers, like any other

    17 retailer, have the wholesaling cost. They have the cost

    18 of ordering, carrying, insuring and financing the

    19 distribution of the parts. And of course they charge

    20 for those wholesaling services. So, the IBSs, the

    21 independent body shops and insurers went to the Congress

    22 and went to the Federal Trade Commission to try to force

    23 us to directly sell those parts, those single-sourced

    24 crash parts to the body shops and to the independent

    25 wholesalers.

    62

    1         Little interest was expressed by the large

    2 warehouse distributors, and later they would testify

    3 that they had no interest in taking on the business.

    4 They also believed that there was no need to take on

    5 additional wholesalers, additional customers. There was

    6 no shortage of GM dealers to handle the business.

    7 There's something like 12,000 dealers spread out in

    8 every area of the country. They thought they could do

    9 the best job of handling the bulky and complex repair

    10 parts because in part, they shared our incentive to keep

    11 the customer happy and make sure that the owner of a

    12 Chevrolet vehicle was put quickly and efficiently back

    13 on the road.

    14         Sure, they shared our interest in the integrity

    15 of the brand name. We believe that opening up the

    16 system to tens of thousands of independent body shops

    17 would reduce the availability of the parts and increase

    18 the time necessary to get them to the customer. We knew

    19 it would impose substantial additional administrative

    20 and monitoring costs. We didn't feel we could derive

    21 the monopoly profits from pricing the parts, because we

    22 would be jeopardizing 95 percent of our business, that's

    23 the vehicle business, by trying to achieve a monopoly on

    24 the parts.

    25         Higher priced parts would have meant driving up

    63

    1 the repair costs for our customers, and would have

    2 reduced the likelihood that a Chevrolet vehicle owner

    3 would become a repeat customer. We knew that one

    4 company, Renault, had recently ceased doing business in

    5 this country because of a faulty service repair system.

    6 Another company, another competitor, Chrysler, had spent

    7 something like $350 million to convert from the system

    8 the FTC was proposing, this open warehousing, open

    9 distribution system, back to the system of distributing

    10 the parts exclusively through its franchised dealers.

    11         We did offer subsidies for GM dealers to sell

    12 the parts to the independent body shops at reduced

    13 prices. In order to pacify them and to pacify the

    14 Federal Trade Commission, in September 1967, we proposed

    15 a plan in which we would offer a 12 percent discount on

    16 the parts resold through the independents. A program we

    17 then called wholesale compensation.

    18         In February of 1968, the Commission, though,

    19 told us that they intended to file a lawsuit in order to

    20 bring about price parody between the GM dealer body

    21 shops and the independent repair shops. Further

    22 negotiations ensued and in the fall of 1968, the

    23 Commission accepted our proposal to raise that subsidy,

    24 that incentive for reselling to 23 percent. Accordingly

    25 we increased our prices on all crash parts in order to

    64

    1 try to recoup the cost of the program, including those

    2 costs of administration and monitoring.

    3         Later, the Commission would estimate the total

    4 costs at $70 million per year, that's almost half of a

    5 billion dollars per year in today's dollars. Now, we

    6 knew the promo would be expensive, but we thought that

    7 opening up our warehouses would be still more expensive.

    8 Well, the arrangement did not satisfy our critics for

    9 long.

    10         In the early 1970s, in the era of wage and price

    11 controls, the President's Council on Wage and Price

    12 Stability raised its own pricing investigation into

    13 crash part pricing. The investigation provided an

    14 extended period of full employment for an economist like

    15 myself at the auto companies and in the President's

    16 Office of Management and Budget. It turned out that

    17 much of the increase in prices was by the newly

    18 installed auto pricing regulations, especially by the

    19 bumper standards that were being -- that had been

    20 suggested by the insurance companies, and that in that

    21 case, not being to enhance safety, but substantially

    22 increase the price of our bumpers, which accounted for

    23 40 percent of any kind of a crash parts price index.

    24         As you can see, the relations between us and the

    25 insurance companies wasn't the best at that time. In

    65

    1 1970, the Commission launched yet another investigation.

    2 What did the Commission want this time? Nothing less

    3 than a remedy at the manufacturing level. That we be

    4 required to make a unique and extremely expensive

    5 tooling for these crash parts available to outside

    6 manufacturers.

    7         Fortunately, they later dropped this proposal.

    8 We heard that their Office of Policy and Planning

    9 Evaluation had estimated that if successfully

    10 implemented, the proposal would increase crashed parts

    11 prices by somewhere between 150 and 580 percent. But

    12 the Commission still wanted GM to sell its GM-branded

    13 crash parts "to all vehicle dealers, independent body

    14 shops, and independent wholesalers at the same prices,

    15 terms and conditions of sale, said prices to be subject

    16 to reasonable cost-justified quantity discounts and

    17 stocking allowances." And I would disagree with my

    18 friend, Steve Salop, on the simplicity of arriving at

    19 that kind of price.

    20         We made one final effort to stave off

    21 litigation. In early October 1975, we raised our

    22 wholesaling discount to 30 percent of the dealer price

    23 on the crash part resale to independents. In early 1976

    24 we announced that we would broaden the plan to allow all

    25 GM dealers to distribute all GM crash parts to anyone.

    66

    1 This meant that independent body shops could now buy

    2 that Chevrolet crash part from a Pontiac dealer or from

    3 any other General Motors dealer. The program never took

    4 hold. The independents stayed with their existing

    5 dealer suppliers. Chevrolet for Chevrolet parts,

    6 Pontiac for Pontiac, so forth. This confirmed our

    7 belief, at least to us, that the existing system was an

    8 efficient way of getting our parts to the independents.

    9 None of it worked.

    10         By March 22nd, 1976, the Commission issued a

    11 complaint charging GM with unfair methods of competition

    12 for refusing to deal with everyone on the same terms we

    13 gave anyone. It said that the wholesaling parts

    14 discount had not achieved price parody between us and

    15 the independents -- between our dealers and the

    16 independents, and that "the consumer was being asked to

    17 subsidize the wholesaling profits of the dealer," which

    18 it was, "and that eliminating the program resulted in an

    19 estimated drop of 10 percent in consumer prices."

    20         So, some 13 years after the initial

    21 investigation had begun, we were in litigation over our

    22 right to choose the customers with whom we would deal.

    23 The Commission extended freight upon us for what they

    24 called a "duty to deal." As an economist, I was the

    25 economist assigned the case. Did we consider settling?

    67

    1 Yes. But Frank Dunne, our lead General Motors counsel

    2 in the case, and his superior, Tom Leary, the recently

    3 retired FTC commissioner, and Bob's former colleague,

    4 pressed management to stay the course because in their

    5 words, "It was the right thing to do."

    6         They also felt that GM would ultimately prevail

    7 in the courts, if not with the full Commission. They

    8 did not want to surrender GM's right to freely and

    9 voluntarily choose the customers with whom we would and

    10 would not deal. We did not want to be forced to accept

    11 a system that was less efficient and less competitive.

    12 Somehow the complaints and investigations never resulted

    13 in any Commission actions against our competitors. Our

    14 chairman, Tom Murphy, agreed, and the rest is history.

    15 We fought the charges to the bitter end.

    16         Three years later, on September 24th, 1979, the

    17 ALJ, Administrative Law Judge, found no evidence that

    18 GM's refusal to deal and its pricing policies injured

    19 the independent body shops as a class. Every

    20 independent body shop witness was doing very well, and

    21 the industry was doing better than comparable

    22 industries, growing faster than, for example, our own

    23 General Motors body shops and general repair shops.

    24         He also found no harm to independent part

    25 distributors. Crash parts prices were actually rising

    68

    1 less rapidly than general inflation and, normally less

    2 rapidly than the price of the so-called competitive

    3 products, such as spark plugs and fan belts. He found

    4 that "creating a duty to deal would increase GM's

    5 distribution costs." He said, and again I quote, "The

    6 evidence here does not show that GM has discouraged,

    7 defeated or prevented the rise of new competition in the

    8 new GM crash parts market."

    9         He concluded that GM did not have any predatory

    10 intent in establishing the system and that there

    11 appeared to be "no substantially adverse effect on

    12 competition attributable to the refusal to sell new GM

    13 crash parts to anyone other than GM dealers." He did

    14 find, however, that under Section 5 of the Federal Trade

    15 Commission Act, that we had unfairly discriminated

    16 against the independent body shops whom he found had to

    17 pay more for the parts than did our GM dealers. He

    18 agreed that, indeed, some of our dealers were engaged in

    19 extensive wholesaling and thus engaged and incurred

    20 extensive wholesaling costs, but he rejected our

    21 contention, based on our own GM financial studies, that

    22 when the dealer's wholesaling and carrying costs were

    23 included in the prices that their body shops had to pay,

    24 were actually below the prices that they were charging

    25 the independent body shops.

    69

    1         He ordered us to terminate our wholesale

    2 compensation plan. He decreed the implementation of the

    3 joint GM/Commission staff which would "cooperatively"

    4 devise a nondiscriminatory plan for distributing new GM

    5 crash parts.

    6         The Commission staff appealed, the headline in

    7 the October 4th Washington Post read, "FTC Challenged

    8 Its Own Ruling on GM Crash Parts." So did we. Finally,

    9 on June 25th, 1982, the full Commission dismissed the

    10 complaint in its entirety. Unlike the ALJ, they did

    11 find injury to competition to the independent body

    12 shops -- to the independent body shop repair witnesses,

    13 I should say. But in their words, apparently, and in

    14 spite of the fact that they could find no overall injury

    15 to the body shops as a class, what disturbed them was

    16 this perceived difference in price at the GM repair

    17 shops and body shops, independent body shops.

    18         The Commission found, though, that the injured

    19 body shop competition was offset by business

    20 justifications. That creating a duty to deal could

    21 result in higher costs of distribution, which ultimately

    22 would be passed on to consumers in the form of higher

    23 prices for GM crash parts. Just as we had said 19 years

    24 earlier.

    25         They found no injury to competition in wholesale

    70

    1 parts distribution. Most importantly, they rejected the

    2 proposed remedy as unworkable. They did not want the

    3 Commission to be involved in "ongoing supervision of the

    4 system." They did not want to, in effect, become

    5 another Council on Wage and Price Stability, having to,

    6 "commit extensive resources to reviewing GM's

    7 interpretations of to whom and at what price it could

    8 sell these crash parts."

    9         The long ordeal was over. After 19 years of

    10 investigation and tens of millions of dollars in

    11 corporate and commission resources, we have not opened

    12 up our distribution system since. We have not sold

    13 crash parts directly to independent body shops or to

    14 independent warehouse distributors. Neither has anyone

    15 else. We did drop the costly and ineffective wholesale

    16 compensation plan, the subsidy for dealer resales.

    17         We have further simplified our pricing program,

    18 in response to the modern computer and the high speed

    19 Internet. In the final analysis, the issue came down to

    20 who can more efficiently manage GM's business? Who can

    21 more efficiently choose the customers with whom we deal

    22 and the prices we charge? We share the Commission's

    23 interest in an efficient system of distribution and in

    24 keeping the car buyer happy.

    25         So, the only question, was and is, who can do

    71

    1 the better job? Thankfully, on June 25th, 1982, the

    2 Commission finally said, and for very good reasons, it

    3 did not want to second guess our business judgment

    4 anymore. We could only hope in the future that the

    5 courts and the Congress also will share these

    6 sentiments. Thank you.

    7         (Applause.)

    8         MR. ABBOTT: Thanks, Tom, for a cautionary tale

    9 about agency antitrust enforcement. One of the things

    10 we are hoping to do in these hearings is to get the

    11 views of business planners, people inside the

    12 businesses, and their reactions to antitrust

    13 enforcement.

    14         Our next speaker also comes from the business

    15 world, Mark Whitener, senior counsel, competition law

    16 and policy at General Electric Company. Prior to

    17 joining GE, Mark was deputy director of the Federal

    18 Trade Commission's Bureau of Competition, where he was

    19 responsible for a variety of antitrust enforcement and

    20 policy initiatives, where he worked on merger

    21 guidelines, health care, intellectual property, and

    22 international enforcement. Mark also spent several

    23 years in private practice in Washington and London

    24 prior to joining the FTC. Mark has written widely,

    25 testified before Congress, and was editor of the ABA

    72

    1 antitrust section's antitrust magazine.

    2         Mark?

    3         (Applause.)

