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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 INTERNATIONAL ISSUES

9 TUESDAY, SEPTEMBER 12, 2006

10

11

12

13

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.

20

21

22

23

24 Reported and transcribed by:

25 Susanne Bergling, RMR-CLR

2

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

9

10 PANELISTS:

11 Morning Session:

12 Philip Lowe

13 Hideo Nakajima

14 Eduardo Perez Motta

15 Sheridan Scott

16

17 Afternoon Session:

18 George Addy

19 Margaret Bloom

20 Paul Lugard

21 James F. Rill

22

23

24

25

3

1 C O N T E N T S

2

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

12

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

22

23

24

25

4

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,

5

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,

6

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.

7

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

8

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

9

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

10

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

11

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

12

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

13

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

14

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.

15

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

16

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

17

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

18

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

19

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

20

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

21

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

22

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,

23

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.

24

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

25

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

49

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.

50

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

51

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

52

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

53

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,

54

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

55

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

58

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

60

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

61

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

62

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

63

1 absence of the practice and then determine whether

2 preventing or lessening of competition, if any, is

3 substantial, and this comparison must be done with

4 respect to actual effects in the past, in the present,

5 as well as likely future effects.

6       In the few minutes remaining, I'd like to touch

7 on just some of the challenges that the Bureau has

8 experienced with respect to the abuse of dominant

9 position. Some of these issues were recently clarified

10 by our Federal Court of Appeal, and others remain to be

11 clarified, notably, joint dominance, the threshold for

12 dominance, essential facilities, and the regulated

13 conduct defense, RCD we'll call it.

14       Now, Section 79 contemplates the possibility

15 that one or more persons may be dominant in a market;

16 however, there have not been any contested cases

17 involving joint dominance. The Bureau takes the

18 position in cases of potential joint dominance that a

19 combined market share of equal to or exceeding 60

20 percent would generally prompt further investigation.

21 In order for the Bureau to conclude that there has been

22 potential joint abuse of dominance, there must be

23 evidence to show coordinated behavior, albeit short of

24 conspiracy, covered by our criminal cartel provisions.

25       The Bureau will consider the following

64

1 questions. Is there evidence that the alleged

2 coordinated behavior is intended to exclude, discipline

3 or predate a competitor? Is there evidence of barriers

4 to entry into the group or barriers to entrance into the

5 relevant markets? Is there evidence that members of the

6 group have acted to inhibit intergroup rivalry?

7       The issue of essential facilities is another

8 area which is yet to be addressed in jurisprudence.

9 Section 78 contemplates circumstances under which the

10 withholding of facilities or resources essential to a

11 competitor might be seen as anticompetitive. The issue

12 of essential facilities is especially relevant in

13 network industries such as telecommunications that have

14 been or will be deregulated. It remains to be seen

15 under what market conditions, if any, the Tribunal would

16 make an order that required a dominant firm to provide a

17 competitor with reasonable access to its resource or

18 facility. Section 78 or 79, as written and as

19 interpreted by the Tribunal, are certainly broad enough

20 to tackle this difficult issue, and our Section 79

21 guidelines clarify this.

22       This brings me to my final point on the

23 challenges of Section 79, and it's a fairly significant

24 one from our perspective, the regulated conduct doctrine

25 or RCD, which is similar in some way to the U.S. implied

65

1 immunity and state action doctrine. What happens when

2 the conduct that contravenes the Competition Act is, or

3 more importantly, could be regulated by another federal

4 provincial or municipal legislative regime?

5       Regardless of whether the RCD or some other

6 doctrine or defense immunizes the impugned conduct from

7 a provision of the Act, the Bureau will always consider

8 the regulatory context in which the conduct is engaged

9 where it is relevant to the application of the provision

10 of the act in question. We are currently in the process

11 of looking at telecommunications reform in Canada, and

12 one of the big issues has been when does the conduct,

13 leave the hands of the section-specific regulator and

14 when does it become the domain of the general

15 competition authority?

16       Our jurisprudence is minimal on the application

17 of the RCD for reviewable matters, such as the abuse of

18 dominant position. However, the Bureau will not refrain

19 from pursuing regulated conduct under the reviewable

20 matters provision, such as abuse of dominance, simply

21 because provincial law may be interpreted as authorizing

22 the conduct or as more specific than the act given that

23 the Bureau's mandate is to enforce the law as directed

24 by Parliament, not a provincial legislature or its

25 delegate.

