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1	UNITED STATES FEDERAL TRADE COMMISSION
2	and
3	UNITED STATES DEPARTMENT OF JUSTICE
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5
6
7	SHERMAN ACT SECTION 2 JOINT HEARING
8	INTERNATIONAL ISSUES
9	TUESDAY, SEPTEMBER 12, 2006
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14	HELD AT:
15	UNITED STATES FEDERAL TRADE COMMISSION
16	SATELLITE BUILDING, CONFERENCE ROOM C
17	601 NEW JERSEY AVENUE, N.W.
18	WASHINGTON, D.C.
19	9:30 A.M. TO 4:00 P.M.
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24	Reported and transcribed by:
25	Susanne Bergling, RMR-CLR

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1	MODERATORS:
2	GERALD F. MASOUDI
3	Deputy Assistant Attorney General
4	Department of Justice
5	and
6	RANDOLPH W. TRITELL
7	Assistant Director for International Antitrust
8	Federal Trade Commission
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10	PANELISTS:
11	Morning Session:
12	Philip Lowe
13	Hideo Nakajima
14	Eduardo Perez Motta
15	Sheridan Scott
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17	Afternoon Session:
18	George Addy
19	Margaret Bloom
20	Paul Lugard
21	James F. Rill
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24
25

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1	C O N T E N T S
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3	MORNING SESSION:
4	Introduction
5	Presentations:
6	Philip Lowe
7	Hideo Nakajima
8	Eduardo Perez Motta
9	Sheridan Scott
10	Moderated Discussion
11	Lunch Recess
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13	AFTERNOON SESSION:
14	Introduction
15	Presentations:
16	George Addy
17	Margaret Bloom
18	Paul Lugard
19	James F. Rill
20	Moderated Discussion
21	Conclusion
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25

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1	P R O C E E D I N G S
2	- - - - -
3	MR. TRITELL: This must be some sort of record,
4	a minute before we're supposed to start, a hush has
5	descended upon the room. I don't have to tell everybody
6	to get in their seats, so thank you, we are off to a
7	good start.
8	Good morning. I'm Randy Tritell, Federal Trade
9	Commission's Assistant Director For International
10	Antitrust. I will be co-moderating this morning's
11	session along with Gerald Masoudi, Deputy Assistant
12	Attorney General for the Department of Justice, which is
13	co-sponsoring these hearings with the Federal Trade
14	Commission.
15	As you know, the FTC and the DOJ strive to
16	allocate matters efficiently consistent with our
17	respective highest and best uses. In that spirit, it
18	falls to me to open this morning's hearings by sharing
19	the following four insights.
20	One, please turn off your cell phones,
21	Blackberries and other devices. Two, the restrooms are
22	outside the double doors and across the lobby. There
23	are signs to guide you. Three, in the unlikely event
24	the building alarm sounds, please proceed calmly and
25	quickly as instructed. If we must leave the building,

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1	go out the New Jersey Avenue entrance by the guard's
2	desk, follow the phalanx of FTC employees to a gathering
3	point, and await further instructions. Four, although
4	we would love to hear what you think of the interesting
5	issues we will be discussing today, we cannot
6	accommodate any comments or questions from the audience
7	at today's hearing.
8	I would also like to thank at least some of the
9	people who have put in a tremendous amount of work to
10	organize this hearing today. From the Department of
11	Justice, Joe Matelis, Gail Kursh, Ed Eliasberg and
12	Brandon Greenland, and from the Federal Trade
13	Commission, Patricia Schultheiss, Doug Hilleboe,
14	Elizabeth Argeris and Ruth Sacks, as well as the staffs
15	of the International Divisions of both agencies.
16	We are honored to have assembled for this
17	morning's session a distinguished panel of senior
18	officials from several of our fellow competition
19	agencies from around the world. They will discuss how
20	their agencies apply their antitrust laws to single-firm
21	conduct and alleged abuses of dominance.
22	Our panelists this morning are Philip Lowe, the
23	Director General for Competition of the European
24	Commission; Hideo Nakajima, the Deputy Secretary General
25	of the Japan Fair Trade Commission; Eduardo Perez Motta,

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1	the President of the Mexican Federal Competition
2	Commission; and Sheridan Scott, the Commissioner of
3	Competition of the Canadian Competition Bureau.
4	I would now like to turn over the podium to my
5	co-moderator, Jerry Masoudi.
6	MR. MASOUDI: Thank you, Randy.
7	Welcome to today's session in our ongoing series
8	of panels on single-firm conduct. The Department of
9	Justice Antitrust Division and the FTC are jointly
10	sponsoring these hearings to help advance the
11	development of the law under Section 2 of the Sherman
12	Act.
13	We have had a number of previous sessions. On
14	June 20, we had a session that included opening remarks
15	from FTC Chairman Debbie Majoras and Assistant Attorney
16	General Tom Barnett of the Antitrust Division, as well
17	as comments from Dennis Carlton, who will soon be a
18	Deputy Assistant Attorney General at the Department of
19	Justice, and Herbert Hovenkamp.
20	On June 22nd, we had panels on predatory pricing
21	and predatory buying, and then on July 18th, we had a
22	session on unilateral refusals to deal. Transcripts
23	from these sessions are available on the DOJ and FTC web
24	sites, and transcripts of this session and future
25	sessions will also be made available.

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1	Today we will concern ourselves with how
2	allegations of anticompetitive single-firm conduct are
3	treated in jurisdictions outside the United States and
4	related international issues. This morning we will be
5	hearing from our panel of distinguished enforcers, and
6	then in the afternoon, we will hear from practitioners
7	and academics active in the international area.
8	First, we will have approximately 20 minutes per
9	panelist to give an opening presentation. We will then
10	have a 15-minute break, and finally, we will have a
11	moderated discussion period. Our discussion today will
12	include an opportunity for our panelists to respond to
13	each other's presentations. So, our first panel I think
14	will end at about noon, and we will start back up after
15	a lunch break at 1:30.
16	I would like to join Randy in thanking the
17	staffs of the FTC and the Antitrust Division for helping
18	put together today's presentation, and I will now turn
19	it back to Randy to give a more detailed introduction of
20	our panelists.
21	MR. TRITELL: Before introducing our first
22	speaker, I would just like to reiterate that the U.S.
23	agencies consider these hearings to be extremely
24	important. In particular, regarding today's session,
25	given the large and increasing number of jurisdictions

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1	that apply antitrust laws to single-firm conduct and as
2	commerce increasingly crosses national borders, it is
3	fitting and important that we hear the views and learn
4	from the experience of our international colleagues as
5	we try to both broaden and deepen our understanding of
6	the issues in this critical area.
7	I am going to provide a brief introduction to
8	each of our speakers before their presentations, and I
9	direct you to the more detailed biographical information
10	in the packet outside this room.
11	First we will hear from Philip Lowe, who, again,
12	is the Director General for Competition in the European
13	Commission. Before his appointment to that post, Philip
14	was first in private industry and then served in a
15	variety of capacities in the European Commission,
16	including as Director of the Merger Task Force of the
17	Competition Directorate, head of the Cabinet of the
18	European Commissioner for Transport, Director General
19	For Development, head of the Cabinet of the Commission's
20	Vice President, and the Acting Deputy Secretary General.
21	Philip?
22	MR. LOWE: Well, good morning, everyone, and
23	thank you, Randy and Jerry. I'm very grateful to
24	Chairman Debbie Majoras and Assistant Attorney General
25	Tom Barnett for giving me the opportunity to take part

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1	in this joint FTC-DOJ set of hearings on Section 2 of
2	the Sherman Act. These hearings seem to reflect a
3	strong interest throughout the world over the last few
4	years in what you call single-firm conduct.
5	At the International Competition Network's
6	conference in Capetown last May, a new working group was
7	launched on international conduct. The OECD has
8	arranged round tables on issues related to single-firm
9	conduct, and numerous conferences have had single-firm
10	conduct appearing on the agenda.
11	At the Commission, we have 40 years of case law
12	related to the application of Article 82 of the European
13	Community Treaty. Article 82 is the treaty article
14	prohibiting abuses of dominant position, so broadly
15	equivalent to your Section 2, although as you realize,
16	the European structure requires a firm to be dominant
17	before it can be caught by any issue of abuse.
18	Of course, we have recently been reflecting very
19	carefully on the coherence and the consistency of our
20	policy under the Treaty and Article 82, and we thought
21	it was a logical step, after having reformed or, say,
22	modernized the application of Article 81, the article
23	dealing with agreements and merger control regime, that
24	we moved our policy in the area of Article 82 more
25	towards an effects-based approach in line with what we