    4         MR. WHITENER: Well, thank you. Tom did all the

    5 heavy lifting for us now, and makes my job a bit easier,

    6 because I can just tell you what I think are all the

    7 policy implications of what Tom just said. I'm going to

    8 urge the agencies to use these hearings to set out a

    9 pretty simple position on this topic, and the topic that

    10 I'm addressing is unilateral, unconditional refusals to

    11 deal with competitors. I think other forms of behavior

    12 that take the form, for example, of the vertical

    13 restraints or exclusive dealing, I think all of those

    14 are readily distinguished from what we're talking about

    15 here today. Perhaps we can get into that during the

    16 discussion.

    17         So, it seems to me that what the agencies can do

    18 here is set out a position that you can call it per se

    19 legality, I suppose, but my sense is that we're really

    20 not creating a rule of exclusion, but what we're doing

    21 is addressing rules of definitions. What does it mean

    22 when we talk about exclusionary conduct under Section 2?

    23 And I think that what the agency should say is that

    24 unconditional refusals to deal with competitors simply

    25 do not constitute exclusionary conduct. And I think

    73

    1 that position, by the way, can be taken consistently

    2 with any of the various analytical models one might

    3 choose for looking at Section 2 issues generally.

    4         That position can be consistent with an

    5 aggressive view of how to look at other forms of

    6 behavior, or a permissive view, because definitionally,

    7 it seems to me what we're saying is that when we try and

    8 define what is exclusion, versus what is the simple

    9 exercise of one's property rights, or even one's market

    10 power, if that's what we're -- if that's what exists in

    11 the technology, that we're taking the rights to one's

    12 property, that exploiting those rights unilaterally,

    13 that choosing not to deal with competitors by supplying

    14 them licensing is within the inherent property right, or

    15 if market power exists, is simply the exercising the

    16 market power and not the unlawful maintenance of

    17 increasing that power.

    18         If the Commission were to take this position, it

    19 seems to me that there are a couple of positive effects.

    20 Not including, by the way, any significant shift in

    21 federal enforcement policy. This is not an area where

    22 the agencies have been active for many years, and I

    23 think quite rightly so.

    24         When businesses look at this issue and assess

    25 risk, they're looking at two things. Private

    74

    1 litigation, which plays out before generalist judges and

    2 agencies, and increasingly international enforcement.

    3 And I think for the agencies to take a clear view, clear

    4 position on this issue, would not only promote the

    5 sensible interpretation of the law in the U.S. as it's

    6 applied to private litigation, but also can help us

    7 advocate for sensible policy abroad. And I'll come back

    8 to that topic in a moment, but I think it's a very

    9 important one.

    10         The ramifications of this approach would be

    11 essentially to say that unconditional refusals to deal

    12 with competitors are not exclusionary, regardless of the

    13 nature of the property, intellectual or otherwise,

    14 regardless of whether the property owner began dealing

    15 and stopped or never began dealing at all, I believe we

    16 made that point. It's not a meaningful distinction or

    17 way to distinguish between anticompetitive and

    18 competitive action, regardless of the property owner's

    19 reasons for not dealing. Whether we use that as a

    20 question of intent or pretext or otherwise. And

    21 regardless of the price that's charged, if a firm with

    22 monopoly power decides to deal, and decides to exercise

    23 the right that's recognized elsewhere in Section 2 to

    24 charge different prices for different end users and in

    25 essence price discriminate, this conduct, standing

    75

    1 alone, is not a Section 2 violation.

    2         Because again, as an analytical matter, I'm not

    3 advocating changing the law or defining a category of

    4 practices that otherwise are exclusionary as lawful, but

    5 simply recognizing that what we're talking about here in

    6 this clear case of the unconditional refusal whether to

    7 license or to sell, this is simply the exercise of all

    8 the rights and the capturing of all the value inherent

    9 in the firm.

    10         Now, the reason for this, analytically, what

    11 exists with antitrust and the reasons for this have

    12 essentially gone off the radar. The reason why these

    13 cases are rare is because in most instances, courts

    14 either through express analysis or intuition come to a

    15 view essentially like the one that I'm describing, but

    16 if you ask judges and juries to apply the ill-defined

    17 standards that exist today, some of them are going to

    18 answer the question the other way. You're really not

    19 given much guidance in terms of how to address it.

    20         There is, I think, an important incentives issue

    21 in play here. I think Bob asked the right question,

    22 which is where's the evidence? I think we should be

    23 looking for evidence to underlie more of our antitrust

    24 judgments, in many areas of the law, rather than relying

    25 on intuition or case law or anything else that might not

    76

    1 really tell us a lot about reality.

    2         So, I think it's a fair question. Hew offered

    3 some examples, some studies. I do think, though, there

    4 is a doctrinal or analytical or philosophical question

    5 here to be answered in terms of incentives, and that is

    6 we, I think, should assume, you're entitled to assume

    7 that incentives are diminished when firms are forced to

    8 share their property and their technology. For the same

    9 reason that we assume that the antitrust laws bring

    10 something positive to the economy.

    11         The antitrust laws reflect a belief in a

    12 competitive model, and it seems to me that forced

    13 sharing, which I think is a fair way to describe as a

    14 corollary to the refusals to deal area, in essence

    15 replaces the competition with regulation. I don't think

    16 we can imagine any remedy to a refusal to deal case that

    17 is not in some very substantial sense regulatory. And

    18 you can talk about the various models and Steve has made

    19 a serious attempt to describe how one may engage in that

    20 regulation, but I think we have to call it what it is,

    21 which is price regulation of every firm that is being

    22 forced to share.

    23         Now, Trinko was a step in the right direction,

    24 in general terms, in the sense that it expressed a

    25 skepticism about refusals to deal and a skepticism about

    77

    1 its cousin essential facilities. But what Trinko didn't

    2 do, by following this Court's tendency to decide cases

    3 generically with a sweeping view of the actual holding,

    4 is the scenario of what exists after Trinko and what has

    5 been applied by the lower courts following Trinko.

    6 There are several analytical tests that really are not

    7 satisfying, that really don't help businesses evaluate

    8 risk very well, and that really don't pose a meaningful

    9 way to distinguish between precompetitive and

    10 anticompetitive conduct.

    11         Most of these have been referred to already.

    12 This question of whether one has ever dealt or has

    13 stopped dealing with a competitor. Well, that may be,

    14 as a factual matter, something that reduces litigation.

    15 Whether a firm is more likely to have a happy

    16 competitor, if you deal with them and stop, that doesn't

    17 really help us say what is or isn't anticompetitive.

    18         The question of whether someone's refusal

    19 relates to intellectual property or not. Not a question

    20 that Trinko exactly addressed, but certainly an issue

    21 that now is clear that there is a -- there is arguably a

    22 different treatment under the law, depending on whether

    23 you look at Xerox or the decision in Kodak or Trinko.

    24 Depending on whether the property is intellectual or

    25 tangible, depending on what circuit you can be sued in.

    78

    1         The question of intent, and this I think is a

    2 really important point in understanding why I think we

    3 should not view unconditional refusals as exclusionary

    4 at all. The intent by a firm that has developed a

    5 product or technology is always essentially the same.

    6 Regardless of how they express it in the conversation or

    7 in the documentation, that intent is to maximize

    8 profits, to maximize the returns on the investment in

    9 that product.

    10         That intent might be expressed in ways that are

    11 very pleasing to the ear of the antitrust lawyer or a

    12 judge or a jury, protecting the intellectual property

    13 rights. Kodak tells us that that's legitimate and

    14 contextual. Maximizing returns on investment. As

    15 opposed to other sorts of ways to describe profit

    16 maximization, which might in the case of refusal to

    17 deal, essentially say, keep -- make sure I can keep this

    18 all to myself. Make sure I can exclude other types of

    19 service competitors from competing with me. Well, that

    20 begins to sound like something in the words of the model

    21 jury instruction that the ABA has put out on refusals to

    22 deal. Like something that is intended to block

    23 competitors.

    24         If you look at the jury instruction that the ABA

    25 has promulgated in this area, blocking competitors is

    79

    1 not a legitimate business justification for the refusal

    2 to deal. Now, how do you distinguish blocking

    3 competitors from the actual fact of keeping the returns

    4 for myself, maximizing my profits, maximizing the return

    5 on my investment.

    6         So, I think the fact that Trinko has perpetuated

    7 the law in language that I found so surprising when I

    8 read it coming from Justice Scalia's process and his

    9 clerks. This procompetitive zeal, anticompetitive

    10 malice, language is not helpful. And some of us may

    11 think, you know, as we see it, the risk here is not that

    12 our colleagues in the federal agencies are putting forth

    13 cases, it's that claims will be filed, it's that judges

    14 will look at the law and conclude that they have to let

    15 it go to trial, it's that juries will be asked to

    16 decide, in essence, when you boil it down, whether this

    17 refusal was good or bad.

    18         And again, I don't think this is an area where

    19 we're facing the onslaught of litigation. It is an area

    20 where I think there is some natural tendencies that

    21 diminish the number of cases that are filed. Section

    22 two cases are not quick hits for class action lawyers.

    23 They're not -- if you get to trial, they're massive and

    24 resource intensive. They may have settlement value, so

    25 there is risk. They certainly impose costs on firms

    80

    1 that have to defend them if they're brought and they

    2 have to counsel around them if they're not.

    3         So, I don't think Trinko really settled it. I

    4 think it was a step, some might say, and Bob might be

    5 right, it was a signal of a very fundamental or

    6 philosophical view. The lower courts aren't bound by a

    7 philosophical view, they're still allowing some cases to

    8 go through.

    9         And I think the jury instructions are

    10 instructive. If you look at monopolization instruction

    11 two and three, if you put those together and you ask

    12 yourself, for example, if I'm a firm and I've developed

    13 a piece of sophisticated equipment, maybe it's got some

    14 patent protection, maybe other parts of it don't, it has

    15 parts, integrated parts, I provide service, and for now

    16 I'm the only service provider and for now I've decided

    17 not to sell parts, or make it a little bit easier, I've

    18 decided not to train my competitors. Service

    19 organizations come to me and want to pay me Steve's

    20 monopoly price or exclusionary price, they want to pay

    21 me a lot for service, or service training, train them to

    22 come in and service my equipment. And I decide I'm not

    23 going to set up a service operation, I'm not going to

    24 offer that service to my competitors. And so in the

    25 short run, I would make a lot of money this quarter if I

    81

    1 sold my service, but I know over the next two or three

    2 or four years, my service is going to be substantially

    3 lower, because I've created competitors in my service

    4 operation.

    5         So, then I think we have the profit sacrifice.

    6 I think if I understand the test, and again, the

    7 question here is not to criticize the profit sacrifice

    8 test, it's to say that we really should not put that

    9 behavior in that test at all, because I don't think it

    10 should be viewed as exclusionary.

    11         So, just to finish up, private litigation is

    12 where the real risk is in many of these areas. It's not

    13 a question of the floodgates being opened. I think the

    14 floodgates were probably turned down a bit after Trinko,

    15 but I think the agencies can be more instructive, and I

    16 think in the international market, this can be much more

    17 than theoretical. U.S. enforcers and practitioners and

    18 academics go out and talk to those in other countries

    19 who are developing laws or who are developing

    20 enforcement policy, such as the European Union review of

    21 Article 82, or who are creating an entirely new

    22 anti-monopoly law, as is happening in China, we see

    23 subtle expression of this policy, or in some cases very

    24 unsubtle expressions, such as an essential facilities

    25 doctrine written in ways that were similar to the U.S.

    82

    1 version, or even a doctrine written similarly to some of

    2 the recent cases in the refusal to deal area. We look

    3 at that and we're concerned, because we understand how

    4 it can be used, and in fact, it's likely to effect on

    5 limiting innovation and being used to confiscate

    6 property, being used to bring about industrial policy,

    7 being used to bring about a different economic status

    8 that some regulator may prefer than the one that would

    9 happen if people who innovated brought in terms of

    10 innovation.

    11         And when we are commenting on those issues, and

    12 I've experienced this myself, sometimes the audience

    13 says yes, but you have the essential facilities

    14 doctrine, or you have refusals to deal. In fact, we've

    15 basically taken this out of cases, post-Trinko cases,

    16 and these are the questions that we're going to empower

    17 our regulators to ask, and by the way, very substantial

    18 fines or other penalties that can come into play for the

    19 violations. I think the way that would be described in

    20 other countries, I think that is diminished when we

    21 still have work to do in cleaning up the vestiges of

    22 these sorts of policies in our own law. I think this

    23 could be applied to refusals to deal.