66

1       Now, as mentioned, the Federal Court of Appeal

2 provided some much needed clarification on Section 79,

3 but there remain a number of frontiers left to be

4 explored. We will be continually seeking out cases

5 which test the boundaries of Section 79. That is one of

6 our priorities at the Bureau for this year, actively

7 seeking out these cases, particularly if we think the

8 case will provide valuable jurisprudence and a degree of

9 clarity to the business community as to the

10 circumstances in which the legislation would not be

11 respected.

12       The Competition Act, with its foundation in

13 modern economics, I believe has served as well since

14 1986 and serves as an appropriate framework for us to

15 continue to explore these issues in the future.

16       Thank you very much.

17       (Applause.)

18 MR. TRITELL: Thank you, Sheridan, and thank you

19 to all our speakers. This is exactly the type of input

20 we were looking for to help inform our hearing process.

21 We will be continuing with a discussion period after a

22 short break. I'd like to thank all the speakers for

23 observing the time limitations, and I would ask you to

24 all do the same by returning to this room in ten

25 minutes, so let's start making your way back about

67

1 11:20. Thanks.

2       (A brief recess was taken.)

3       MR. TRITELL: We are going to resume now, thank

4 you.

5       We are going to have our discussion period, and

6 we're going to begin by asking each of the panelists if

7 they'd like to spend a couple of minutes reacting to any

8 of the presentations that they've heard this morning.

9       So, we'll start with Philip Lowe, if you would

10 like to offer any observations.

11       MR. LOWE: The answer to that question is yes.

12       The first thing which struck me was the issue of

13 the scope of what we regard as potential action by

14 agencies against the possible anticompetitive conduct of

15 dominant firms, and also the way in which in some

16 jurisdictions the definition goes beyond issues of

17 dominance, the conduct of dominant firms, but to unfair

18 trade practices in general.

19       Now, I think it's fair to say that U.S. action

20 under Section 2 and EU action under 82, notwithstanding

21 the issues of price discrimination and excessive pricing

22 cases, which we have from time to time been engaged in,

23 has broadly restricted the scope of our attention to the

24 behavior of dominant firms and not to unfair trade

25 practices themselves, which are left to applications of

68

1 other aspects of law, and you can see in the German

2 Section 2, the distinction between the German cartel

3 legislation and the German unfair trade practices

4 legislation, and I think this distinction in U.S.,

5 German and European traditions reflects -- indeed, we

6 hope confirms -- the orientation towards protecting the

7 competitive process with the ultimate objective of

8 enhancing consumer welfare.

9       Now, the second aspect of scope is, of course,

10 what several of my colleagues have referred to, which is

11 to what extent in recently liberalized sectors, public

12 utilities, the presumption has been made that because of

13 the significant market power of the privatized

14 corporations, it is impossible to rely on ex post

15 intervention in order to achieve a successful control of

16 the conduct of firms concerned, and even outside

17 liberalized sectors in non-U.S. jurisdictions, even in

18 the U.S., the power of the regulators also touches on

19 the issue of -- implicitly, at least -- of the

20 significant market power of those in network industries.

21       So, I think in all our jurisdictions, we share a

22 category of potential anticompetitive practice which we

23 decide needs to be dealt with by regulation, and it's

24 characterized in the European jurisdiction, telecom's

25 regulations, where we explicitly recognize competition

69

1 principles but particularly the issue of significant

2 market power, and we allow national regulators to impose

3 remedies if they can prove significant market power.

4       Now, this is relevant in particular to what

5 Sheridan's just said about the way in which there is an

6 interface between ex ante action and ex post action, and

7 in that sense we have in process, too, a review at the

8 moment as to whether there are categories of the

9 telecom's industry, for example, which can now no longer

10 be subject to ex ante regulation, and we do that, in

11 principle, by focusing on a list of markets where we

12 think there is still a potential problem and where price

13 control or price regulation and access regulation is

14 required up front.

15       So, the discussion on Section 2 and in our

16 discussion paper of Article 82 does not focus on these

17 unfair trade practices, nor does it focus on these

18 categories of sectors where we've decided ex ante

19 regulation is necessary.

20       Now, in the area of abuse of a dominant

21 position, there has been some discussion among our

22 economists in Europe and elsewhere as to whether, in

23 fact, if you prove the existence through an

24 effects-based analysis of abuse, isn't this sufficient?