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1	have initiated under Article 81, the merger control.
2	This required, nevertheless, a thorough review of the
3	policy so far and, indeed, the case law which was at the
4	back of it.
5	The application of Article 82 was, I think,
6	widely criticized as being fragmented without guiding
7	principles and for applying in some instances general
8	form-based criteria whose meaning was not always clear
9	in specific cases. To that extent, this would cause
10	Article 82 to be applied in cases where there would be
11	not any sufficient likely or even actual restrictive
12	effect on the market, and this would clearly be wrong.
13	There was much concern from the business
14	community about these false positives, so-called type
15	one errors. Likewise, it is a mistake and would be a
16	mistake if a form-based approach caused Article 82 not
17	to be applied to the cases in which there was likely or
18	actual harm to the market, false-negatives or type two
19	errors.
20	The vocal parts of business were perhaps less
21	concerned about these errors, but as an authority
22	charged with, in principle, protecting consumer welfare,
23	an objective which the Commission and in particular my
24	Commission have underlined in the last few years, I
25	believe we've got to be concerned about both types of

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1	errors, and this is a fundamental reason for our review
2	of Article 82.
3	After some initial internal debate, we involved
4	our colleagues in the national competition authorities
5	in the EU Member States in discussions about the review.
6	In December last year, we published a discussion paper
7	on the application of Article 82 to exclusionary abuses,
8	and we suggested what we regarded as a framework for the
9	continued rigorous enforcement of Article 82, building
10	on the economic effects-based analysis carried out in
11	recent cases.
12	The discussion paper aimed to describe a
13	consistent methodology for the assessment of some of the
14	most common abusive practices, which you have already
15	discussed in the context of these hearings, predatory
16	pricing, single branding, tying and bundling and refusal
17	to supply.
18	Now, we didn't in the discussion paper go
19	through all the aspects of Article 82, and I haven't got
20	time today either to go through every single aspect.
21	You will notice that one major difference between the
22	application of Section 2 and Article 82 is the explicit
23	reference in 82 to exploitative abuses, which we have
24	not dealt with in the discussion paper, and we have not
25	taken a decision about whether we will deal with them in

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1	any guidelines at the present time. However, there is
2	or there has been some comment from the public
3	consultation that we should, in fact, clarify what our
4	position is.
5	What I would like to do first of all, however,
6	is to emphasize some of the principles we set out in the
7	section of the paper called "A Framework For Analysis of
8	Exclusionary Abuses," and then I'll give you a flavor of
9	what has been the reaction to the principles and to the
10	methodologies outlined in the discussion paper during
11	the public consultation, which has been in force this
12	year.
13	The paper I think for the first time makes it
14	clear that the main objective of Article 82 is to serve
15	consumer welfare by protecting competition. We want to
16	protect competition on the market, not individual
17	competitors. The basic assumption is that the
18	competition will benefit consumers and that limits on
19	competition will hurt consumers. Of course, limits on
20	competition should, therefore, in principle be
21	prohibited unless it can be shown that efficiencies
22	outweigh the loss of competition for consumers.
23	Naturally, the paper states that we are
24	concerned about likely and actual effects on consumer
25	welfare in the short, medium and long term, and

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1	obviously the longer the conduct has been going on, the
2	more we will concentrate on actual effects. So,
3	consumer welfare we regard as the anchoring principle
4	for our competitive analysis, and we do not enter much
5	into what Debbie Majoras in her opening remarks at these
6	hearings called "the search for the Holy Grail test,"
7	and I agree entirely with her that the debate hasn't any
8	dimension or it could run the danger of becoming too
9	academic and losing practical significance.
10	That's not the aim of the discussion paper.
11	What we're attempting to do is to make a first
12	contribution to establishing principles and
13	methodologies which give clarity to business and the
14	legal community on what policy will apply and guidance
15	to those agencies, in particular in Europe, which we
16	have to apply them.
17	Now, there are two central questions which the
18	paper calls on us to ask. The first is, does the
19	conduct of a dominant firm have the capacity to
20	foreclose? This depends in good part on the form and
21	nature of the conduct, whether it is positive or
22	negative in its consumer effects. The answer to that
23	question is fairly obvious if one is dealing with
24	exclusive dealing. Sometimes it is less obvious to
25	distinguish between the capacity to foreclose and any

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1	other effect, for example, in the case of rebates, and
2	I'll come back to that in a moment.
3	The second question we ask is does the conduct
4	have a likely or actual market distorting effect.
5	Likely effects are, in our opinion, effects which in a
6	specific market context are predictable on the basis of
7	experience and/or a solid theory of economic harm. The
8	likelihood and significance of foreclosure depends on
9	factors such as preexisting market power and barriers to
10	expansion or entry, the market coverage of the conduct,
11	and in the case of selective foreclosure, the importance
12	of the targeted customers or competitors.
13	Actual effects are established on the basis of
14	evidence of market evolution in the past, and this
15	doesn't necessarily involve complicated economic
16	studies. It can be presented as facts which can be then
17	investigated by the authorities on the basis of the
18	evidence submitted to it.
19	Now, coming back to rebates, as I mentioned
20	earlier, it is not immediately obvious whether any
21	particular rebates have the capacity to exclude. To
22	answer that question, we first need to ask, exclude who?
23	In the paper, we propose that for rebates as well as for
24	other types of price-based conduct, the exclusion of as
25	efficient competitors is abusive.

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1	Now, this is not the only test which can be used
2	to show abuse. It nevertheless appears to us in
3	principle as a useful one, as it allows dominant firms
4	to assess their conduct based on their own costs. A
5	failed price/cost test is, of course, not the end of the
6	analysis. We would still have to show a likely market
7	foreclosure effect.
8	And by the way, as public consultation has
9	shown, one test may not be the final answer to the
10	analysis we need to carry out. There may be several
11	tests which have been proposed which are relevant to a
12	particular case. Nevertheless, we are comforted in the
13	view that the benchmark of the efficient competitor on
14	the market is one which is extremely important to judge
15	the behavior of the dominant company against it.
16	Now, the paper also states that if conduct
17	clearly creates no efficiencies and only raises
18	obstacles to residual competition, there is no need to
19	carry out a full effects-based analysis. Such conduct
20	can be presumed to be abusive. However, as with any
21	presumption, the dominant company can, of course, rebut
22	it by providing evidence that the conduct will create
23	efficiencies, or as our case law refers to in the
24	opinion of the court, is objectively justified.
25	Now, exclusionary conduct could escape the

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1	prohibition of Article 82 if the dominance undertaken
2	can provide an objective justification for its behavior
3	or if it can demonstrate that its conduct produces
4	efficiencies which outweigh the negative effect on
5	competition. There is an objective justification where
6	the dominant company is able to show that the otherwise
7	abusive conduct is actually necessary on the basis of
8	objective practice external to the parties involved; in
9	particular, external to the dominant company.
10	The dominant company may, for example, be able
11	to show that the conduct concerned is necessary for
12	safety or health reasons related to the dangerous nature
13	of the product in question, but that necessity, that
14	concept necessity, must be based on objective practices
15	that apply in general for all undertakings in the
16	market.
17	Now, I want to come on to efficiencies. The
18	same conduct can, of course, have effects which enhance
19	efficiency and effects which restrict competition, and
20	in this paper we propose a weighing or balancing
21	approach where efficiencies are balanced against the
22	negative effects on competition, and that balancing
23	exercise determines whether or not the conduct is
24	abusive.
25	Now, this test is important, and notwithstanding

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1	all the discussions about how efficiencies should be
2	assessed and upon whom the burden of proof should lie,
3	the one core element that I cannot see us moving away
4	from is that fundamentally, there should be this
5	balancing, and ultimately, that balancing of the
6	efficiencies against the distorting effects is in the
7	responsibility of the agency concerned, although you can
8	argue the burden of proof of efficiencies on the side of
9	the defendant must go beyond simple provision of
10	evidence to actually argue why the behavior is necessary
11	and why it is beneficial to consumers.
12	The purpose of competition law should be to
13	maximize consumer welfare. Of course, consumer welfare
14	can be harmed by inappropriate, disproportionate
15	intervention by a regulatory body, but it can also be
16	harmed by inappropriate reluctance to intervene. As I
17	mentioned earlier, in working towards maximizing
18	consumer welfare, we need to be as concerned about
19	under-enforcement as over-enforcement, and we need to be
20	as concerned by not giving up emphasis on efficiencies
21	as we are by giving too much emphasis to efficiencies.
22	Now, as to how we carry out this analysis in
23	practice, EC law already provides us with a framework.
24	Certain types of conduct can be analyzed both under
25	Article 81 and under 82. Consistency requires that the