    24         (Applause. )

    25         MR. ABBOTT: Thanks, Mark, for bringing in the

    83

    1 international dimension and the vagaries of juries and

    2 jury instructions. Quite interesting. We are going to

    3 take a ten-minute break now, and I would urge people to

    4 try and get back here as promptly as possible. Thank

    5 you.

    6         (Whereupon, there was a recess in the

    7 proceedings.)

    8         MR. McDONALD: Ladies and gentlemen, thank you

    9 for your attention and returning to your seats following

    10 our very outstanding presentations from the panel. As

    11 promised, we will ask the panelists to take about three

    12 minutes each to respond to panelists' remarks, to defend

    13 their remarks and to defend their honor. We will go in

    14 the initial order that they made their presentations.

    15         Bill Kolasky?

    16         MR. KOLASKY: Thank you. Thank you very much,

    17 Bruce. I realized when I sat down that I hadn't really

    18 gotten to the punchline of my presentation, which was

    19 how do you apply the Section 2 depth-wise sliding scale

    20 rule of reason to refusals to deal. And so I just

    21 wanted to sort of move through that very quickly.

    22 First, I agree with those who say, and Mark Whitener in

    23 particular, that in general unconditional, unilateral

    24 refusals to deal ought not to be unlawful. And so I

    25 think in evaluating competitive effects in the first

    84

    1 step of the rule of reason analysis, courts should

    2 distinguish sharply between a simple unilateral refusal

    3 to deal, and a refusal that is part of a broader pattern

    4 of anticompetitive conduct.

    5         The classic example of that is the MCI/AT&T

    6 case, where AT&T basically played rope a dope with MCI

    7 in their negotiations over interconnection and their

    8 misuse of the regulatory process through sham

    9 litigation. That was what really constituted the

    10 exclusionary conduct.

    11         Second, in evaluating proper justifications,

    12 courts should, and here I agree completely with Hew, as

    13 Phil Areeda used to say, courts should really take into

    14 account macro justifications, namely that they should

    15 recognize that a monopolist's desire to capture the

    16 value of its investments and innovation is part of what

    17 stimulates the economy. It is competition on the

    18 merits, and it is a legitimate business justification in

    19 and of itself.

    20         Third, as with any rule of reason test, with

    21 respect to refusals to deal, the degree of scrutiny of

    22 the proffered business justifications, including that

    23 one, should depend on the strength of the showing of

    24 anticompetitive effect. But most importantly, courts

    25 should not substitute their judgment for that of the

    85

    1 monopolist, as to its business strategies, as to what is

    2 the most profitable business strategy. And then

    3 finally, again agreeing with Hew, courts should not

    4 impose any remedy that they cannot efficiently enforce.

    5         I know we're going to talk about the

    6 efficient -- the essential facilities doctrine, so I am

    7 going to save my remarks on that until we get to it.

    8 Thanks.

    9         MR. McDONALD: Thank you. Bob Pitofsky?

    10         MR. PITOFSKY: Bill, let me start off with a

    11 question, in your sliding scale approach to refusals to

    12 deal, which I found very helpful, but what do you do

    13 with a situation, you get to step three, the defendant

    14 says, well, I had these good business reasons, and then

    15 you say, well, the burden is now on the plaintiff to

    16 show that they are not persuasive. And suppose the

    17 plaintiff somehow falls short? Is that -- that's the

    18 end of the deal?

    19         MR. KOLASKY: No, I think that there could be a

    20 case in which the plaintiff is not able to rebut the

    21 justifications, but nevertheless shows that there are

    22 anticompetitive effects, and you might have to engage in

    23 a balancing then of the anticompetitive effects against

    24 the procompetitive benefits of the conduct. My point is

    25 simply, if you look at Section 1, rule of reason cases,

    86

    1 courts almost never reach that fourth step, and I doubt

    2 that they would reach it very often in Section 2 cases.

    3         MR. PITOFSKY: I think that's fine, I

    4 couldn't -- I'm comfortable, entirely comfortable with

    5 where you are, and I think the emphasis on why they did

    6 it and what their reasons are is certainly where the

    7 emphasis should be, and if you get to step four, where

    8 you have to balance anticompetitive effects against

    9 something, you know, it's really a crap shoot, and very

    10 hard to expect the judges, much less juries to do that

    11 in a reasonable and rational way. And I don't end up

    12 agreeing with too many people up here.

    13         Mark, I think your unconditional refusal to

    14 deal, conditional refusal to deal is an excellent way of

    15 introducing the subject. I'm just a little

    16 uncomfortable with absolute select safe harbor. I go

    17 along with you as far as strong, strong presumption, but

    18 then I sort of get off the train, because I worry about

    19 the really unusual case, and I think IHS in Europe, and

    20 I'm not one to know enough about it, but I'm going to

    21 oversimplify it. A company with a monopoly position on

    22 a form of intellectual property says I will deal with A,

    23 B, C and D, that's all fine, I'll work out the terms,

    24 but as far as X, you've already said that you want

    25 access because you want to be my rival, and I'm not

    87

    1 going to do that. And I refuse to deal with you. And

    2 then it turns out on careful analysis that the alleged

    3 investment, all the incentive, all the work that the

    4 monopolist is supposed to do, approached zero. This

    5 monopoly fell in its lap, and yet it refuses to license

    6 a rival. It is, it is a sort of an unconditional

    7 refusal to deal, but I would like someone to take a look

    8 at it. I would like to not close the door before a

    9 little more analysis takes place.

    10         Third, I mentioned that I looked carefully at

    11 Greg Werden's piece on no economic sacrifice of profits.

    12 You know, when you get to the end, after all the talk

    13 about universal meetings, he has a balancing test in

    14 there, too. So, there's going to have to be some sort

    15 of balance, and I'll stop there.

    16         MR. McDONALD: Thank you. Hew?

    17         MR. PATE: Not surprisingly, I would like to

    18 close the door, and I think when Steve and I have talked

    19 about this, he says in a way, my part of this is much

    20 easier, because basically everything I'm saying boils

    21 down to don't try this at home. And that's right. And

    22 it may be fine for Professor Salop to put -- charge up

    23 and to propose formulas, but the basic thrust of my

    24 presentation is that if businesses are required to

    25 undergo this sort of exercise in district courts in

    88

    1 front of juries, that the uncertainty and the lack of

    2 predictability that is created are going to be harmful

    3 to economic activity. That does not make me, as Alden

    4 suggested, an antitrust skeptic, it makes me a skeptic

    5 about the ability of antitrust to provide general rules

    6 that should require firms to assist their rivals.

    7         I'm not a skeptic about doing this in Section 1,

    8 in the same way, I think some of the examples that Steve

    9 mentioned in terms of the Halliburton example, reaching

    10 an agreement not to compete in Kansas in return for

    11 getting transportation in Iraq, or what have you, you

    12 know, that's a Section 1 agreement not to compete. It

    13 need not be characterized as a Section 2 refusal to

    14 assist, and I don't think that there's any slippery

    15 slope that leads from saying you shouldn't have that

    16 sort of duty to authorizing everything else.

    17         As to the balancing test and the meet for the

    18 case and these sorts of things, the problem is that the

    19 information to make these decisions is not going to be

    20 available to businesses at the time they have to decide

    21 whether to undertake the unilateral conduct, and

    22 deciding what the consumer welfare effects are going to

    23 be is extremely difficult. It is not the same as what

    24 the agencies do or purport to do in a merger context,

    25 where both parties have voluntarily entered into a

    89

    1 transaction knowing that all of their information is

    2 going to be available, that third party information is

    3 going to be available, and that a prediction can be

    4 made. Very different from making a business decision

    5 exante about whether to undertake competitive activity

    6 and risk capital.

    7         So, Bob concedes that step four is a crap shoot,

    8 if you get to it, I think steps three are a crap shoot,

    9 too, because we're going to be rummaging around in files

    10 looking for sound bits from sales executives memos and

    11 the like if we're going to embrace an intent base

    12 approach to all this.

    13         So, to me, I'm very attracted to Mark Whitener's

    14 idea that just carve out the idea of a unilateral

    15 unconditional refusal to assist a competitor. Many of

    16 the cases that are going to be litigated won't be that

    17 simple, but if we had agreement on that, as a very

    18 clear, crisp proposition, it would certainly be helpful

    19 in terms of how the case would be analyzed thereafter.

    20         IMS Health and IP, there's some different things

    21 there, I think that, you know, maybe a copyright was

    22 recognized in a system that shouldn't, but I really do

    23 think that if you're going to grant an IP right, which

    24 should provide very great certainty, and then leave the

    25 door just a little bit open to analyzing case by case

    90

    1 whether enough effort was put into the innovation, that

    2 can't be a sensible way to run an IP system.

    3         So, if there's a problem with the IP system,

    4 maybe that needs to get fixed, as a better way to

    5 approach those sorts of situations. Thanks.

    6         MR. McDONALD: Thank you. Steve?

    7         MR. SALOP: I guess I want to make three

    8 comments. The first is that I heard a lot of criticisms

    9 of intent tests, but no, the sacrifice standard, the NES

    10 standard is inherently an intent test. It's just an

    11 intent test that doesn't work -- that doesn't

    12 quantitatively, but does it in an objective way. That

    13 it's fundamentally an intent test, we're trying to

    14 figure out whether the sole purpose of the conduct was

    15 to generate monopoly power.

    16         With respect to balancing, I find I have to

    17 disagree with Bob, it's not trying to -- it's not some

    18 sort of social balancing adding up the social debits and

    19 credits. What it actually is is trying to figure out

    20 the effect on consumers, and I think that's different,

    21 because it's more -- it is something that is more

    22 objective.

    23         For example, just like in mergers, you do

    24 balancing efficiencies and -- efficiency effects and

    25 market power effects, but in the end, the question is:

    91

    1 Is the merger going to raise prices? And so I wouldn't

    2 call it -- act as if it's some kind of open-ended

    3 balancing, it's something that's really fairly

    4 objective.

    5         The general criticism that balancing tests are a

    6 crap shoot, you know, there are balancing tests all over

    7 the law. All over the place. And a generalized

    8 criticism that courts aren't good at balancing, well,

    9 that's pretty much what courts do. In negligence cases,

    10 in first -- in due process cases and so on.

    11         Finally, don't do this at home, Mark said,

    12 whether or not we do it at home, we shouldn't let the

    13 Chinese do it.

    14         (Laughter.)

    15         MR. SALOP: In the end, this don't do it at home

    16 argument always comes down to saying you want to

    17 eliminate the jury system, and/or generalist judges.

    18 And, you know, if you think that antitrust is beyond the

    19 capability of juries, and you want to get Congress to

    20 change the rules or amend the constitution, and have it

    21 all done by an expert agency, like the FTC, well then go

    22 after that. That's an issue of throwing the baby out

    23 with the bath water. If it's a problem of the juries

    24 can't do it, then get somebody to make the decisions

    25 that are good at it. And just like if antitrust isn't

    92

    1 up to the task of maintaining competition or economy,

    2 well then maybe we have to go with regulation, but you

    3 have to solve the problem in a way that's tailored to

    4 what the problem really is, not some other problem.

    5         So, for example, dealing with a -- if you don't

    6 like the law, the issue is change the law, don't change

    7 the standard itself, and that would be another example

    8 of something that the courts might do. I say the way to

    9 make antitrust coherent is that another 30 years from

    10 now we don't make fun of the dark ages now is to make

    11 sure that the rules make logical sense, rational

    12 economic sense, not just the goal-oriented to solving

    13 the problem of higher prices.

    14         MR. WALTON: I guess I'm still worried about the

    15 remedy in the Hughes case and I go back to the testimony

    16 for 19 years the Commission tried to get us to sell

    17 these crash parts to all vehicles and customers, at the

    18 same prices, terms and conditions of sale, this is their

    19 words, said prices to be subject to reasonable cost

    20 justified quantity discounts and documents. We argued

    21 for 19 years on what that meant. We have very good

    22 economists, excellent economists at the Federal Trade

    23 Commission, we had economists elsewhere and we could

    24 never come to an agreement as to what that meant.

    25         The Commission finally 19 years later said they

    93

    1 didn't want to have anything to do with it. They said

    2 they didn't want to "commit extensive resources to

    3 redoing GM's interpretations to whom and what price it

    4 should sell its crash parts."