25 Why do you need to go through the whole process of

70

1 defining dominance and defining significant market

2 power? I know that some people in this room, including

3 eminent members of the two agencies, have written on

4 this subject, and thankfully, I am comforted that by

5 their views, which are our views, that as agencies, we

6 need to focus our activity on areas where there is

7 likely to be the most competitive harm and where

8 consumer welfare is paramount ultimately, and the

9 screening through the test of dominance is essential for

10 us to proceed.

11       Having said that, one of the things which struck

12 me in listening to my colleagues, too, is that we've

13 concentrated very much on the issue of liability, what

14 are the conditions for confirming the existence of

15 abusive behavior of a dominant firm, and we have gone on

16 less but, you know, at least two of my colleagues have

17 referred to it as the issue of what the appropriate

18 remedies are to any problem.

19       Now, we have had, in the last five years, maybe

20 ten important cases under Article 82, and I do not need

21 to remind you of all of them, but under the heading of

22 predatory pricing, there's the very celebrated case in

23 Europe against the German Postal Service for abusive

24 pricing on mail parcel services, concentrating on issues

25 of whether the incremental costs were really covered,

71

1 and Warner, too, which was about margin squeeze, was

2 effectively about pricing below average variable costs,

3 where effectively, too, we looked at the issue of

4 recoupment, although we say we do not, and Virgin BA,

5 which is still in front of the Board of Justice, Mission

6 2, related to rebates, and trying to control the

7 distinction between what is an abusive rebate due to

8 quantity or loyalty or what is aggressively competitive.

9       We have the cases of what is described as

10 Brandenburg Foods, which is otherwise known as Unilever,

11 and about whether the tying of a supplier to small

12 outlets for impulse ice cream -- impulse ice cream is

13 ice cream which you immediately eat, or at least spit

14 out -- but there was an exclusivity provision on use of

15 freezers and a ban on purchase of other ice creams by

16 the shops. When we attacked that, then the rule changed

17 to no other ice cream can be put in the freezers, but

18 eventually, we won that case.

19       In Coca-Cola, which Eduardo referred to -- and

20 we didn't sanction the company. We reached a settlement

21 with them, an extensive global -- in fact, global

22 settlement, on the abandonment of individually set

23 target rebates. And in the Prokent complaint against

24 Tomra, which is the -- Tomra is the world's -- you may

25 not know this, but Tomra is the world's dominant

72

1 supplier of reverse vending machines, in which you put

2 empty bottles into. It may sound trivial, but it's a

3 very, very important industry, and they had individual

4 rebates and bonus systems which we condemned as

5 anticompetitive.

6       MR. TRITELL: Philip, I want to give the others

7 a chance, but I think we will have a chance to come back

8 to a lot of these points in the discussion period.

9 Thanks very much.

10       MR. LOWE: Sorry, I just wanted to mention some

11 of these cases.

12       MR. TRITELL: I was glad to hear about the

13 impulse ice cream case.

14       We are going to turn to a couple of the

15 panelists, and I forgot to say, we have been asked by

16 our court reporter to speak right into the microphone.

17       Mr. Nakajima, would you like to make any

18 comments?

19       MR. NAKAJIMA: Let me make my comment very

20 brief. Since Mr. Lowe kindly referred to the Japanese

21 unfair trade practices, I feel that I need to respond to

22 his comments on this.

23       First of all, as I said, unfair trade practices

24 has multiple functions; not only it tends to prevent

25 private monopolization at the early stage, but also it

73

1 is tasked with protection of SMEs and consumers

2 functions.

3       Second of all, this is my personal view.

4 Whenever we compare Japanese law with Sherman Act of

5 United States or Article 81, 82 of EU, I feel that it is

6 not so fair, because in the case of United States, there

7 are 50 states. The 50 states or most of the states have

8 maybe their own competition laws, and in the case of EU,

9 of course, 25 countries -- I don't know how many of

10 them, but most of them, I suppose --

11       MR. LOWE: It's getting that way.

12       MR. NAKAJIMA: -- but that is not the case for

13 Japan. So, under the framework of competition law or

14 under our antimonopoly law, it serves multiple functions

15 required to be fulfilled, and actually, when we spoke

16 with people in Asian countries, the concerns that people

17 had in those countries may be some types of unfair trade

18 practices. That's what I wanted to say on what Mr. Lowe

19 commented on about our unfair trade practices.