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1	conditions for assessing efficiencies defense under 82
2	be similar to what we have as a policy with respect to
3	restrictive agreements under Article 81 and the
4	exemptions under Article 81-3.
5	The efficiencies must be realized or are likely
6	to be realized by the conduct. The conduct must be
7	indispensable to realize the efficiencies. Overall,
8	consumers should benefit from the efficiencies, there
9	must be consumer buy-in, and competition shouldn't be
10	eliminated as a result of the practices concerned.
11	We also discussed the issue in the paper of the
12	extent to which -- the market power of the company, and
13	here again, I think this is a departure for us as an
14	agency. We identify in I hope a convergent way with
15	U.S. thinking the concept of dominance mostly with the
16	concept of significant market power. That market power,
17	if it is very high, as indicated by the strength of the
18	constraints upon the dominant company, may mean that we
19	will have to undertake the balancing of efficiencies in
20	a much more rigorous way if, indeed, the strength of the
21	market power is very great.
22	The burden of proving a capability to foreclose
23	and the likely or actual foreclosure, and I emphasized
24	this before, it physically falls on the authority or the
25	plaintiff, but the burden of proving an objective

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1	justification for efficiencies should be on the dominant
2	company. Ultimately, however, the agency should carry
3	out the assessment, and that assessment in our system is
4	controlled by the courts as to whether we have actually
5	made that balancing in a way which doesn't project any
6	obvious misinterpretation of the facts or bad judgment
7	as to the likely effects.
8	Now, let me indicate some areas of reasonable
9	consensus internationally and in Europe as to the ideas
10	in the discussion paper. There's certainly some welcome
11	for the overall aim of clarifying the application of
12	Article 82 and for an effects-based approach. There's a
13	broad welcome for the clarification that the ultimate
14	objective is to protect consumers, and some commentators
15	have frequently had the impression that it was
16	otherwise.
17	There's broad consensus on the aim to protect
18	competition and not competitors, and an authority must
19	be free to act where harm remains likely but has not yet
20	materialized. We don't have to wait until a patient is
21	dead before we try to revive them. And there is an
22	emphasis throughout the commentary on the need for safe
23	harbors and presumptions of both legality and illegality
24	to ensure that the effects-based approach is applied in
25	a practical and operational way, but, of course, they

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1	have to be based on sound economic principles, and the
2	attempts to define the safe harbors shouldn't result in
3	more uncertainty than actually leaving the thresholds
4	outside any guidelines.
5	For example, if the pressure is an effects-based
6	approach to lower the safe harbor to a very restrictive
7	level in order to look at an operation in detail on the
8	basis of economic or econometric analysis, frequently we
9	are giving the impression that we would systematically
10	engage in very detailed economic effects-based analysis
11	above the safe harbor, and this has given rise to some
12	commentary that we have, in fact, tried to extend the
13	degree of the outreach of Article 82 as a result of the
14	proposed guidelines.
15	There are some difficult open questions. We
16	consider the conduct that clearly creates no
17	efficiencies and only raises obstacles to competition
18	should be presumed to be abusive, but what are the
19	classes of conduct which are so nakedly abusive that we
20	have a per se rule prohibiting them? Similarly, conduct
21	which is clearly competition on the merits should be
22	legal, but we have the challenge of defining the
23	categories of the conduct which fall into that area as
24	well.
25	When it comes to price-based conduct, how far

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1	should we rely on price/cost tests? What are the
2	alternatives to the price/cost tests? How exactly
3	should they be formulated? For example, we need to show
4	profit sacrifice to prove predation. Nothing like a
5	tongue-twister. Is profit sacrifice also an appropriate
6	test for other price-based conduct, for instance,
7	rebates?
8	There is a lot of commentary in the U.S. about
9	the explicit need for a recoupment test in predation. I
10	have to say that we're quite sensitive to that comment,
11	our traditional view being that if we have a good story,
12	a robust story, about the dominance of a company, then
13	it should be capable of recouping. However, depending
14	on the predictability and the operationality of any
15	methodology we announce in guidelines, we are certainly
16	giving thought to the need for an explicit recoupment
17	test.
18	The role of the so-called "meeting competition
19	defense" is most clear when it comes to price
20	discrimination. In the U.S., you have even stated
21	explicitly, you have got it in the acts. It makes
22	perfect sense that a company can argue that the reason
23	it charges different prices to different customers is
24	that competition forces it to do so, but it's much less
25	clear what the meeting competition defense should have

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1	as a role beyond price discrimination.
2	For example, I'm not sure it should be a defense
3	in itself when a company argues that it is losing money
4	on particular sales by charging prices below avoidable
5	costs because competition forces it to do so. That begs
6	the question why the company wants to make those sales
7	at all. It may have a good reason for doing so, but it
8	seems to me that that reason then should be the defense,
9	not the meeting competition defense.
10	The reactions to our paper show definite support
11	for efficiencies playing a role in the analysis, and in
12	that respect, there is an ongoing debate, which I hope
13	will end very quickly, on who should have the burden of
14	proof. All I can say is that the approach of expecting
15	an agency to analyze potential efficiencies is one which
16	is bound to fail because the agency has less information
17	than the companies who are arguing for the efficiencies,
18	and the approach that the -- well, that some say the
19	defendants should be balancing efficiencies against
20	distorted effects is equally unrealistic, because it is
21	the agency who has the major role in analyzing what the
22	likely distorted effects are.
23	I have only touched the surface, ladies and
24	gentlemen, of the issues raised in our paper. It proves
25	I think that we are at the same degree of reflection,

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1	review, thorough review of our policy, as you are in the
2	States. All I can say is that the major challenges for
3	us are no longer in the area of general principles, but
4	in the area of balancing legal certainty,
5	operationality, against an effects-based approach which
6	gives a right answer and avoids type one and type two
7	error.
8	Thank you very much.
9	(Applause.)
10	MR. TRITELL: Thank you very much, Philip, for
11	getting us off to a strong start this morning.
12	I would now like to introduce our next speaker,
13	Hideo Nakajima, Deputy Secretary General of the Japan
14	Fair Trade Commission. In that capacity, Mr. Nakajima
15	is in charge of international affairs, where he heads
16	the Japanese delegations to multilateral organizations
17	and bilateral consultations among competition
18	authorities.
19	Before joining the JFTC, Mr. Nakajima worked
20	with the Asian Development Bank in Manila as Assistant
21	to the President and Director General of Budgeting and
22	Personnel Management, and for the Ministry of Finance
23	where he served as Research Director of the
24	International Finance Bureau and Chief Planning Officer
25	of Japan's Fiscal Investment and Loan Program.

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1	Mr. Nakajima, the floor is yours.
2	MR. NAKAJIMA: Thank you very much. My name is
3	Hideo Nakajima. I'm the Deputy Secretary General of
4	Japan's Fair Trade Commission. I am really grateful to
5	the Department of Justice and the Federal Trade
6	Commission for the invitation to participate in this
7	important panel. It's a great honor to be here.
8	I was asked by DOJ and FTC to talk about
9	specific examples of how JFTC applies our consumer
10	policy to single-firm conduct. In doing so, first let
11	me take a few minutes to briefly explain about our
12	general statutory or legal framework on the regulation
13	of single-firm conduct, since such framework, I believe,
14	looks different from that of United States as well as
15	that of the EU, and then I would like to present several
16	specific cases regarding single-firm conduct in our
17	nation.
18	So, first, let me explain the basic framework of
19	our Antimonopoly Act, which is Japan's basic competition
20	law. In our country, single-firm conduct is regulated
21	by two different provisions. One is private
22	monopolization; the other is unfair trade practices.
23	First, private monopolization. Private
24	monopolization is prohibited in Section 3 of the AMA and
25	defined in Section 2 of the Act as those business