    5         The other thing is, why do we have a dealer

    6 list? One of the major reasons we have a dealer

    7 distribution system is we don't know what the price

    8 should be. That's a subject between the dealer and the

    9 dealer's customers and the region in which the dealer

    10 operates. It depends on the trade-in analysis the

    11 dealer gets on the car, that's part of the price, it

    12 depends on financing, insuring, there's no way that we

    13 in Detroit, folks in the central office, can tell the

    14 dealer what price to charge for its products.

    15         And then how, if we didn't do it, how can

    16 someone in the court, the jury, or the government figure

    17 out what the prices should be? That just goes to, I

    18 think, basically the onus that debate has been won and

    19 lost on what's been more effective, central planning or

    20 decentralized markets, and it's decentralized markets

    21 that we're trying to take advantage of in our dealer

    22 distribution system. That's it.

    23         MR. WHITENER: Okay, well, on the Chinese point,

    24 I think what I'm trying to say is when we say to them

    25 don't do it, we're essentially saying, do as I say, not

    94

    1 as I do. So, I don't think it's credible if we say

    2 don't do it if we're doing it.

    3         On the sort of regulation point, taking a point

    4 that Bob made, sort of a general sense that you don't

    5 want to slam the door on the rare case that might be

    6 meritorious. You put that alongside Steve's concern

    7 that if we withdraw antitrust from the field, we're

    8 inviting sort of massive direct regulation that we

    9 might -- and we might, you know, regret. It seems to me

    10 that if you put those two together, the instances when

    11 real intervention to force some holder of a bottleneck,

    12 or a dominant standard that's durable, the instances

    13 when that's really going to be in the public interest

    14 are going to be rare, and my point is that that's

    15 something that antitrust is not really set up to do.

    16         So, if you encounter one of those situations, to

    17 Bob's point, when you haven't slammed the door on the

    18 government's ability to exercise the power to take, or

    19 to regulate. But that's the proper way to do it,

    20 because that's in essence what you're doing, not really

    21 applying the antitrust standards that are going to be

    22 applied to other types of cases.

    23         MR. McDONALD: Thank you. We have developed a

    24 list of propositions that we would like to get the

    25 response of the panelists to, both in terms of

    95

    1 determining whether there's a general consensus or

    2 perhaps a widespread disagreement on these propositions,

    3 and also to get their more in-depth views on these

    4 particular points.

    5         Let's start with one on the essential facilities

    6 doctrine as distinct from the refusals to deal more

    7 generally. Could I have by show of hands from the panel

    8 whether they agree with the proposition that courts

    9 should abandon the essential facilities doctrine.

    10         MR. SALOP: Could you define essential

    11 facilities doctrine so we know which one you're

    12 referring to?

    13         MR. McDONALD: That is actually a question that

    14 I've got for the panel, so if you want to abstain for

    15 the moment, let's see the hands --

    16         MR. SALOP: I'll abstain until I find out what

    17 the doctrine is.

    18         MR. McDONALD: Those who agree with the

    19 proposition. Very good. Bob Pitofsky, it would be

    20 helpful to know from you as one of the proponents of a

    21 rare essential facilities doctrine is what does it mean,

    22 and is there a requirement, or do the general

    23 requirements of Section 2 apply when you're bringing an

    24 essential facilities claim? Do you, for example, have

    25 to show the representing competitive effect?

    96

    1         MR. PITOFSKY: Well, I think that if you sum up

    2 the four qualifications in MCI, which virtually every

    3 lower court adheres to, then you, in effect, you have

    4 found an anticompetitive effect. And the four I believe

    5 was: This only applies to monopolists, it must truly be

    6 essential, you can't compete without it, and therefore

    7 if the monopolist doesn't make it available, it won't be

    8 in the competition. The monopolist has requested and

    9 denies making it available, and -- oh, and that it's

    10 feasible to make it available. There aren't any

    11 chemical engineering business reasons why it can't be

    12 done.

    13         If all of those circumstances are true, and they

    14 will rarely all be present, then it seems to me that

    15 allowing the monopolist to charge any price it chooses

    16 up to the point where substitute products can become

    17 available, is not a good idea. You're better off

    18 cautiously making essential facilities doctrine actual.

    19         MR. McDONALD: So, your point is at least under

    20 the first two elements of the MCI test implicitly

    21 incorporate the rest of Section 2?

    22         MR. PITOFSKY: I think so.

    23         MR. McDONALD: Is there anyone who wants to

    24 disagree with that and say we ought to demand more for

    25 any sort of essential facilities case?

    97

    1         MR. KOLASKY: I'll take the bait, I think you

    2 should do that, because the first two, as I understand

    3 those requirements, is simply that the monopolist has an

    4 essential facility, that it owns and controls an

    5 essential facility, and that it has a monopoly, and that

    6 the plaintiff is going to -- or the rival is not able to

    7 duplicate that facility. I think if you allow the

    8 essential facilities test to be imposed on that basis,

    9 then you really are in an area where you're going to

    10 have compulsory sharing in lots of cases.

    11         And I guess one question I would like to turn

    12 and put to Bob, as an advocate of the essential

    13 facilities doctrine, is: Would you apply the doctrine

    14 in cases of intellectual property, because there, when

    15 you're talking about patents and copyrights, it's going

    16 to be rare that the defendant would be able to show that

    17 it's not feasible to make the essential facility

    18 available?

    19         MR. PITOFSKY: That's a good question, and the

    20 answer is that I am not sure it does apply with

    21 intellectual property. I think that's where the case

    22 law now is.

    23         MR. McDONALD: Steve Salop, did your fellow

    24 panelists answer your question or would you like to

    25 yourself pose what the essential facilities doctrine

    98

    1 ought to look like?

    2         MR. SALOP: Well, I set out my -- I set out my

    3 standard, I think in cases where it's a really big

    4 monopoly, you know, I mean, you know, I -- the first

    5 couple of MCI prongs or about monopoly power in the two

    6 markets, so I would say in the situation where it's a

    7 really big monopoly and in a very important market, then

    8 maybe it will weaken the plaintiff's need to show as

    9 much anticompetitive effect, and you use my prong two

    10 test as a way to determine the rate that's pressed, and

    11 that would be the way to handle it. You would have to

    12 worry there about incentives, and I think you would, but

    13 yeah, I think it's -- I think it is something that we

    14 should do where it's a really important monopoly.

    15         You know, there's a lot of markets where

    16 normally, take Trinko, something like Trinko, that you

    17 say, oh well, the regulator is going to get it. But,

    18 you know, it's an accident of history that this industry

    19 has been regulated and say operating systems are not

    20 being regulated. So, the question is, what do you do

    21 where you have like a big monopoly, if this was -- if

    22 the FCC had made the decision 25 years ago to include

    23 operating systems in its jurisdiction and it had held up

    24 with the courts well then, you know, the case in Europe

    25 that, you know, some of the prongs in the case here

    99

    1 would have gone to the FCC and we would be in a

    2 situation like Trinko. They would have made a decision

    3 of whether or not Microsoft had to "share," had to give

    4 access to the information that they wanted in Europe to

    5 the APIs or to look into the operating systems of

    6 someone here. But Microsoft turns out not to be

    7 regulated. Nobody took on the task of regulation.

    8         So, the question is, should the court take over

    9 the regulation, and I agree there is regulation, should

    10 the court take over the regulation when nobody else is

    11 doing it, or where the company otherwise isn't

    12 regulated. I don't see why not. You know, it's not as

    13 if courts never do that. Gas prices have been regulated

    14 since 1950, for example. There are little places where

    15 district courts are acting like regulators. They're

    16 extreme, I agree they're extreme, and they're rare, but

    17 it's not to say that it should never be done. And I

    18 don't think that's all Bob is trying to get at by

    19 preserving the essential facilities doctrine for

    20 extraordinary cases.

    21         MR. McDONALD: Hew, do you have a comment on the

    22 implication of applying the essential facilities

    23 doctrine in the intellectual property area?

    24         MR. PATE: Sure, I would say before that, I

    25 don't think it's an accident of history that some of

    100

    1 these cases occur in situations where the State had

    2 previously put a firm in a monopoly position and tried

    3 to interfere in the first place and the law is trying to

    4 introduce competition. I don't think it's an accident.

    5         As to IP, yes, I think the interesting thing

    6 about the MCI, the four-part test, is it would be a very

    7 good way to describe exactly what the patent system is

    8 trying to incentivize, and the paradigm of the most

    9 valuable patent that produces something brand new that's

    10 extremely valuable, that nobody can duplicate, and we

    11 have a patent system that says, in order to incentivize

    12 that, you ought to have the exclusive right to it. And

    13 it just can't make sense, in my judgment, for antitrust

    14 then to come along and second guess that.

    15         We're seeing that now in Europe, where the

    16 question is on the table whether it was sufficiently

    17 innovative intellectual property to be protected in the

    18 trade secret realm, for example, and I think that's just

    19 a very disorderly way to go forward, because it damages

    20 the predictability on which businesses rely to commit

    21 capital.

    22         MR. McDONALD: Thank you. Steve, did you start

    23 to respond?

    24         MR. SALOP: I just wanted to make a footnote to

    25 what you said. I mean, the court didn't create the Ma

    101

    1 Bell monopoly, the Ma Bell monopoly got created by a

    2 series of mergers and certain conduct that was declared

    3 not to follow antitrust laws. It was not as if the

    4 government said all of these competing telephone

    5 companies can merge.

    6         MR. PATE: No, but there was a state sanctioned

    7 local loop monopoly in place was what I was suggesting.

    8 Not that -- not that the court ordered the creation of a

    9 monopoly.

    10         MR. SALOP: Well, they didn't disagree, they

    11 didn't break up the operating companies 80 years ago.

    12 They didn't. It's not like they made them do it. They

    13 committed.

    14         MR. PITOFSKY: Just one line. Look, the fact is

    15 lower courts have mandated access in situations where

    16 intellectual property was involved, and I didn't notice

    17 that it asked for investments or anything on patent work

    18 or intellectual property followed that, but I have to

    19 agree with you. The essential facilities doctrine runs

    20 head on into the very purpose of the patent system, and

    21 underlying that purpose, when the patent system is out

    22 of control, and this is for a different panel, but it's

    23 just, it leaves you with a feeling that essential

    24 facilities wasn't designed to do that.

    25         MR. McDONALD: The last comment, Bill Kolasky?

    102

    1         MR. KOLASKY: I guess I will make what I call

    2 the Robert Bork point, and that is that all of the

    3 discussion so far has been about policy reasons why you

    4 should or should not have an essential facilities

    5 doctrine. There really is a more fundamental point, and

    6 that is the language and the congressional intent

    7 underlying Section 2. Section 2 is designed to prohibit

    8 affirmative conduct that is designed to gain a monopoly

    9 through improper means. And I don't think that you can

    10 use Section 2 to impose an affirmative duty on someone

    11 to share, unless they have taken affirmative acts to

    12 acquire or maintain their monopoly by improper means.

    13 Simply not sharing is not an affirmative act. I mean,

    14 you contrast that to the affirmative acts that were

    15 taken by Aspen Ski Co., which went beyond a simple

    16 refusal to deal.

    17         MR. WHITENER: Right, and that was essentially

    18 the comment that I was trying to make, there's no

    19 essential principle, once you declare that retaining is

    20 maintaining. Yes, we can understand how the English

    21 language can be used if I say that I take steps to

    22 retain my rights and not share them, I'm maintaining a

    23 monopoly if there's a monopoly on the product. But

    24 that's semantics. That's the point I was trying to

    25 make.

    103

    1         A minute ago Steve said I thought basically that

    2 it's an accident of history that some segments are

    3 regulated and some aren't, and therefore some courts

    4 should and do step into those voids where the lack of

    5 regulations occurred. I think if I understood it right,

    6 that's a fundamental -- well, I don't agree with that

    7 idea of the political system, the regulatory act is

    8 conscious, a lack of regulation is the result of a

    9 judgment at some level of the political administrative

    10 system, that there's not going to be regulation, and my

    11 point is that those -- it's in the political process

    12 where decisions expressly to regulate a particular

    13 sector, to re-allocate resources, to take to cap prices,

    14 et cetera, those should be made in the political

    15 process, not where courts decide that a failure to

    16 regulate is a mistake.