20       Also, I feel I need to address the comment of

21 Mr. Lowe about EU's discussion paper on Article 82.

22 Actually, JFTC highly appreciates that discussion paper

23 since it tends to enhance predictability, transparency,

24 certainty, through sound economic analysis.

25       We are looking forward to seeing the forthcoming

74

1 draft guidelines which will be issued I heard within

2 this year. In this respect, let me take up one specific

3 issue of concern I have. As Mr. Lowe mentioned,

4 discussion paper emphasized more focus on effects-based

5 approach, but we concerned that such focus on

6 effects-based approach rather than a form-based approach

7 may undermine or compromise predictability or

8 transparency or certainty in the application of Article

9 82.

10       So, again, we are looking forward to seeing how

11 the guideline will address such issue of potential

12 conflict or trade-off between risk-based approach on the

13 one hand and enhanced predictability or quality on the

14 other hand, though. Mr. Lowe already touched upon some

15 ways of reaching a possible solution on this issue by

16 referring to creating a safe harbor based upon the

17 economic analysis.

18       Thank you very much.

19       MR. TRITELL: Thank you.

20       Eduardo?

21       MR. PEREZ MOTTA: Thank you.

22       Just briefly, Randy, I'd like to take two points

23 that were starting to be discussed by Philip. One has

24 to do with the case of regulation. By the Mexican law,

25 in regulated sectors, we basically have an ex post

75

1 application of the instrument. So, actually, before you

2 regulate prices, you have to ask yourself if there is a

3 lack of competition conditions in that particular

4 market.

5       For instance, in airports, you have to first --

6 but exactly, you should not say anything unless you find

7 that that particular airport, for instance, doesn't have

8 enough competition from other airports which are

9 relatively close. So, you have to make the analysis if

10 there is a lack of competition. If there are no

11 conditions of competition in that particular situation,

12 then you have to make a declaration on the lack of

13 competition conditions, and then the regulator will have

14 the ability in that particular case to regulate those

15 prices. So, that's -- we produce more of an ex post

16 type of analysis in those cases.

17       And just one word on the Coca-Cola case.

18 Actually, we tried to negotiate a settlement with

19 Coca-Cola. We were basically using the argument that

20 Coca-Cola had already reached an agreement with the

21 European Commission, and we said, well, why not try in

22 the case of Mexico?

23       But my impression, and this is my really

24 personal impression, is that external lawyers in this

25 case, especially on the bottlers' side of Coca-Cola,

76

1 were not so interested in closing the case, and I guess

2 the incentives were just not there to try to stop the

3 litigation and it was impossible. So, we had to impose

4 the sanction.

5       As I said, it was the strongest sanction we have

6 ever imposed, because there were cases for each and

7 every bottler. So, the accumulation of the sanction was

8 relatively high.

9       But besides that, I would have to say that the

10 case became very public in Mexico because one of the

11 correspondents, I think it was from Associated Press, he

12 just discovered that there was this small grocery store,

13 the one that started the case against Coca-Cola, which

14 is something I even didn't know myself, because I got

15 the case a little bit late. I just went into the office

16 two years ago, and this case had been gong on for about

17 five years already, so once this cable went around, the

18 public opinion and the public impact on Coca-Cola in

19 this particular case, because of the situation that the

20 sanctions were basically -- I mean, that the original

21 case started with this sort of -- this kind of case, it

22 just went around, around the world. The kind -- the

23 declarations of these -- the owner of this small grocery

24 store, because the exclusive dealings of Coca-Cola and

25 so on.

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1       So, my impression in the end is that the cost

2 for Coca-Cola, from the public exposure of this case,

3 was much higher than the sanction that we imposed. Even

4 if they had paid the sanction and forget about the

5 situation, it would have been cheaper than what they

6 paid finally in terms of legal costs and so on.

7       MR. TRITELL: Thank you, Eduardo.

8       Sheridan, any reactions?

9       MS. SCOTT: Just two quick comments.

10       One, just following up on Philip and Eduardo's

11 comments on regulation and how we see handling companies

12 that have been formed into monopolies or whatever and

13 the progression towards proper alignment for the

14 sector-specific regulator and the competition authority.

15 As I've understood Philip and Eduardo to address this,

16 one should first of all apply competition tests to

17 determine whether there should be deregulation.