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1	activities of a firm which brings about a substantial
2	restraint of competition in any particular field of
3	trade by excluding or controlling the business
4	activities of other firms.
5	Exclusion is interpreted as making it difficult
6	for other firms to continue their business activities or
7	preventing other firms from entering the market.
8	"Control" means to deprive other firms of their freedom
9	of decision-making concerning their business activities
10	and to force them to obey the controller's intents.
11	Regarding "substantial restraint of
12	competition," the Tokyo High Court opined that
13	"restraining competition substantially means bringing
14	about a situation in which competition itself has
15	significantly lessened and thereby a specific firm or
16	firms can control the market by determining freely, to
17	some extent, prices, qualities, volumes, and various
18	other terms on its or their own volition."
19	Unlike U.S. and EC regulations on single-firm
20	conduct, the provision of the AMA concerning private
21	monopolization does not refer to the position of a
22	relevant firm in the market. Therefore, in our legal
23	framework, dominant position of a firm or firm's
24	dominance is not a statutory prerequisite for
25	establishing private monopolization, and in determining

26

1	whether a specific single-firm conduct falls under
2	private monopolization, that is, whether its specific
3	unilateral conduct has substantially restrained
4	competition in the market, various relevant factors
5	should be considered in a comprehensive manner. Those
6	factors to be taken into account would include market
7	characteristics, market shares, entry barriers, buyer
8	power as well as the relevant unilateral conduct and its
9	anticompetitive effects.
10	Of course, it would be quite natural to presume
11	that a firm which can control the market with some
12	latitude of its own volition by excluding or controlling
13	the business activities of other firms usually has a
14	certain degree of market dominant position or
15	substantial market power. Actually, as we will see
16	later, that is the case for all the private
17	monopolization cases the JFTC has handled so far.
18	Regarding the remedial measures for private
19	monopolization, the JFTC is to issue an order to cease
20	the conduct of exclusion or control bringing about
21	private monopolization, and to take necessary measures
22	to restore competitive situation.
23	In addition, by the amendments to the AMA, which
24	became effective at the beginning of this year,
25	administrative surcharges are now to be imposed on a

27

1	firm in case of private monopolization caused by the
2	control of other firms' business activities. This is
3	because such controlling type of private monopolization
4	where the powerful firm dominates the business
5	activities of other firms in the market and thereby
6	control the prices, volumes of supplies, customers of
7	their relevant products or services is considered not
8	different from cartels in terms of its economic
9	consequences on competition in a market.
10	Criminal sanctions such as imprisonment (up to
11	the maximum of three years) and fines (up to the maximum
12	of 5 million yen in case of natural persons and 500
13	million yen in case of legal persons) are applicable to
14	private monopolization like cartel cases. However, so
15	far criminal sanctions have never been imposed on any
16	private monopolization cases.
17	Another provision stipulating regulations on
18	single-firm conduct in the AMA is unfair trade
19	practices, which are prohibited by Section 19 of the
20	AMA. Unfair trade practices refer to several specific
21	types of conduct designated by the JFTC in its
22	notifications as ones tending to impede fair
23	competition.
24	Among various types of unfair trade practices,
25	such as, one, unjust refusal to deal, two, unjust

28

1	dealings on exclusive terms, three, unjust dealings on
2	restrictive terms, four, unjust low sales prices, five,
3	unjustly discriminatory prices, six, unjust tie-in
4	sales, and seven, unjust interferences with competitor's
5	transactions, can be considered to be used as means to
6	create or maintain monopolies by controlling or
7	excluding competitors, and regulations against those
8	types of conduct are aimed at preventing private
9	monopolization at an incipient level.
10	In this connection, let me just touch upon the
11	multiple functions which the regulation on unfair trade
12	practice under the Act are to serve. That is, in
13	addition to supplementary function to regulations on
14	private monopolization, which I just referred to, unfair
15	trade practices regulate other types of single-firm
16	conduct, such as customer inducement by deceptive or
17	unjust benefits practices, and abuse of superior power
18	or what we call dominant bargaining position, which is
19	considered as undermining the very basis of fair
20	competition itself. Maybe it's better to briefly
21	explain here what dominant bargaining position means in
22	AMA to avoid possible misunderstanding.
23	The dominant bargaining position means that
24	large-scale firm, like a large-scale retailer, has a
25	superior power in bilateral transactions with it's

29

1	counterpart, like by small-scale supplier who is heavily
2	dependent on such large-scale firm for their business.
3	The large-scale firm does not necessarily have to be
4	absolutely dominant in a relevant market. In Japan,
5	abusive conduct by such dominant bargaining power, such
6	as coercive behaviors by large-scale retailer against
7	his small-scale suppliers heavily dependent on the
8	retailer have been a serious concern among the public,
9	and JFTC has recently dealt vigorously with those cases
10	among various types of unfair trade practice.
11	Anyway, a single-firm conduct falls under the
12	unfair trade practices, thereby prohibited, if such a
13	conduct is found to belong to any of these specified
14	conducts designated by the JFTC and to tend to impede
15	fair competition. "Tending to impede fair competition"
16	is assumed not to have comparable anticompetitive effect
17	to "substantial restraint on competition," which is
18	necessary for violation of the prohibition of private
19	monopolization.
20	As such, the regulations on the unfair trade
21	practices are basically applicable to both "dominant"
22	firms and "nondominant" firms. However, regarding some
23	types of conduct designated by the JFTC as unfair trade
24	practices, for example, unjust dealing on exclusive
25	terms, whether a firm is "influential in the market" or

30

1	not, is considered.
2	According to the Guidelines Concerning
3	Distribution Systems and Business Practices issued by
4	the JFTC, whether a firm is "influential in a market" or
5	not is determined by, among other things, the firm's
6	market share or its market position. Here, in order for
7	a firm to be found influential, either the market share
8	of no less than 10 percent or the market position among
9	the top three is prerequisite.
10	Regarding remedies for unfair trade practices,
11	as in the case of private monopolization, a cease and
12	desist order, or order of taking elimination measures,
13	is to be issued, though unlike private monopolization,
14	neither of administrative surcharges nor criminal
15	sanctions are to be imposed.
16	Now, let me go to the enforcement activities of
17	the JFTC on single-firm conduct regulations.
18	First, the private monopolization. Since the
19	enactment of the AMA in 1947, the JFTC has found illegal
20	a total of 15 cases of private monopolization, and for
21	the last ten years, we have dealt with nine cases. Most
22	of the recent cases are excluding type of private
23	monopolization. On the other hand, for the last ten
24	years, we have handled a total of more than 200 cartel
25	cases.

31

1	As already mentioned, whether some specific
2	single-firm conduct is found to fall under private
3	monopolization is to be determined by taking into
4	consideration various relevant factors comprehensively
5	on a case-by-case basis. However, in actual
6	enforcements, we have taken legal measures only for
7	those cases where substantial restraints of competition
8	in the market have been quite obvious. Let me take up
9	two examples.
10	The first one is the case against Paramount Bed
11	Company, Limited (Paramount Bed), where the decision was
12	issued on March 31, 1998.
13	The relevant market of this case was the one on
14	the hospital bed ordered by Tokyo Metropolitan
15	Government's Finance Department, and the Paramount Bed
16	held approximately 90 percent share in this market and
17	other two manufacturers held the rest. Seeing the whole
18	Japanese market of the hospital bed, the market
19	situation was not so different, and Paramount Bed
20	manufactured and sold the majority of hospital beds
21	ordered by the government or by local municipalities.
22	Under such a market condition, Paramount Bed
23	approached the procurement officials to craft tender
24	specifications that would only apply to products
25	manufactured by Paramount Bed. By means of this

32

1	conduct, Paramount Bed was able to exclude the business
2	activities of other hospital bed manufacturers.
3	Also, in the situation that manufacturers were
4	not allowed to participate in bids, Paramount Bed
5	controlled the business activities of bid participants
6	by choosing a successful bidder among the participants
7	who sell its beds, and by indicating respective bidding
8	prices to successful bidders as well as other bidding
9	participants. Moreover, Paramount Bed provided funds to
10	bid participants in order to ensure that those
11	participants would obey the instruction of Paramount
12	Bed.
13	The JFTC found that the conduct by Paramount Bed
14	fell under the private monopolization, as it excluded
15	the business activities of other hospital bed
16	manufacturers and controlled the business activities of
17	its supplier and therefore substantially restricted
18	competition in the market by exercising the monopoly
19	power (dominance). Therefore, the JFTC ordered
20	elimination measures to Paramount Bed.
21	The second case is the one against Hokkaido
22	Shimbun Press, where the consent decision was issued on
23	February 28, 2000.
24	The relevant market of this case is the daily
25	newspaper market in the Hakodate area, which is located