    17         MR. McDONALD: Very strong points. Shall we

    18 move to the second proposition?

    19         MR. ABBOTT: Yes, the second proposition is the

    20 antitrust laws should never require a firm to deal with

    21 a rival. Who agrees with this proposition?

    22         MR. PITOFSKY: Wait, wait, wait, what does it

    23 mean? Does never include remedy law? That after you

    24 found a violation on some basis, remedy is mandating the

    25 theory?

    104

    1         MR. ABBOTT: Let's stipulate, I'll say, that we

    2 have not found an antitrust violation and assume as part

    3 of a remedy certainly that's been required and so let's

    4 stipulate that's not included in the statement.

    5         MR. KOLASKY: So you're assuming this is a

    6 liability question?

    7         MR. ABBOTT: Right, so this is a very broad

    8 question, that the antitrust laws should never require a

    9 firm to deal with a rival.

    10         MR. SALOP: We each answered this question

    11 already.

    12         MR. ABBOTT: Well --

    13         MR. WHITENER: If a refusal is unconditional, I

    14 agree with the statement.

    15         MR. ABBOTT: Is there anybody else who would say

    16 if the refusal is unconditional, they agree with this

    17 statement? Mark and Hew?

    18         MR. PATE: Unilateral and unconditional, I

    19 assume you're meaning.

    20         MR. ABBOTT: Unilateral and unconditional.

    21 Because clearly if you add conditional, then the

    22 conditions can mimic, you know, tying, exclusive

    23 dealing, other arrangements. So, clearly, good point.

    24 So --

    25         MR. WHITENER: And Bob makes a good point, too,

    105

    1 excepting other situations where you're recommending a

    2 merger.

    3         MR. ABBOTT: Right. Sure, sure. So, I think

    4 the panel has ably pointed out that the statement was --

    5         MR. SALOP: I have a question. I have a

    6 question. On this word unconditional, if two companies

    7 go to the monopolist and they both want to buy the input

    8 and one says -- and he says why do you want it? And one

    9 says I want it to enter a market and compete with you,

    10 and the other says I want it to put on my coffee table,

    11 and he gives it to the second but not the first, is that

    12 conditional or unconditional?

    13         MR. WHITENER: He doesn't give it to the firm

    14 who says he wants to buy it to compete with you, right?

    15 That shouldn't be unlawful. There's no condition

    16 whatsoever.

    17         MR. SALOP: I'm sorry.

    18         MR. KOLASKY: There is a condition. I will not

    19 sell it to you unless you agree not to sell it to me.

    20         MR. WHITENER: No, I'm not going to sell to

    21 somebody who is a competitor or who is going to use the

    22 product to compete with me. That's --

    23         MR. SALOP: Can I just get where you're going?

    24 If he says I'm not going to sell to anybody unless he

    25 agrees not to compete. Is that legal?

    106

    1         MR. WHITENER: No, that's illegal. Let's put it

    2 this way, if you want to call the fact that it's a

    3 competitor a condition, I'll grant that. I don't think

    4 I'm going to grant anything else, but I'll grant that.

    5 If you want to say that the fact that --

    6         MR. SALOP: I don't believe that you still

    7 believe in so much in RPM law. I mean, here we are in

    8 the thick of Parke-Davis versus Dr. Miles, this is --

    9         MR. WHITENER: No, I think you're distinguishing

    10 between agreements and unilateral practice is important

    11 in a lot of settings, including this one.

    12         MR. SALOP: So, if he has a history in which

    13 5,000 people have asked him to sell, and half of them

    14 don't compete and they get it, and the other half which

    15 did want to compete, who said, just stupidly said to the

    16 guy, when they asked for the product, that they were

    17 going to compete, he said no to them, but you would not

    18 infer that illegal agreement?

    19         MR. WHITENER: Not illegal for the firm --

    20         MR. SALOP: Should it get to the jury as to

    21 whether there was an agreement or not or is that as a

    22 matter of law there was no agreement?

    23         MR. WHITENER: It didn't sound like agreement

    24 evidence to me just now, but --

    25         MR. PATE: Do you, Steve, feel that field of use

    107

    1 restrictions and licenses should be subject to antitrust

    2 scrutiny? IP licenses, patent licenses? I mean?

    3         MR. SALOP: Subject to the other conditions of

    4 my rule, but there can be an argument that IP has got

    5 some special place, you know, I could imagine the

    6 Supreme Court could make that declaration, but, you

    7 know, the thing, very few refusals to deal would be

    8 actionable under my view because very few people have

    9 the requisite monopoly power in the two markets, but,

    10 you know, this constitutional question of whether IP is

    11 different, until the Supreme Court decides it, I'm not

    12 going to decide it, I'm not going to argue IP.

    13         MR. ABBOTT: I think there's also, we've

    14 probably spent a lot of time on IP and I'm sure it will

    15 rise again. There's also statutory construction

    16 questions regarding section 271 of the patent act which

    17 raises questions about whether that section should be

    18 construed as applying to antitrust or just to so-called

    19 patent misuse.

    20         But let me move away from IP for a second and

    21 relatedly ask what is the difference between charging a

    22 price higher than a buyer is willing to pay, and

    23 refusing to deal? One can imagine offering to deal at

    24 an infinite price is tantamount to refusal to deal, but

    25 what if you just say, okay, I'm a monopolist, have a

    108

    1 right to charge my price, and a potential competitor

    2 says, well, this is just way higher than I'm willing to

    3 pay. Bill?

    4         MR. KOLASKY: You know, one of the problems I

    5 have with -- one of the problems I have with a lot of

    6 these questions is that antitrust is necessarily a very

    7 fact-specific field, and it's one of the beauties of the

    8 common law approach and the rule of reason. And, so, I

    9 think it's very hard to answer these questions in the

    10 abstract without knowing the facts of the particular

    11 case. You have a case such as the MetroNet decision in

    12 the Ninth Circuit which was decided on remand after the

    13 Supreme Court's decision in Trinko, where prior to

    14 Trinko, the Ninth Circuit had held that Quest had to

    15 make Centrex features available to a reseller at a price

    16 at which that reseller would be able to resell those

    17 features profitably.

    18         On remand, the Ninth Circuit realized the error

    19 of its ways, which were particularly clear in that case,

    20 because you had dozens of other resellers who were able

    21 to compete profitably, buying the features at the price

    22 that Quest was willing to sell them to this reseller.

    23         So, my point is simply, you have to look at the

    24 facts of each individual case, and I don't think you can

    25 answer it globally.

    109

    1         MR. ABBOTT: Anybody want to elaborate on that?

    2         MR. SALOP: Well, I'll just say a word on it.

    3 You have to distinguish between bargaining failure and

    4 an anticompetitive refusal to deal. I think that's the

    5 issue we're getting at. So, you know, aside from

    6 everything else involved, that might have just been the

    7 defendant's posted price, and he might say that's the

    8 price I posted and I might be open to negotiate and the

    9 plaintiff never even offered me a price, didn't make a

    10 genuine offer. And I think that the plaintiff should

    11 have to make a genuine offer over and above the, you

    12 know, the compensatory price.

    13         MR. ABBOTT: Hew?

    14         MR. PATE: I don't think that that distinction

    15 is going to hold up in practice, and I do think, Alden,

    16 that it is very difficult to draw this boundary. It has

    17 been understood, I thought, that American antitrust law

    18 does not tell the monopolist that it is unlawful to

    19 charge the monopoly price. That's a difference we have

    20 with the Europeans, where under article 82, it can be an

    21 abuse to charge a high price. That is of why it's so

    22 hard categorically to tell Europeans under their system

    23 that what they're doing when they look at compelled

    24 sharing is fundamentally inconsistent with the

    25 principles of antitrust. I think it is fundamentally

    110

    1 inconsistent with an important principle of antitrust

    2 here.

    3         MR. SALOP: I guess that the refusal to deal

    4 approach, then, that I'm taking and a lot of other

    5 economists have taken is the situation where the firm is

    6 trying to charge a price above the monopoly price, and

    7 that's -- so, you know, what it's saying is that it's a

    8 sacrifice of profits in some sense in order to achieve

    9 and obtain --

    10         MR. WHITENER: See, what's not clear to me is

    11 where the sacrifice is, if I'm charging the profit

    12 maximizing price for me. You know, at some point I can

    13 set a price that fully compensates me, not only for what

    14 I think Steve calls the monopoly price, but the

    15 exclusionary price. That is the price of not having

    16 somebody else take this product and compete with me with

    17 it. I think I'm entitled to charge that, and I think

    18 what's being proposed is simply a scheme to regulate the

    19 monopolist pricing, but at a level called something like

    20 an exclusionary price, rather than the monopoly price.

    21 It's still essentially third party intervention saying

    22 we're going to decide what price the monopolist can

    23 capture for its profit.

    24         MR. WALTON: I guess I have a problem with how

    25 do we get this pricing? I just, first of all, what if

    111

    1 it is a false positive? Then I'm not really a

    2 monopolist. What if we're misidentified as a false

    3 positive. Even if we identified you correctly, who's

    4 going to set this price? I just told you it's very,

    5 very difficult for someone, even in our position in

    6 Detroit to set the prices, let alone someone else. So,

    7 I worry about this stringently.

    8         MR. ABBOTT: Okay, I suggest we move on to the

    9 next question.

    10         MR. McDONALD: A firm can refuse to deal with

    11 its competitors only if there are legitimate competitive

    12 reasons for the refusal. The burden of coming forward

    13 with legitimate competitive reasons has been imposed on

    14 the defendant. Who agrees with this proposition?

    15         (No response.)

    16         MR. McDONALD: Not even Bill Kolasky on the

    17 step-wise approach?

    18         MR. SALOP: It doesn't say whether they have

    19 monopoly power. It doesn't --

    20         MR. McDONALD: I would think that would -- I

    21 would bet that would be implicit.

    22         MR. SALOP: Are you thinking whether we think

    23 that Kodak was rightly decided? Is that the question?

    24         MR. McDONALD: No. Steve?

    25         MR. SALOP: Actually the opinion of the Supreme

    112

    1 Court, yes, I thought that opinion was rightly decided,

    2 I thought the Justice Department and Kodak took a really

    3 extreme position, and, you know, killing their argument

    4 was like shooting fish in a barrel.

    5         MR. PITOFSKY: Disclosure.

    6         MR. SALOP: And I could write the brief.

    7         MR. PITOFSKY: I do, too, think Kodak was right.

    8 This was the famous footnote that caused a lot of people

    9 to be upset. And I don't believe any subsequent case

    10 has taken that footnote as accurate.

    11         MR. McDONALD: Very good. Bill Kolasky, on the

    12 subject of legitimate reasons, you directed us to

    13 consider macro reasons, macro justifications, such as

    14 the defendant's -- a defendant wanting to maintain

    15 incentives to innovate, a defendant wanting to recoup

    16 the investment it's made in the innovation. As a

    17 practical matter, how would a defendant go about proving

    18 that?

    19         MR. KOLASKY: I don't think that you need proof

    20 of that, in an individual case. The analogy I would use

    21 is to the law in the area of conscious parallelism,

    22 where one of the reasons why we don't allow conscious

    23 parallel pricing behavior to be attacked under Section 1

    24 is because it is perfectly natural competitive behavior.

    25 It's the kind of behavior that you would expect of a

    113

    1 firm in an oligopoly market.

    2         Similarly, you would expect a firm, including a

    3 monopolist, that spends good money developing new

    4 facilities, inventing new products, in order to gain a

    5 competitive advantage, to want to use those products and

    6 those facilities for that purpose. And that is a

    7 legitimate business justification in and of itself. I

    8 don't think it requires further additional proof. I

    9 think the burden is really on the plaintiffs then to

    10 show that there is some other purpose underlying the

    11 refusal to make the facilities or the inventions

    12 available.

    13         MR. McDONALD: That's probably especially

    14 applicable in the intellectual property context. Any

    15 comments from the other panelists quickly on this point?

    16         MR. SALOP: Well, I gave a quote from Kodak on

    17 this about the limits on this defense. You know, I

    18 mean, what worries me about it is the proof of

    19 competitors could equally not well make this argument.

    20 The group of competitors could say, you know, if we

    21 can't set the price jointly, we're going to be involved

    22 in doing this competition, and we won't be able to make

    23 enough money to re-invest and next thing you know the

    24 United States is going to lose out to China. And, you

    25 know, just antitrust categorically does not -- does not

    114

    1 permit that argument with regard to competition. The

    2 antitrust courts are very suspicious of that kind of

    3 argument, and I think we should be when a firm makes it

    4 as well.

    5         As for these, you know, expectations, Bill said

    6 that it's what we expect the firm to do. I mean, I

    7 don't agree with that. I mean, we expect firms in the

    8 paper industry to collude, but that doesn't mean we let

    9 them do it.

    10         MR. PATE: I don't think this comparison to a

    11 group of horizontal competitors makes much sense, and

    12 courts are pretty well equipped to investigate whether

    13 there has been an agreement among competitors. Firms

    14 are pretty well equipped to understand that they're not

    15 supposed to get involved in that kind of conduct, and so

    16 there the law has a workable mechanism to enforce a

    17 judgment about whether society is going to be better or

    18 worse off with that sort of collusion.

    19         I don't think anybody on the panel would argue

    20 that if you had a magic machine that would correctly

    21 tell us the consumer welfare balancing answer, that we

    22 wouldn't want to impose it. The point is that there is

    23 no such machine, and in the unilateral context, there's

    24 no way to give firms a basis on which to make decisions

    25 about investing capital that is workable when we're

    115

    1 talking about this category of forced sharing.

    2         MR. McDONALD: Thank you. Strong points.

    3 Moving to the next proposition.

    4         MR. ABBOTT: Yes, next proposition, and don't

    5 ask me to define the language here, because it's

    6 Professor Hovenkamp. Herb Hovenkamp, "Condemnation for

    7 unilateral refusals to deal should be reserved for

    8 situations in which firms have extraordinary amounts of

    9 very durable market power." So, extraordinary, very

    10 durable, and he doesn't define what it means, but do you

    11 agree with his statement?

    12         (No response.)

    13         MR. ABBOTT: So, he's saying here that there

    14 should be condemnations in the rare instances, for

    15 instance, where there are extraordinary amounts of very

    16 durable market power.

    17         MR. KOLASKY: I suspect you have people

    18 disagreeing for a lot of different reasons on this one.

    19         MR. ABBOTT: So, does anyone agree with that?

    20         MR. SALOP: Well, if you let me define the

    21 words, I could -- I can define extraordinary amount and

    22 very durable market power in a way that I agree with it

    23 100 percent.

    24         MR. ABBOTT: Does it make any sense to use those

    25 terms which by definition are extremely, one might

    116

    1 argue, open for debate?

    2         MR. PITOFSKY: You could interpret this as an

    3 expansion of the essential facilities doctrine, which

    4 I'm sure Hovenkamp didn't intend. I mean, it's hard to

    5 deal with really vague language like that.

    6         MR. KOLASKY: I was going to make the same point

    7 with the flip side of this. I haven't read this

    8 particular passage of the antitrust enterprise, but from

    9 reading his treatise, I would be -- I would be surprised

    10 if he didn't say this in the context of suggesting how

    11 the essential facilities doctrine should be limited, and

    12 if that's the case, you know, my response is since I

    13 think the essential facilities doctrine should be

    14 abandoned all together, you know, I suppose if you're

    15 not going to do that, I would agree it should be limited

    16 in some way and this is as good a way to limit it as

    17 any.

    18         MR. ABBOTT: Mark, do you have any thoughts on

    19 that?

    20         MR. WHITENER: Actually, I think I tend to agree

    21 with what Bill just said. I would eliminate the

    22 doctrine, but if you couldn't do that, you know, look

    23 for some limiting factors. I don't think this concept,

    24 again, going back to my earlier comments, really helps

    25 you distinguish as a matter of antitrust policy when you

    117

    1 want to intervene. It's just sort of a directional

    2 thing that's saying if the, you know, the impact is

    3 great we're going to intervene and if it's not we

    4 aren't. But so I think it's better just -- in fact, I

    5 think this point illustrates why the doctrine probably

    6 isn't very helpful.

    7         MR. ABBOTT: Yes, why don't we try, I think

    8 given the inexactitude of the terms here, why don't we

    9 move to the next proposition.

    10         MR. McDONALD: This is one that we discussed in

    11 the forward, the legality of a refusal to deal should

    12 depend on whether the refusal constitutes a change from

    13 prior business practices. Hew, you outlined some of the

    14 reasons that you thought that that was probably

    15 incorrect. Let's see the vote.

    16         (No response.)

    17         MR. McDONALD: Who agrees with this proposition?

    18         MR. SALOP: May I rephrase the proposition?

    19         (Laughter.)

    20         MR. McDONALD: Who invited the economist?

    21         MR. SALOP: You know, economists go through

    22 depositions, we know better than to answer questions

    23 like this. How about you ask whether the refusal

    24 constitutes a change from prior business practice is a

    25 relevant fact, agree or disagree. Would you accept that

    118

    1 rephrasing?

    2         MR. McDONALD: I'll accept that amendment.

    3 What's the vote? Hew, do you think it's not relevant?

    4         MR. PATE: I'm on board for the idea that if

    5 it's really unilateral and unconditional, I wouldn't

    6 ask, but is it a relevant fact, I mean I guess that

    7 describes the current state of the law, and similar to

    8 Bill's answer, if we're going to get into this

    9 enterprise, I would make it a relevant fact instead of a

    10 dispositive fact. So, I guess I would go with you that

    11 far.

    12         MR. SALOP: What if you were not sure whether it

    13 was conditional or unconditional? Would it be relevant

    14 then? Because you're never sure whether it's

    15 conditional or unconditional.

    16         MR. PATE: The way I say it in the written

    17 paper, do I believe it's relevant, it does provide some

    18 benchmark, it gives some indication that there was a

    19 price at which one time there was a willingness to deal.

    20 I'm not sure that I see why it's relevant to whether --

    21 just deciding whether something is conditional or

    22 unconditional or that I would use it as sort of a tie

    23 breaker if I wasn't sure.

    24         MR. SALOP: Oh, no, no, I agree with you, it

    25 doesn't tell you anything about whether it's conditional

    119

    1 or unconditional, but if you want per se legality for

    2 refusals to deal that you know are unconditional, but

    3 it's potentially actionable if you knew it was

    4 conditional, then you've got two prongs, you've got two

    5 issues now, and so the threshold question would be is it

    6 conditional or not, and once you've answered that, you

    7 would know where to go.

    8         So, I'm just suggesting what if you weren't sure

    9 whether it was conditional. You know, you're going to

    10 have to have some burden of proof to define at some

    11 threshold on what defines conditional, and so if there's

    12 some uncertainty about that, that might take you a step

    13 further and then this would be relevant.

    14         MR. PATE: Yeah, I'm not sure I agree that

    15 there's a connection. Again, I think the relevance is

    16 that if you were in a situation where the court is going

    17 to get into policing a duty of forced dealing, then it

    18 is true that prior practice gives you a starting point

    19 where the complete absence of prior practice doesn't,

    20 but that's the best I'll say for it.

    21         MR. McDONALD: Bob?

    22         MR. PITOFSKY: I think I -- look, this is a

    23 response to arguments that the defendant might make.

    24 The defendant might say, it's not feasible for me to

    25 make this particular service or facility available, and

    120

    1 the answer is you used to do it, why can't you do it

    2 now? Well, the defendant might say, we'll never figure

    3 out what a fair price is if you mandate the price, and

    4 the answer is, well, you seem to have come up with a

    5 fair price before. In that sense, it could be a factor.

    6 Is it really the heart of the matter, is it dispositive?

    7 I don't think so.

    8         MR. McDONALD: Don't you think, Bob, that in

    9 Aspen and in Trinko's characterization of Aspen, this

    10 was a liability factor?

    11         MR. PITOFSKY: The court made a fair amount

    12 about the Aspen, I -- I wouldn't do it that way. The

    13 fact that it's a departure from my entire business, it's

    14 one factor among five or six others, and I wouldn't even

    15 make it high on my list of factors.

    16         MR. McDONALD: Okay. I'm getting strong

    17 endorsement of this.

    18         MR. KOLASKY: Can we just follow up on that.

    19 And I think Aspen really illustrates the problem very

    20 well. You know, I agree completely with Bob. I think

    21 it's a relevant factor, but by no means a dispositive

    22 factor. I think what the court found particularly

    23 relevant about it in Aspen was that Ski Co. had entered

    24 into the multi-mountain pass at a time when the three

    25 mountains that it later owned were separately owned.

    121

    1 And, so, you know, there was a belief that a basis for

    2 concluding that in a competitive market, you would have

    3 a multi-mountain pass that covered all of the mountains

    4 in that particular area, and the same was true at other

    5 areas around the country where there were multiple

    6 peaks, including ones in which Ski Co. operated, so

    7 there was a good basis for the court to believe, and

    8 infer, that it was a profitable, procompetitive,

    9 cooperative arrangement that benefited consumers.

    10         The problem with it in Aspen, if you look

    11 closely at the facts, and there's a very good article in

    12 the Antitrust Law Journal by Lopatka and Page which

    13 could do that, is that, you know, they show that given

    14 the way the revenue sharing was done in Aspen, Highlands

    15 was benefitting disproportionately to Ski Co., and, you

    16 know, I think Steve and I may disagree about the facts

    17 of the case on this, you could actually argue that all

    18 that Ski Co. was trying to do in that case was to

    19 renegotiate the price. You know, there was some bravado

    20 in the language they used about making an offer to

    21 Highlands that it couldn't accept, but that's the sort

    22 of thing people often kind of, you know, overstate and

    23 that often engage in when they're in tough negotiations.

    24         MR. McDONALD: Facts are important. Steve, you

    25 have a point on this and Tom Walton had his hand up,

    122

    1 too.

    2         MR. SALOP: I was going to say that the Trinko

    3 court is all over the place on this, because there was

    4 a, you know, a lot of different conduct, as Bill pointed

    5 out, in Aspen. With respect to the sharing of, you

    6 know, with respect to the joint ticket, that was

    7 collusion. So, you know, and indeed they were sued by

    8 the Colorado Attorney General for it. So, yeah, in some

    9 sense, all they were trying to do, on that part, they

    10 were just trying to redistribute cartel profits.

    11         I think what the -- what the part of Aspen that

    12 the Trinko court endorsed was not about the four

    13 mountain pass, though they talked about the four

    14 mountain pass. They were really animated, as I am,

    15 about the fact that they refused to sell daily tickets

    16 in bulk or indeed at retail to Highlands, even though

    17 they sold them to a lot of other people. And that's the

    18 part that really showed the sacrifice. And, you know,

    19 so the part that's the outer boundary of antitrust, it's

    20 not the refusal to sell daily tickets, I would say, you

    21 know, which is well within the refusal of the law, but

    22 the fact that you find a firm liable for a Section 2

    23 violation for refusing to sell to its competitor.

    24         MR. McDONALD: Tom Walton?

    25         MR. WALTON: I'm not an expert in any of this,

    123

    1 which is why I'm abstaining from most of the questions.

    2 One thing that's been addressed partially, I think it's

    3 important that if someone had decided that Chrysler had

    4 tried the system that the Commission was recommending,

    5 that we could somehow have a burden to go back to that

    6 failing system.

    7         MR. SALOP: Actually, if you show they failed,

    8 it would be important -- but if they succeeded.

    9         MR. WALTON: I think it did in that case, the

    10 ALJ, the Administrative Law Judge did take that into

    11 account in his decision that there were competitive

    12 reasons, efficiency reasons for adopting this.

    13         MR. PATE: And it only took 17 years, 19, yeah.

    14         MR. SALOP: What do you expect in the Nixon

    15 antitrust with Muris and Jim Miller. I mean, they were

    16 just very slow and much too interventionalist.

    17         MR. KOLASKY: If I can just respond to Steve's

    18 point, because one thing that I, you know, Aspen really

    19 illustrates how you have to be careful here. The mere

    20 fact that Ski Co. was not willing to sell tickets to

    21 Highlands at the retail price, does not necessarily show

    22 that their decision made no economic sense and was not

    23 profit maximizing. If the availability of the four

    24 mountain pass diverted a large enough number of skiers

    25 from the three Ski Co. mountains to Highlands, then even

    124

    1 if Highlands was willing to pay the full retail price

    2 where the Ski Co. tickets had sold, it could be a

    3 money-losing proposition for Aspen, depending on how the

    4 revenue sharing was done.