33

1	in the southern part of Hokkaido. Hokkaido Shimbun
2	published a general daily newspaper that accounted for a
3	majority of general daily newspaper publications in the
4	Hakodate area.
5	Under the market circumstances, when Hakodate
6	Shimbun was entering the daily newspaper market in the
7	Hakodate area, Hokkaido Shimbun obstructed the entry of
8	Hakodate Shimbun and carried out the following actions
9	to hinder their business:
10	First, Hokkaido Shimbun applied for trademark
11	registration to the Patent Agency regarding nine
12	mastheads, including "Hakodate Shimbun," that would be
13	used when publishing newspapers in the Hakodate area,
14	although they had no specific plans to use those
15	mastheads.
16	Second, the main newspaper publishers in
17	Hokkaido received articles through Jiji Press and Kyodo
18	News Service. Based on a priority policy with prior
19	contractors where Jiji Press would not deliver articles
20	against the will of the present contractors, Hokkaido
21	Shimbun implicitly solicited Jiji Press not to deliver
22	articles to the Hakodate Shimbun so that Jiji Press and
23	Hakodate Shimbun could not conclude a delivery
24	agreement.
25	Third, to make it difficult for Hakodate Shimbun

34

1	to earn advertisements revenues, even in the situation
2	where damage to Hokkaido Shimbun itself was expected,
3	Hokkaido Shimbun split the price of inserting
4	advertisements in local edition in half for small and
5	medium-sized companies, who would be the targets for
6	Hakodate Shimbun for collecting advertisements.
7	The JFTC found that the conduct by Hokkaido
8	Shimbun fell under excluding type of private
9	monopolization, as it excluded the business activities
10	of Hakodate Shimbun and substantially restricted
11	competition in the market. Hokkaido Shimbun appealed
12	for a hearing procedure against the recommendation but
13	finally accepted to take measures issued by the JFTC.
14	Next, enforcement activities of unfair trade
15	practices.
16	For the last ten years, the JFTC has taken legal
17	measures against around 50 cases of unfair trade
18	practices, including 10 cases of dealing on exclusive or
19	restrictive terms, and nine cases of interference with
20	transaction.
21	In determining whether any specific single-firm
22	conduct falls under unfair trade practices, that is,
23	whether it tends to impede fair competition, basically
24	speaking, as in the case of private monopolization,
25	various relevant factors should be taken into account on

35

1	a case-by-case basis. For example, in a case concerning
2	discriminatory pricing, the Tokyo High Court opined that
3	various factors, including the structure and development
4	of the relevant market, the difference of supply costs,
5	market position of the concerned retailer (market
6	share), and subjective intentions for setting price
7	differentials would need to be taken into account in a
8	comprehensive way (April 27, 2005).
9	On the other hand, in this connection, it should
10	be noted that regarding unfair trade practices, the JFTC
11	has designated in its series of notifications those
12	types of single-firm conduct which are likely to tend to
13	impede fair competition, and has also clarified more
14	specifically what kinds of conduct violate our AMA as
15	unfair trade practices in various guidelines, including
16	Guidelines Concerning Distribution Systems and Business
17	Practices which was issued in 1991 to address the final
18	report of U.S.-Japan Structural Impediments Initiative
19	in 1990. Therefore, we believe that there has been a
20	certain level of clarity, predictability and
21	transparency secured in the determination of unfair
22	trade practices.
23	Let me take up one example of the case of unfair
24	trade practices, which involved a market dominant
25	company in Japan, Microsoft KK (MSKK), a subsidiary of

36

1	Microsoft Corporation, and the recommendation decision
2	was issued on December 14, 1998.
3	According to the decision, the market situation
4	of the case was as follows. First, MS Excel had been
5	popular among consumers since 1993 and had acquired the
6	top market share for spreadsheet software. On the other
7	hand, MS Word was originally an English word processor
8	and it was said that the function for Japanese language
9	did not work very well, and thus, "Ichitaro" produced by
10	the Japanese software company had the top share for word
11	processor software in Japan in 1994.
12	In the market situation, MSKK decided to take a
13	policy to make PC manufacturers pre-install both MS
14	Excel and MS Word in their PCs in 1995. On the other
15	hand, many PC manufacturers, including major ones, asked
16	MSKK to license only MS Excel because they preferred to
17	pre-install Ichitaro rather than MS Word. However, MSKK
18	rejected this proposal and finally made these PC
19	manufacturers accept the license agreement where PC
20	manufacturers should pre-install not only MS Excel but
21	also MS Word in their PCs.
22	In addition, MSKK decided to take a position
23	that it made PC manufacturers pre-install not only MS
24	Excel and MS Word but also MS Outlook schedule
25	management software in their PCs, in 1996. Since there

37

1	was another type of schedule management software, which
2	held the top market share, and was called Organizer
3	produced by Lotus Corporation, a part of the PC
4	manufacturers asked MSKK to license only MS Excel and MS
5	Word in order to pre-install Lotus Organizer instead of
6	MS Outlook. However, MSKK again rejected the proposal
7	and finally made all manufacturers accept installing MS
8	Outlook as well as both MS Excel and MS Word in their
9	PCs.
10	The JFTC found that MSKK unjustly made PC
11	manufacturers buy its word processor software by tying
12	it with its popular spreadsheet software. In addition,
13	MSKK unjustly made PC manufacturers buy its schedule
14	management software by tying it with its spreadsheet
15	software and word processor software. These conducts
16	fell under the category of illegal tie-in sales.
17	In summary, as I have mentioned, under our AMA,
18	single-firm conduct can be regulated by either private
19	monopolization or unfair trade practices. In both
20	cases, a case-by-case basis approach is to be taken in
21	determining whether concerned conduct is unlawful or
22	not, by considering all relevant factors
23	comprehensively.
24	Finally let me touch upon the current
25	discussions related to regulations against single-firm

38

1	conduct which have been developed in the Antimonopoly
2	Act Study Group established in Cabinet Office as a
3	private discussion body under the Chief Cabinet
4	Secretary. At that group, there is an argument that
5	surcharge should be imposed on not only controlling type
6	of private monopolization but also excluding type of
7	private monopolization.
8	Also, others argue that even some types of
9	unfair trade practices should be subject to surcharge.
10	As an official of the JFTC, since these discussions
11	would affect the future regulation system against
12	single-firm conduct, I would like to carefully study
13	various views of relevant parties and continue to
14	monitor future discussion in this study group.
15	Finally, needless to say, ongoing discussions
16	here in the United States and the EC on single-firm
17	conduct is very helpful and valuable to advance our own
18	thinking on the regulations on single-firm conduct. We
19	will continue to closely monitor such discussion.
20	Thank you very much for your kind attention.
21	(Applause.)
22	MR. TRITELL: Thank you very much, Mr. Nakajima,
23	for that perspective from Japan.
24	Moving to Mexico, I'm pleased to introduce
25	Eduardo Perez Motta, the Chairman of Mexico's Federal

39

1	Commission on Competition. Before joining the CFC,
2	Eduardo was ambassador and permanent representative of
3	Mexico to the World Trade Organization. He's also
4	headed the Representation Office of the Ministry of
5	Trade and Industrial Development in Brussels, where he
6	coordinated the Mexican team negotiating the Free Trade
7	Agreement between Mexico and the European Union.
8	Eduardo?
9	MR. PEREZ MOTTA: Good morning. I would like to
10	first of all thank the DOJ and the FTC, my good friends,
11	Tom Barnett and Debbie Majoras, for inviting me to
12	participate in these hearings. It is a real pleasure
13	and a privilege to be here today.
14	For a relatively small economy, best practices
15	abroad become an important instrument to promote or to
16	maintain or to try to maintain best practices within
17	your country, and this was actually the case of Mexico,
18	where we recently had a very important overhaul in our
19	legal framework in competition.
20	So, let me first try to see if this works. It
21	is not responding.
22	(Pause in the proceedings.)
23	MR. PEREZ MOTTA: Okay, thank you.
24	Well, also the heart of competition policy in
25	Mexico comes actually from our Constitution. Article 28

40

1	in our Constitution basically uses very strong words,
2	and it comes from 1857, but with very strong words
3	against monopolies, it says that the law will severely
4	punish all kinds of concentration in one or a few hands
5	of basic commodities, all agreements, processes or
6	combinations undertaken by producers, industrialists,
7	tradesmen, et cetera, to prevent competition or free
8	market access and force consumers to pay exaggerated
9	prices. That's the way it is written in our
10	Constitution.
11	And also, it will banish whatever constitutes an
12	undue exclusive advantage in favor of one or more
13	persons and against the public in general or a certain
14	social class. That's the origin and that's the heart of
15	competition policy in Mexico.
16	Even though this is a very old basic origin of
17	the competition law, it is not until 1993 when we
18	created the Federal Law of Economic Competition, which
19	translates those definitions in specific procedures.
20	So, it was not until 1993 where also the Federal
21	Commission on Competition for Mexico was created. So,
22	our institution is relatively young, and it was a month
23	ago when we published the first real overhaul of the
24	Federal Law of Economic Competition. That was a reform
25	approved at the end of the last legislature, which was

41

1	April, April this year, where it was published about a
2	month ago.
3	So, those specific procedures in our law
4	basically go in three instruments. First, merger review
5	process. Second, what we call absolute monopolistic
6	practices, which is basically cartels. And third, what
7	we call relative monopolistic practices, which is
8	precisely the topic of today's discussion, and it's in
9	general single-firm dominant conduct.
10	So, I will concentrate in the last of our
11	instruments, but I would have to say that in each and
12	every one of those instruments, in the last reform, we
13	got an improvement either of our procedures or we got an
14	important simplification of procedures, like in the case
15	of the merger review process, it was a major
16	simplification of the procedures in Mexico. We
17	increased the thresholds, we created a fast-track
18	mechanism, and we also included efficiency
19	considerations as an obligation for the Commission to
20	consider when evaluating a merger.
21	In the case of absolute monopolistic practices,
22	we introduced a major reform, which was the leniency
23	program, which is the state of the art. We were
24	inspired from best practices in the U.S., best practices
25	in the European Union, as well as in Canada, we used

42

1	OECD recommendations to basically build that program,
2	and that's a very interesting situation, because this is
3	the only kind of program, the leniency program in
4	Mexico, in the case of competition law, is the only area
5	where that applies in our law, in general.
6	So, we don't have that -- that this is the first
7	time that we introduced this kind of legislation, which,
8	of course, has a very important mechanism of incentives
9	basically to change the interests of players to create
10	that kind of solutions or even to just stabilize them in
11	the medium term.
12	So, going directly to single-firm dominant
13	conduct, we have to distinguish in our law two types of
14	situations. First, when we evaluate relative
15	monopolistic practices, we basically make a difference
16	between what we should consider as specific conduct of a
17	single firm which is dominant in a specific market and
18	this second one, which is regulation.
19	For the first one, for conduct, basically what
20	our laws says is that the relative monopolistic
21	practices are those acts or agreements or combinations
22	whose object or effect is to unduly exclude,
23	substantially impede access, or establish exclusive
24	advantages in favor of one or more persons, and this is
25	subject, of course, to the rule of reason, and those are

43

1	the articles in our law which are used to address these
2	issues.
3	Now, in terms of regulation, this is a
4	completely different situation, where you could have a
5	declaration on effective competition conditions, which
6	in this case the Commission, the Competition Commission
7	of Mexico, is empowered to resolve on the existence of
8	effective competition conditions as a prerequisite for
9	economic regulation, and this could be done either by a
10	sectorial regulator or by the Ministry of the Economy.
11	The way this analysis is made in our law is just
12	the following. The first step is to find out if the
13	practice exists, and we have those practices typified in
14	11 specific practices. We think that this typification
15	basically provides a legal certainty to the companies,
16	because they know exactly in which cases those practices
17	could be sanctioned or not as long as the other
18	conditions, of course, apply.
19	We have to demonstrate the object or effect of
20	that practice. It is clear that the size of the firm
21	does not demonstrate a harm necessarily. We also have
22	to apply the rule of reason. The agent has to have a
23	substantial market power in the relevant market, and it
24	is clear that competitor injury does not demonstrate a
25	violation. And finally, efficiencies. Efficiencies

44

1	must show that the conduct has a favorable effect on
2	competition or that those anticompetitive effects are
3	offset by consumer benefits.
4	So, in the end, what is important is to look at
5	the net effect on welfare, and as Philip was saying, in
6	this case, the burden of proof is on the side of the
7	company. So, basically the agency would use the
8	information and the arguments that the company is giving
9	in order to evaluate those efficiencies.
10	Now, in terms of those specific practices, as I
11	was saying, in our law, we have identified and typified
12	11 specific practices, which some of them are oriented
13	to single-firm dominant conduct, and some others are
14	other anticompetitive practices which are, of course, as
15	well subject to the rule of reason.
16	For the second type of practices, which are
17	other anticompetitive practices, we could include or we
18	include vertical market division by reason of geography
19	or time; vertical price restrictions; exclusionary group
20	boycotts; and discrimination in price, sales or
21	purchasing conditions. For single-firm dominant
22	conduct, we have identified tied sales, exclusive
23	dealing, refusals -- refusals to sale, predation,
24	loyalty discounts, cross subsidization, and raising
25	rivals' costs.

45

1	Of course, we have different cases that have
2	applied to each of these practices. For instance, in
3	the case of exclusive dealings, maybe the most important
4	case was the case of Coca-Cola, where we boast the
5	highest fine in the history of the Mexican Commission.
6	That was the case between Pepsi against Coca-Cola.
7	For the case of tied sales, maybe the case that
8	comes to my mind, was some ports in Mexico. They were
9	offering piloting services, and it happens that those
10	pilots in some of those ports also owned the boats.
11	They had a company where they offered the services of
12	the boats to transport the pilots to the ships, and it
13	happened that if you wanted to use a pilot, they gave
14	you the service only as long as you contracted at the
15	same time, the ships that transported those guys. So,
16	that was a case of tied sales, and we sanctioned those
17	pilots in this particular case.
18	The case of predation, this was an interesting
19	case. The most important one was on Chiclets. That was
20	a Warner-Lambert case against Adams, and in that case,
21	the case went off to the Supreme Court, and actually we
22	lost the case because the Supreme Court considered -- at
23	that time, the predation was part of a group of
24	practices which were not identified in the law. They
25	were in the rulings. So, basically the Supreme Court

46

1	said that because that was not typified in the law, it
2	was not possible to apply it. So, that was basically
3	their decision in terms of unconstitutionality of that
4	particular article. That was changed. That was changed
5	precisely in the reform that was just recently passed.
6	Actually, those cases, those five particular
7	practices, were the ones that originally were in our
8	rulings, and they were moved to the law in the recent
9	approval of the reform.
10	For the efficiency considerations, I would like
11	just to raise this in the case of WalMart in a recent
12	investigation in the Mexican Commission. The claim was
13	in this case that WalMart was pressuring its suppliers
14	to charge higher prices to its competitors under the
15	threat of suspending purchases of their products. Maybe
16	you have had a similar situation in the U.S. I'm not
17	really sure, but that could have been the case.
18	Efficiencies were the main arguments, and they
19	were offered by WalMart. They argued that lower prices
20	from suppliers resulted from cost reductions in its
21	distribution systems, better inventory management,
22	shorter average payment periods, et cetera, and those
23	efficiencies were translated into the lower prices for
24	consumers. So, that was the consideration, that the
25	weight of those arguments outweighed the possible

47

1	anticompetitive impact of that behavior, and the
2	Commission basically decided that the efficiency gains,
3	the net efficiency gains, were positive in this case,
4	and we closed that case.
5	So, let me briefly just end by speaking a little
6	bit about the sectorial cases, not the conduct of single
7	firm which has a dominant position in the market, but
8	the case when Mexico's competition law allows for price
9	regulation when this is warranted by competition
10	analysis, and this is important because this would apply
11	for most regulated sectors or for some unregulated
12	sectors when you have a situation of a lack of
13	competition in that particular market.
14	For the regulated sector, this is a much
15	clear-cut situation. You could have, in the case of
16	telecommunications, railroads or airports, a lack of or
17	the absence of competition conditions and then the need
18	to regulate prices in very specific cases.
19	In the second situation, which is when the
20	Executive has -- the Executive in Mexico has actually
21	the constitutional attribution to issue price controls,
22	and actually, the Mexican economy used to be, a few
23	years ago, a highly regulated economy. Most of the
24	prices were controlled during some time.
25	With the entrance into force of Mexico's