    5         MR. SALOP: I agree with that, that's a footnote

    6 in my paper, and interestingly, what's really actually

    7 interesting about the Trinko court, is they did not

    8 balance the losses in the one market against the gains

    9 in the other. When they did their profit sacrifice

    10 test, they took the very superficial naive approach.

    11 They said, oh, you sacrificed profits on the daily

    12 ticket, that's it, that's your profit sacrifice. So,

    13 really they took quite an extreme position in that.

    14         MR. McDONALD: Thank you. Moving to the next

    15 proposition.

    16         MR. ABBOTT: Yes, the next proposition.

    17         MR. McDONALD: It is difficult to craft an

    18 injunctive remedy in a refusal to deal case.

    19         MR. KOLASKY: You mean one that works well?

    20         MR. McDONALD: It's really easy to craft one

    21 that doesn't, yes, Hew probably agrees. Everybody

    22 agrees. Steve, yours is difficult enough. Bob

    23 Pitofsky, you've said that you thought that one reason

    24 that it was appropriate to have refusal to deal

    25 liability is that the defendant would get a reasonable

    125

    1 royalty from the remedy. How would you calculate that

    2 reasonable royalty?

    3         MR. PITOFSKY: Well, it's hard to generalize. I

    4 mentioned two examples, one is that you previously have

    5 been dealing with people and charging them a royalty,

    6 and you know, the first thing I would do is say to the

    7 parties, why don't you try to work it out, and come back

    8 to us with a proposal. And they come back and say we

    9 can't work it out and you say, I'm going to refer it to

    10 arbitration. And then the arbitrator comes back and

    11 comes up with a number. Presumably that will work most

    12 of the time. And if neither one of those approaches

    13 work, you get some expert economist to come in and argue

    14 with some other expert economist and you come up with a

    15 reasonable number. Look, we all voted, it's very

    16 difficult, the most difficult part of this whole area to

    17 accomplish, but it has been done, it can be done, and

    18 the price is not, I think, part of it.

    19         MR. McDONALD: Steve, is your formula one that

    20 can be applied by a jury in district court?

    21         MR. SALOP: With expert economists and good

    22 lawyers, yeah, I think so. I think it can be proved.

    23         MR. McDONALD: All right, we'll move on to the

    24 next proposition.

    25         MR. ABBOTT: Next proposition is that an

    126

    1 intellectual property owner's unconditional, unilateral

    2 decision not to license technology to others cannot

    3 violate the antitrust laws. Again, this is that the

    4 unilateral, unconditional decision not to license

    5 technology to others cannot violate the antitrust laws.

    6 Who agrees?

    7         MR. PITOFSKY: That's what the law is.

    8         MR. ABBOTT: All right, one, two, three, four.

    9 Who disagrees?

    10         MR. SALOP: I don't agree.

    11         MR. ABBOTT: Steve Salop abstains and Bill

    12 Kolasky disagrees.

    13         MR. KOLASKY: Can we explain why?

    14         MR. ABBOTT: Yes, explain why you disagree,

    15 Bill.

    16         MR. KOLASKY: Again, I'm going to keep coming

    17 back to the common law nature of antitrust. Suppose the

    18 fact pattern similar to what you had in MCI and AT&T but

    19 involving intellectual property rights instead of

    20 interconnection. A patent owner knows that rival A is

    21 thinking about investing in R&D to develop a competing

    22 technology, and so it strings A along, promising to

    23 license it, but in fact, playing rope-a-dope with it,

    24 delaying it, in order to discourage the rival from

    25 investing in its own technology. I would think in those

    127

    1 circumstances, you could hold the refusal to license to

    2 be an antitrust violation.

    3         Again, it's not a simple unconditional refusal

    4 to license, but there's a pattern of conduct that is

    5 having an anticompetitive effect.

    6         MR. WHITENER: I think that last point is

    7 important, it's outside the context of unilateral,

    8 unconditional behavior. You have something else going

    9 on, whether that's something that would be an antitrust

    10 violation, I don't know, but now you're describing

    11 something else, and I think it's very, very important

    12 and useful to always come back in these cases to what it

    13 is we are looking for and separate out conduct of what

    14 you described by the simple decision to obtain the

    15 property one's self.

    16         MR. PATE: And you probably plead the elements

    17 of fraud in the way you described it, right, so it's an

    18 open question whether that needs to stay an antitrust

    19 claim before you can prove the wrongful behavior.

    20         MR. SALOP: That's what the Microsoft cases and

    21 the Telecom cases that all of these allegations are

    22 still rolling in the negotiations and, you know, they

    23 were elements.

    24         MR. ABBOTT: Should one distinguish between

    25 patent licensing, let's maybe soften the unconditional,

    128

    1 in other forms of intellectual property licensing, such

    2 as trademarks. For example, trade secrets, is there a

    3 reason to distinguish among forms of IP?

    4         MR. PATE: I would say as long as they're

    5 defined correctly, if there isn't a problem with the

    6 underlying IP system, the answer probably is no, that

    7 there shouldn't be a requirement to license any of

    8 those, as long as they're performing their proper

    9 function, and I think you have to give a conclusive

    10 promotion of correctness to the IP system in doing so,

    11 and then turn to IP reform as the way to handle it if

    12 the IP system isn't. Otherwise, you have this collision

    13 that defeats the purposes of both bodies of law.

    14         MR. ABBOTT: Anyone disagree, or are we all of a

    15 common mind here?

    16         (No response.)

    17         MR. ABBOTT: Okay. Well, let's move to the next

    18 proposition, which is compulsory licensing of IP as an

    19 antitrust remedy should be rare. Now, probably we

    20 should distinguish between remedies in different sorts

    21 of cases here, but first I would like to get people to

    22 vote on this proposition as a general matter. Who

    23 agrees?

    24         MR. PITOFSKY: Yeah, I agree it should be rare.

    25         MR. KOLASKY: Are you taking merger out?

    129

    1         MR. ABBOTT: Well, that's why I said we should

    2 distinguish between all the forms of situations in which

    3 remedies arise.

    4         MR. WALTON: In a merger case, it could be the

    5 least restrictive, most effective remedy in some cases.

    6 If it was a remedy for a unilateral, unconditional

    7 refusal, you shouldn't be doing it in the first place.

    8         MR. ABBOTT: So, what you're saying is that this

    9 decree depends upon the facts, and certainly we've seen

    10 a number of major cases in mergers in which IP was very

    11 key to the merger, in which compulsory licensing was

    12 required. How about the nonmerger context?

    13         MR. PITOFSKY: Let me just in the merger

    14 context, the leading example is Ciba-Geigy where the

    15 Commission allowed the merger to go through on the

    16 condition that a basket of intellectual property rights

    17 were divested to a third party. And as that's the one

    18 time that I think Business Week said that the government

    19 finally got something right. So, it can be a least

    20 restrictive alternative can be the best way to go. Does

    21 it come up a lot? It has been known to come up.

    22         MR. ABBOTT: Okay, I think this question has

    23 raised fewer sparks than some of the other ones, and

    24 let's see if the next one generates some sparks.

    25         MR. McDONALD: This one is tailor made for Tom

    130

    1 Walton. A manufacturer's refusal to deal with

    2 independent service organizations should not violate the

    3 antitrust laws.

    4         MR. WALTON: Yes, I would be all for that. I

    5 would say in Kodak, General Motors, there's two -- there

    6 was a -- I'm not an expert in Kodak, by any means, I've

    7 read it briefly, but apparently there was a distinction

    8 between whether Kodak was going to impose this refusal

    9 to deal on manufacturers that already had their copy

    10 machines, that was one issue. But the other issue was

    11 whether it would be going forward, whether it would

    12 impose -- it did not do that, it did not do that, first

    13 thing.

    14         The second thing it did was impose this

    15 restriction on companies like General Motors that were

    16 going to buy the machines, or bought a new machine, then

    17 they would have to use only the parts provided by Kodak

    18 or not use the independent service organization. You

    19 have the right to not enter into that agreement.

    20         So, the Kodak market was a competitive market,

    21 so I don't see any -- I may be wrong, but I just don't

    22 see any problem with that situation.

    23         MR. SALOP: That case was not the first

    24 situation.

    25         MR. WALTON: Oh, was it? I may stand corrected.

    131

    1         MR. McDONALD: By a show of hands, who else is

    2 willing to share Tom Walton's is unconditional

    3 endorsement to this proposition?

    4         MR. PATE: If the question is competitive

    5 upstream market, would you have agreed with the Kodak

    6 result, I would say no, so I think I would raise my hand

    7 on that.

    8         MR. WHITENER: Same.

    9         MR. McDONALD: Do any of the panelists care to

    10 speak on the circumstances in which refusal to deal with

    11 an ISO definitely should be an antitrust violation?

    12         (No response.)

    13         MR. KOLASKY: Again, I think what makes it

    14 difficult is the qualification that Hew put on his

    15 answer, you know, if you had a situation like Kodak

    16 where you had a competitive upstream equipment market,

    17 then it's hard to imagine the circumstances in which you

    18 would find a refusal to deal with an ISO unlawful. But

    19 what if you had the circumstance where you had a

    20 monopolist upstream who is refusing to deal with ISOs?

    21 Again, I think as a general matter, there's a strong

    22 presumption that it's not unlawful, but if the plaintiff

    23 is willing to show facts that show that it was a part of

    24 an anticompetitive pattern of conduct that was designed

    25 to maintain or expand your monopoly, then it could be

    132

    1 unlawful if there are not legitimate business reasons

    2 for it.

    3         MR. SALOP: I would not use the distinction Bill

    4 did, but rather I would ask whether it was a change in

    5 conduct such as it was a monopoly, so if even a

    6 monopolist from the get-go says you have to deal with

    7 me, that would be okay, but the question is, you know,

    8 the Kodak case was about the change in conduct.

    9         MR. KOLASKY: But another situation, normally

    10 you think that the markets for ISOs are relatively easy

    11 to enter, and that therefore a refusal to deal with ISOs

    12 is not likely to raise entry barriers, but suppose the

    13 plaintiffs were able to show that the reasons the

    14 monopolist was refusing to deal with ISOs was to make it

    15 more difficult for somebody else to enter the equipment

    16 market, and thereby break down their monopoly. On those

    17 facts, then I think you might have a basis for

    18 liability.

    19         MR. McDONALD: Thank you. We're going to move

    20 now to a couple of hypotheticals.

    21         MR. ABBOTT: Okay. The first hypothetical

    22 raises a question of IP, and let me read it: Ajax

    23 Company holds a patent (patent X) over a small part of a

    24 device that provides a new broadband service far

    25 superior to any alternatives. There are no acceptable

    133

    1 substitutes for that patented part; without it the new

    2 broadband service cannot be deployed. Firms holding all

    3 patents covering all other essential parts of the device

    4 have entered into a patent pool that sets a reasonable

    5 royalty. Under this all third party businesses may

    6 obtain a license. Ajax, however, refuses to license

    7 patent X to anyone, thereby preventing third party

    8 companies from having any access to the part that is

    9 necessary to be able to provide the welfare-enhancing

    10 broadband service."

    11         Well, again, this is a small component of a

    12 larger device, but by holding the patent and refusing to

    13 license the patent for that one component, despite the

    14 fact there are many other components, in effect, Ajax is

    15 able to prevent any other firm from launching the

    16 broadband device, and the broadband service that depends

    17 upon the device. First of all, does Ajax have an

    18 absolute right not to license patent X?

    19         MR. WHITENER: I mean, I think it does, but I'm

    20 not sure in the hypothetical yet really if I understand

    21 what Ajax is doing. I don't particularly care, because

    22 I don't think I'm going to condemn their decision to sit

    23 on their patent, but what are they planning to do to

    24 make money? Are they going to invent some other way to

    25 do the broadband service? If they're just trying to

    134

    1 stupidly put the patent in a drawer, I don't think that

    2 subjects them to liability.

    3         MR. PATE: No, I don't think that they are

    4 required to license the patent, and it really doesn't

    5 matter to me whether they put it in the drawer or not.

    6 Not because that wouldn't produce a situation wherein

    7 that case consumer welfare wouldn't be enhanced by

    8 taking it from them, but because of a judgment that a

    9 property rule here is going to be superior to a

    10 liability rule in producing innovation over the

    11 long-term. And if the broadband service is one that's

    12 going to cure avian flu or something, then presumably

    13 the government can take, and with just compensation, use

    14 it if there's some sort of emergency at issue, but

    15 otherwise, no, I don't think Ajax has any obligation.