48

1	competition law in 1993, there was a specific regulation
2	on that. So, there was a specific restriction on that
3	attribution that could only apply when the Federal
4	Competition Commission could issue what we call a
5	Declaration of Lack of Competition Conditions, and only
6	in those conditions, prices would be regulated, and the
7	procedure to make this Declaration of Absence of
8	Competition Conditions was made in the recent reform of
9	the Mexican law.
10	One example of the first case, which is the one
11	in which this could apply for a regulated sector, was
12	the case of Telmex, when in 1997, the Commission
13	initiated an official procedure to determine if Telmex,
14	which is what we consider the dominant telephone company
15	in Mexico, had precisely a dominant position. We
16	divided the markets in to five markets, and we basically
17	considered that Telmex had substantial market power in
18	those five telephone markets, like local telephone
19	service, national long distance service, international
20	long distance service, access to interconnection to
21	local networks, and interurban transport.
22	Basically, there was an amparo, which is an
23	appeal by the company, and we have this case -- just
24	imagine, this case was started in 1997. We are in 2006,
25	and this case is still in the courts and has not been

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1	solved. So, actually, from a legal point of view, I
2	cannot speak about dominance on Telmex, but they do have
3	95 percent of the leased lines in Mexico. I'm just
4	finished. Actually, I'm just finished. So, just in
5	time.
6	So, thank you very much for this invitation.
7	It's a real honor for me to be here today, and I hope we
8	will have a good session, some questions and I hope
9	answers as well. Thank you very much.
10	(Applause.)
11	MR. TRITELL: Thank you very much, Eduardo, and
12	congratulations on your success in the reform of
13	Mexico's competition law.
14	We will now move to the north, and I am very
15	pleased to introduce Canada's Commissioner of
16	Competition, Sheridan Scott. Sheridan is responsible
17	for the administration and enforcement of Canada's
18	Competition Act as well as consumer protection statutes.
19	Before joining the Competition Bureau, she was Chief
20	Regulatory Officer of Bell Canada, Vice President of
21	Planning and Regulatory Affairs for the Canadian
22	Broadcasting Corporation, and Senior Legal Counsel at
23	the Canadian Radio Television and Telecommunications
24	Commission. She has also taught law at the University
25	of Ottawa and Carlton university.

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1	Sheridan?
2	MS. SCOTT: Thank you very much, Randy, and I
3	would like to join my colleagues in saying what an honor
4	and a privilege it is to be here today and how thankful
5	I am for the invitation from the DOJ and the FTC to be
6	able to talk to you this morning a bit about Canada's
7	competition law.
8	As Randy mentioned, as Commissioner of
9	Competition, I am responsible for the administration and
10	enforcement of the Competition Act. Under our
11	legislation, the single-firm anticompetitive behavior is
12	captured by the abuse of dominance provisions found in
13	Sections 78 and 79 of our legislation.
14	This morning, I'd like to outline the
15	Competition Bureau's approach to enforcing the abuse of
16	dominance provisions and the necessary elements for a
17	successful application under the Act. I'd also like to
18	discuss the most recent abuse case that went before the
19	Competition Tribunal, and finally, touch upon some of
20	the challenges that we face in trying to enforce Section
21	79.
22	Most of the points that I'll be making this
23	morning can actually be found in our Abuse of Dominance
24	Guidelines -- found on our web site -- that are
25	instructions for the business community to understand

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1	the approach that we take to enforcing the legislation.
2	Now, since 1986, abuse of dominant position has
3	been a reviewable matter under the Competition Act.
4	What that means is it is a matter that is not inherently
5	bad but subject to review by our Competition Tribunal, a
6	specialized court that is composed of judges as well as
7	laypersons with a background in accounting, business and
8	economics. They determine whether, on balance,
9	anticompetitive conduct has substantially lessened or
10	prevented competition or is likely to do so.
11	It's only once a firm becomes dominant in its
12	relevant market that the firm's behavior is open to
13	examination under Section 79. The Act outlines a test
14	with three essential elements, all of which must be met
15	in order to conclude that an abuse of dominant position
16	has occurred.
17	Firstly, the Bureau must demonstrate to the
18	Tribunal that one or more persons substantially or
19	completely control throughout Canada or a part of it a
20	class or species of business. In other words, you must
21	demonstrate that a company is dominant in its market.
22	Now, our analysis begins, not surprisingly, with a
23	definition of a relevant product market, looking at a
24	number of factors, most importantly, substitutability.
25	The geographic market is also defined, and here the

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1	Bureau will consider factors such as the evidence of
2	foreign competition, imports, and transportation costs.
3	Once the product and geographic market have been
4	defined, the law requires a determination of market
5	power. This requirement is fundamental to a success
6	under an application under Section 79. The Tribunal has
7	clarified that high market share together with barriers
8	to entry will typically be sufficient to support a
9	finding of market power. A prima facie conclusion of
10	market power may be made on the basis of high market
11	share alone, but factors such as barriers to entry,
12	excess capacity, and countervailing powers also normally
13	bear in the Bureau's assessment.
14	To date, the cases brought before the Tribunal
15	have all included respondents which possessed very high
16	market shares; indeed, in excess of 80 percent in all
17	examples. In the Abuse Guidelines, the Bureau states
18	that a market share of less than 35 percent will
19	normally not give rise to concerns of market power,
20	while the Tribunal has indicated that a market share of
21	less than 50 percent cannot be considered a prima facie
22	indication of market power. Whether a firm with market
23	share falling below 50 percent would be found to exhibit
24	market power remains to be tested before our Tribunal.
25	The second element the Bureau must make out is

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1	that the dominant person or persons have engaged in or
2	are engaging in a practice of anticompetitive acts. A
3	business must engage in more than an isolated act to
4	constitute a practice, which means engaging in several
5	acts of the same nature or several acts of a different
6	nature. Assessing when behavior is anticompetitive is
7	still complex. Some examples of behavior, such as the
8	introduction of a new brand or aggressive pricing could
9	have a procompetitive business purpose and not an
10	anticompetitive business purpose, so we're very careful
11	to look into the differences in those sorts of
12	behaviors.
13	Now, Section 78 provides a nonexhaustive list of
14	anticompetitive acts. The section references acts such
15	as the preemption of scarce facilities or resources
16	required by a competitor for the operation of its
17	business; margin squeezing, requiring a supplier to sell
18	to only certain customers. The Tribunal has also found
19	other facts that are not listed in the legislation, such
20	as the use of long-term exclusive contracts, to be
21	anticompetitive when engaged in by a dominant firm.
22	In order to be found anticompetitive, the
23	behavior engaged in must have a predatory, exclusionary
24	or disciplinary purpose vis-a-vis a competitor. The
25	Tribunal does not require evidence of subjective intent,

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1	but rather, evidence as to the overall character or
2	purpose of the act in question. This is determined by
3	considering factors such as the reasonably foreseeable
4	or expected consequences of acts, any business
5	justification, and any evidence of subjective intent,
6	the so-called "smoking gun."
7	For example, in a case involving Laidlaw, the
8	Tribunal found that acts engaged in by Laidlaw could
9	only be interpreted as being targeted towards its
10	competitors. The respondent in that case had acquired
11	competitors and imposed onerous no-compete clauses in
12	the purchase agreements, utilized long-term contracts
13	with highly restrictive clauses, and intimidated both
14	customers and competitors through threats of litigation.
15	In assessing all the facts of that case, the Tribunal
16	had no difficulty concluding that Laidlaw had engaged in
17	a practice of anticompetitive acts in the relevant
18	markets.
19	In each potential abuse case, once dominance,
20	the first element that I described, and a practice of
21	anticompetitive acts, the second element, has been
22	established, the Commissioner must still convince the
23	Tribunal that there has been a substantial negative
24	effect on competition as a result of the anticompetitive
25	act. This third element under Section 79 requires that