    16         MR. ABBOTT: Does anyone else think it matters,

    17 does it matter if Ajax plans to launch a new broadband

    18 service itself? We've heard from a couple of people, as

    19 opposed to just sitting on the patent, or alternatively,

    20 and the facts haven't been presented here, but maybe

    21 they have some interest in some other broadband

    22 investment, and they find it profitable, at least in the

    23 near term, not to have a new broadband service

    24 introduced by anyone.

    25         Steve?

    135

    1         MR. SALOP: It would make it a lot more

    2 interesting. But Ajax is a client of mine and I don't

    3 feel that I should comment. You know, I think that it's

    4 what we've been talking about all day. I mean, once you

    5 say Ajax has an -- is a competitor downstream, that

    6 they've got ISDN, and now this is DSL, then you've got

    7 the vertically integrated -- if they're a monopolist

    8 downstream, then you basically have the hypothetical

    9 that we've been talking about all day.

    10         MR. ABBOTT: Does anybody, and we heard Hew Pate

    11 speak directly to this, does anybody believe that the

    12 welfare impact on the industries or consumers who would

    13 benefit from the new broadband service should be taken

    14 into account?

    15         (No response.)

    16         MR. ABBOTT: No one is willing to comment on

    17 that? So, you all agree with Hew's proposition that it

    18 doesn't matter, and the absolute right not to license?

    19 And you don't need to -- you don't take into account any

    20 potential welfare effects?

    21         MR. PITOFSKY: I find this very difficult to

    22 deal with, because as a practical matter, you have to

    23 ask Ajax why? Why are you doing this? What's your

    24 role? What are your other facilities? What are your

    25 resources? And I know you don't like the idea of

    136

    1 somebody having to explain why, but in a bizarre

    2 situation like this, I can't even begin to cope with

    3 this hypothetical. Well, what do you mean you want

    4 what? Is there no price under the sun that will be

    5 enough that this patent pool can induce you to come into

    6 the transaction? And depending on what that reason is,

    7 then we go forward with, under what circumstances, if

    8 any, should the law intervene.

    9         MR. KOLASKY: I'm sort of with Bob on this in

    10 the sense that I don't think there are nearly enough

    11 facts in this hypothetical to begin to answer the

    12 question. I mean, on its face, this sounds like Ajax

    13 has simply invented a better mousetrap and it ought to

    14 be free to capture the value from that new mousetrap

    15 however it wants, and if, for example, hypothetically

    16 the members of the patent pool currently have, you know,

    17 100 percent of the market and Ajax is a new entrant,

    18 that using this new device as its entry point, then it's

    19 perfectly natural that it would want to have a period of

    20 time in which it has exclusive rights to that device.

    21 It may down the road license others, and in addition its

    22 refusal to license may stimulate the others to try to

    23 develop an alternative to this new device. So, this

    24 doesn't sound anticompetitive on its face. It sounds

    25 like competition on the merits.

    137

    1         MR. ABBOTT: Steve, a quick comment?

    2         MR. SALOP: I agree with Bob, and I think

    3 stating that in this pristine way, you know, in Aspen,

    4 the reason why Aspen took that extreme position that

    5 they just had a right to do whatever they wanted, was

    6 because they squandered all their other defenses in the

    7 courts below. And, you know, in a real world case,

    8 unless Ajax just decided to fight this because, you

    9 know, their CEO or board members were intellectual

    10 property lawyers and they felt it was a good thing just

    11 to fight it for the good of the country, they would give

    12 a reason. And the reason -- and then the reason is

    13 going to matter.

    14         MR. PATE: But the thing that's important is

    15 that requiring them to give a reason, in and of itself,

    16 is going to generate a tremendous amount of uncertainty

    17 in our system of litigation-based decision making. So,

    18 you can always come up with a better result in the

    19 individual case, you've got to consider what you do to

    20 the system when you do that.

    21         MR. WHITENER: Right, and if somebody states the

    22 reason bluntly in an email, which is I want to keep

    23 others from competing with me in my IP, you know, you

    24 might get to trial and you might have liability, even

    25 though, beyond repeating myself, all you were doing was

    138

    1 keeping it.

    2         MR. PATE: I don't know which is better, we've

    3 had some strain of this conversation that has said that

    4 the worst thing would be that if Mr. Ajax is cranky and

    5 has it in the drawer, then we're worried about the

    6 consumer welfare effects of it not being used, but that

    7 if it's being used to get a competitive advantage, then

    8 that's good, that's the American way, but, you know, as

    9 Mark points out, it may be that if the email says that

    10 we're going to use this to stick it to the competition,

    11 that's when you have a really protracted litigation.

    12         MR. ABBOTT: Well, let's turn quickly to the

    13 last hypothetical, we're going to make this litigation

    14 last some more. The final hypothetical is a shorter

    15 one, so -- but perhaps ironically has fewer ambiguities

    16 than our previous hypothetical. Alpha Company owns the

    17 only source of an input (input Z), or if we had an

    18 English speaker here, it might be input Zed, and alpha

    19 uses input Z to make widgets. Beta Company invents a

    20 new technology that uses input Z to make widgets at a

    21 lower cost than Alpha's technology. Alpha refuses to

    22 sell input Z to Beta, but Alpha does sell input Z to

    23 firms in other industries for $100 per unit.

    24         First of all, should Alpha be required to sell

    25 input Z to Beta, since it sells to firms in other

    139

    1 industries? Hew?

    2         MR. PATE: Well, and you're eliminating

    3 arbitrage, they can't get it from the $100 purchasers

    4 for some reason?

    5         MR. ABBOTT: Yes, let's assume that. Yes, I

    6 think --

    7         MR. PATE: No, I don't think Alpha has an

    8 obligation to sell the input it owns to Beta.

    9         MR. ABBOTT: Anybody else?

    10         MR. KOLASKY: Again, too few patent facts. Does

    11 Alpha have a monopoly on the widgets market, are there

    12 other ways to make widgets with inputs A, B and C? I

    13 mean, you just don't know enough.

    14         MR. WHITENER: I actually think under these

    15 facts, I know enough to say no obligation to deal, no

    16 obligation if they deal, no obligation to deal at $100,

    17 no obligation to deal at Steve's, you know, the monopoly

    18 at nonexclusionary price. I mean, look, Alpha owns Z.

    19 Alpha has the rights to all the return money on Z, and

    20 it really shouldn't matter if Z can be deployed in one

    21 antitrust market or 50. It's all the same way of saying

    22 Alpha owns, lawfully, I assume, developed Z, it gets

    23 every dollar attributable to ownership of Z by

    24 exploiting it itself. And I do have a question for

    25 Steve, if Beta, with this low-cost technology, assume if

    140

    1 they get the input at whatever, let's say $100, if we

    2 can predict that their lower cost widget manufacturing

    3 method is going to let them ultimately take most or all

    4 the sales of widgets, do they have to share their

    5 manufacturing technology with Alpha?

    6         MR. KOLASKY: That's an interesting question.

    7         MR. SALOP: I mean, that's an interesting

    8 question. It would depend, is there a monopoly on that

    9 technology or are there other makers of that technology?

    10         MR. WHITENER: We are predicting over that,

    11 since they get the input at $100, they are going to get

    12 all the widget sales because they have a lower cost of

    13 manufacturing. And let's assume they can readily

    14 license this device to Alpha. Do they have to share it?

    15         MR. SALOP: I mean, I think you have to go

    16 through now it's the machinery is an input, but it

    17 wouldn't -- so I guess you're saying they have a

    18 monopoly on securing your technology, but they may have

    19 no market power in the widget business, and, you know,

    20 the monopoly power in the widget business, which is what

    21 Bill is getting at, is a very important element, not to

    22 mention the alternatives to input Z.

    23         MR. WHITENER: I think what would happen if you

    24 did conclude there was monopoly power and an obligation

    25 to deal, one consequence is Alpha's incentive to develop

    141

    1 a lower cost technology itself is now removed, because

    2 they can share, and if Beta gets to buy the input at

    3 $100, their incentive to innovate around or replicate Z

    4 I think is what is similarly diminished.

    5         So, I mean, I think you can construct a set of

    6 facts that says they have to deal with each other and I

    7 think you have wound up essentially with the economics

    8 of one firm producing rather than two firms struggling

    9 to compete with each other.

    10         MR. SALOP: Or the two firms competing. That's

    11 the problem with the competitive nature, if they do or

    12 not.

    13         MR. ABBOTT: Any additional comments on that

    14 hypothetical?

    15         (No response.)

    16         MR. ABBOTT: Well, if not, let just have a few

    17 closing remarks, and I think my colleague, Bruce

    18 McDonald, may want to say one or two things as well.

    19 Let me move to the podium, very briefly.

    20         It's difficult to generalize based on depth and

    21 also the comments that were made today, but I think

    22 we've heard some interesting discussions and analyses of

    23 different aspects of the refusals to deal with

    24 competitors. Number one, we have heard alternative

    25 forms of multipart balancing tests, some of these tests

    142

    1 have been characterized as really sliding scale, tests

    2 that rely on certain propositions, but that don't

    3 require a lot of difficult administration. We've also

    4 heard some concerns that the problem with any of these

    5 tests, and this is going to repeat a theme, that when

    6 you go to a jury, will the jury be able, sensibly, to

    7 apply them given their, in effect, potentially high

    8 error costs. We've heard some responses that, well, no,

    9 the juries are in the business of doing that, generalist

    10 courts and judges are in the business of weighing,

    11 applying weighing balancing tests in all sorts of areas

    12 of law.

    13         We've also, I think, heard all speakers,

    14 certainly emphasize the theme that facts and hard facts

    15 and details are very important, that's certainly come up

    16 in the context of propositions we raised and in

    17 hypotheticals. There's always a demand, quite

    18 understandable, for more details and more facts. I

    19 think that all of this, and in particular, the specific

    20 written comments and written presentations by our

    21 panelists will prove quite valuable as we ponder the

    22 record developed throughout the hearings and there are

    23 no simple or some might argue there are simple answers

    24 here, but certainly there are no -- there is no

    25 unanimity of opinion.

    143

    1         Despite that fact, I think we've heard that, and

    2 it seems to be a general theme, that imposing a duty to

    3 deal on the monopolist is something that is very rare.

    4 Some would say that general unconditional impositions to

    5 deal should never be applied, others say there's more

    6 nuance to that, but I think there's a general

    7 understanding that this is a very unusual sort of

    8 requirement, and certainly perhaps intentionally with

    9 antitrust law and having more to do with regulation, and

    10 that brings us to the sort of broader question that over

    11 the tension and the dividing line between antitrust

    12 remedies and regulation in general, and the ability of

    13 courts and expert agencies to administer such tests will

    14 remain with us.

    15         And now I would like to turn briefly to Bruce

    16 McDonald to see if he has any additional insights to

    17 share, and also to thank him and all of the people from

    18 the Department of Justice who have helped so much in

    19 putting together this session. I would also like to

    20 thank all of my colleagues in the Federal Trade

    21 Commission, too numerous to mention, who have done a

    22 wonderful job in making this session a success.

    23         Bruce?

    24         MR. McDONALD: Let me just add thank you that

    25 today's discussion does highlight that even though this

    144

    1 may be one of the most narrow grounds for battle in the

    2 refusal to deal -- in the single firm conduct debate, it

    3 is certainly one of the most hard fought. The agencies

    4 work hard to try to incorporate the latest thinking into

    5 their enforcement decisions and these hearings are a

    6 part of helping us to remain on the cutting edge. We

    7 can't thank the panel enough for the time they devoted

    8 to preparing their presentations and for being here and

    9 for sharing their expertise for us.

    10         On behalf of the FTC and DOJ, thank you very

    11 much.

    12         (Applause.)

    13         (Whereupon, at 5:13 p.m., the hearing was

    14 concluded.)

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    1
    CERTIFICATE OF REPORTER

    2
    3
    4 I, Sally Jo Bowling, do hereby certify that the

    5 foregoing proceedings were recorded by me via stenotype

    6 and reduced to typewriting under my supervision; that I

    7 am neither counsel for, related to, nor employed by any

    8 of the parties to the action in which these proceedings

    9 were transcribed; and further, that I am not a relative

    10 or employee of any attorney or counsel employed by the

    11 parties hereto, nor financially or otherwise interested

    12 in the outcome of the action.

    13
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    SALLY JO BOWLING

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    Updated June 25, 2015