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1	the practice has had, is having or is likely to have the
2	effect of preventing or lessening competition
3	substantially in a market.
4	This requirement ensures that the Bureau examine
5	the effect on competition as a whole, not just taking
6	into account the repercussions of the practice on a
7	specific competitor. In assessing the effect on
8	competition, the Tribunal will examine the degree to
9	which the anticompetitive acts preserve or enhance the
10	dominant firm's market power; that is, through the
11	preservation or enhancement of barriers to entry or
12	expansion. While the issue of substantial lessening of
13	competition has been considered by the Tribunal, it has
14	not yet had the opportunity to comment on the
15	substantial prevention of competition, something that
16	we're looking at and seeing in cases that we can take to
17	it.
18	The Tribunal has noted in Tele-Direct, a case
19	concerning directory advertising, that where a firm has
20	a very high degree of market power in a market, even an
21	act that has a small impact on the competitiveness of a
22	given market may be considered substantial.
23	In assessing the impact of a practice on
24	competition, the Bureau uses a "but for" test; namely,
25	but for the anticompetitive practice in question, would

56

1	there be significantly greater competition? This test
2	has recently been endorsed by our Federal Court of
3	Appeal in the Canada Pipe case, to which I will return
4	shortly.
5	Under this standard, the question is not simply
6	whether the relevant market would be competitive in the
7	absence of the impugned practice, nor whether the level
8	of competitiveness observed in the presence of the
9	impugned practice is acceptable; rather, the question is
10	whether, absent the anticompetitive acts, the market
11	would be characterized by materially lower prices,
12	greater choice, or better service.
13	Requiring a linkage between an act and an
14	anticompetitive effect also requires that the Bureau
15	consider all potential reasons for the maintenance or
16	enhancement of market power and isolate the effects of
17	the anticompetitive act in question. Thus, Section
18	79(4) of the legislation compels the Tribunal to
19	consider, for example, whether the practice is a result
20	of superior competitive performance. This is not the
21	same as an efficiencies defense which exists in our law
22	with respect to merger review. The Bureau, as stated in
23	the Abuse Guidelines, takes the position that superior
24	competitive performance is only one factor to be
25	assessed in determining the cause of the substantial

57

1	lessening of competition. It is not a justifiable goal
2	for engaging in an anticompetitive act.
3	I'd now like to say a few words about the
4	remedies that exist under Canadian law where an abuse of
5	dominance has occurred. Before litigating an abuse of
6	dominance case, of course, the Bureau will often
7	approach the dominant firm whose conduct is being
8	investigated and see whether we can obtain a voluntary
9	change of behavior to address our concerns. Where
10	possible, alternate case resolution is pursued rather
11	than litigation.
12	However, once we're pursuing litigation and the
13	Tribunal has found that an abuse of dominance has
14	occurred, it may make an order prohibiting the
15	respondent from further engaging in the impugned
16	practice. It may also direct any respondent to the
17	abuse application to undertake any action, including the
18	divestiture of assets or shares, as are reasonably
19	necessary to overcome the effects in the marketplace,
20	but in practice, the Tribunal has never done so, so
21	essentially, the only remedies available to the Tribunal
22	are injunctive, with the one exception of the airline
23	industry, where there's provisions that allow for the
24	imposition of administrative monetary penalties.
25	We are on record, supported by others, such as

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1	the OECD, that a lack of financial consequences for a
2	dominant firms found to have abused their position is a
3	significant shortcoming in our legislation. This
4	shortcoming is all the more acute in light of the fact
5	that only the Commissioner is able to apply to the
6	Competition Tribunal under Section 79, and civil damages
7	for injured parties are not available through the
8	ordinary court process for abuse of dominance.
9	There is limited case law on Section 79 since
10	only five contested cases have gone before the Tribunal
11	since 1986 when these provisions were introduced. Our
12	latest contested case, the Canada Pipe case, brought
13	some important clarifications and developments with
14	respect to the tests for abuse of dominance, and it is
15	the only decision that has been taken at the Federal
16	Court of Appeal level, and so I would like to spend a
17	few minutes on its findings.
18	Canada Pipe is a Canadian company which produces
19	and sells cast-iron drain, waste and vent products, DWV
20	products referred to. The practice at issue in this
21	case was Canada Pipe's Stocking Distributor Program, the
22	SDP program, which is described as a loyalty rebate
23	scheme. In contrast to a volume-based discount, under
24	the SDP, distributors of Canada Pipe's DWV products
25	obtain quarterly and yearly rebates as well as

59

1	significant point-of-purchase reductions in return for
2	stocking exclusively the cast-iron DWV products that are
3	supplied by Canada Pipe. Except for losing the yearly
4	and quarterly rebates, there are no penalties attached
5	to opting out of the SDP.
6	It was alleged that the SDP program enhanced and
7	preserved to a significant extent Canada Pipe's market
8	power in three relevant product markets. The Tribunal
9	found that Canada Pipe was, indeed, dominant in those
10	product markets. It also found that the SDP, though a
11	practice, was not anticompetitive, and regardless, did
12	not substantially lessen or reduce competition.
13	Consequently, the Competition Tribunal dismissed our
14	application under Section 79.
15	The Tribunal's decision was appealed to the
16	Federal Court of Appeal, and in June, the Commissioner's
17	appeal was allowed and the case was remanded back to the
18	Competition Tribunal for further consideration. Canada
19	Pipe has until September 22nd to decide whether or not
20	it will appeal the Federal Court of Appeal decision.
21	Now, as previously indicated, Section 79 sets
22	out three distinct elements that must be shown to exist
23	before a finding of abuse of dominant position can be
24	made. The Federal Court of Appeal clarified that the
25	applicable test under the multi-element structure of

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1	Section 79 consists of three discrete subtests, each
2	corresponding to a different requisite element. The
3	most significant statements by the Federal Court of
4	Appeal relate to the second and the third elements. I
5	am going to go back over the ones I have just described
6	to you and explain to you how Canada Pipe fit into that
7	framework.
8	With respect to the second element, as
9	previously indicated, to be considered anticompetitive,
10	an act must have a predatory, exclusionary or
11	disciplinary negative purpose vis-a-vis a competitor.
12	As such, the inquiry under this part of the test focuses
13	upon the intended effects of the act against the
14	competitor, not the effects of those acts on the state
15	of competition in the marketplace or the general causes
16	thereof. As a result, some types of effects on
17	competition in the market might be irrelevant for the
18	purpose of this subtest if these effects do not manifest
19	through a negative effect on a competitor, or a negative
20	purpose, sometimes assessed through looking at the
21	effects.
22	The Federal Court of Appeal noted that the proof
23	of the intended nature of the negative effect on a
24	competitor can thus be established directly through
25	evidence of subjective intent or indirectly by reference

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1	to the reasonably foreseeable consequences of the acts
2	themselves and the circumstances surrounding their
3	commission. It concluded that even though evidence of
4	subjective intent is neither required nor determinative,
5	intention remains an important ingredient of the second
6	element of the test under Section 79.
7	In particular, intention is relevant in the
8	sense that while a respondent cannot disavow
9	responsibility for the reasonably foreseeable
10	consequences of its act, a respondent might nevertheless
11	be able to establish that such consequences could not in
12	the context of a second element of the test be
13	considered the purpose or overall character of the acts
14	in question.
15	So, in appropriate circumstances, proof of a
16	valid business justification for the conduct in question
17	can overcome the deemed intention arising from the
18	actual or perceived ill-effects of the conduct by
19	showing that such anticompetitive effects are not, in
20	fact, the overriding purpose of the conduct in question.
21	In essence, a valid business justification provides an
22	alternative explanation as to why the impugned act was
23	performed. To be relevant in this case, a business
24	justification must be a credible efficiency or
25	procompetitive rationale for the conduct in general

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1	attributable to the respondent which relates to and
2	counterbalances the anticompetitive effects or
3	subjective intents of the acts.
4	The Court clarified that the second element
5	relates to whether the impugned act exhibits the
6	requisite anticompetitive purpose vis-a-vis competitors,
7	while the third element concerns the broader state of
8	competition and whether the practice has the effect of
9	substantially lessening or preventing competition in the
10	market. The Court, on appeal, further clarified that
11	the but for test must be applied by the Tribunal in
12	assessing the impact of a practice of anticompetitive
13	acts on competition in the relevant market.
14	The Federal Court of Appeal judgment clarified
15	that the third element of the test is not whether the
16	markets would or did attain a certain level of
17	competitiveness in the absence of the impugned practice
18	or whether the level of competitiveness observed in the
19	presence of the impugned conduct was high enough or
20	otherwise acceptable. These are absolute evaluations,
21	while the statutory language of the effect of preventing
22	or lessening clearly demonstrates a relative and
23	comparative assessment. The Tribunal must therefore
24	compare the level of competitiveness in the presence of
25	the impugned practice with that which would exist in the