18       One of the issues we have is whether the

19 sector-specific regulator will actually apply the same

20 sorts of tests of SMP that we would as competition

21 authorities, and part of our job in Canada is using our

22 advocacy ability to speak to the regulator to persuade

23 them that they should be applying proper competition

24 tests, because we will then be reassured that if they

25 deregulate only where there's an observance of market

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1 power, we will then be in a position to rely on the

2 general Competition Act on an ex post basis and not

3 worry about whether we will require ex ante regulation

4 due to the continuing market power.

5       So, that remains important to us, not to have

6 sector-specific provisions in our Competition Act to try

7 to assist the sector-specific regulator in taking

8 competition principles into account. One of the things

9 we're working are on telecom-specific guidelines that

10 will be using examples from the telecom sector but with

11 a law of general application, which is what the

12 Competition Act is. So, we feel that's part of our

13 responsibility as a competition authority, to have

14 guidelines generally about abuse, and then to try to

15 find some sector-specific examples to provide guidance

16 to parties, because we think this guidance is extremely

17 important.

18       Now, our legislation -- I think -- legislation

19 seems to me is a bit like ours, is more explicit than

20 the general provisions you find in the EU and Japan and

21 the U.S. I would see all the more reason for you to

22 have guidelines explaining to people how you interpret

23 legislation, but even in the case of Canada, where we

24 have a number of tests specifically set out in the

25 legislation, I think we have a responsibility to provide

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1 clarity to the business community through enforcement

2 guidelines.

3       MR. TRITELL: Thanks.

4       We are going to move into our question period.

5 We would like to allow a little time for discussion, so

6 if you will bear with us, we may run over until 10 or 15

7 past 12:00, and I would like to turn to Jerry Masoudi to

8 begin our questions.

9       MR. MASOUDI: Thanks.

10       I would like to ask a question about remedies,

11 and Sheridan, you went into that issue in some detail,

12 stating that injunctive remedies are available on the

13 public side, no monetary remedies and no private

14 enforcement, and then, Mr. Nakajima, you suggested that

15 there were criminal penalties available in Japan, but

16 they have not been implemented in the past, and Philip,

17 you discussed the issue of remedies somewhat.

18       I wonder if we could at least start with Eduardo

19 and Mr. Nakajima to talk about both private and public

20 enforcement, the remedies that are available to either

21 private parties or to enforcers, and then allow Sheridan

22 and Philip to add anything further that they would like

23 to say on the matter.

24       MR. PEREZ MOTTA: Well, in the Mexican case, the

25 Federal Commission of Competition has both regulatory

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1 and adjudicative powers, and they are concentrated just

2 in the Commission. There is no direct private right of

3 action, and that is, the private party harmed by

4 anticompetitive conduct that violates the law cannot

5 really file their case directly with a court of the

6 judicial system. They must bring their complaint before

7 the Commission, and only after the Commission resolves

8 in their favor, they may claim a damage before a court.

9 So, that's how we work.

10       MR. NAKAJIMA: Yes, in Japan, compared to the

11 United States, private enforcement of competition law

12 has not been so active; however, recently, more and more

13 damage actions have been brought, particularly by local

14 governments regarding bid-rigging cartels, reflecting a

15 growing concern by the local public on the damage caused

16 by such cartels and most of those actions are formal

17 actions of the JFTC's dispositions.

18       Regarding private monopolization cases, the

19 number of the private action is quite limited; however,

20 in the case of Hakodate Shimbun, which I just discussed

21 in my presentation, Hakodate Shimbun actually brought

22 this action before the Tokyo High Court ruled against

23 Hokkaido Shimbun for damages caused by Hokkaido

24 Shimbun's unlawful act. The case is still continuing.

25       Also, in addition to such damage action, on

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1 occasion of recent amendment of the Act, the Dict

2 requested the government to expedite the consideration

3 of possible introduction of so-called collective action,

4 particularly for injunction of unfair trade practices.

5       Now, we are seeking the views of legal experts

6 and making research on such systems in other

7 jurisdictions. We plan to come up with a conclusion on

8 this issue by the end of the next year, that is, by the

9 end of 2007.

10       That's all. Thank you.

11       MR. MASOUDI: Philip, I don't know, or Sheridan,

12 if you have anything further to add on the issue of

13 remedies.

14       MS. SCOTT: I guess one of the issues we discuss

15 sometimes is the value of having a specialized court

16 that determines these matters, where you would have

17 judges. As I said, our Competition Tribunal has a

18 combination of judges and laypersons, and the lay

19 persons have background in economics and accounting and

20 business, and we debate sometimes whether, if there were

21 damage provisions introduced into our legislation, would

22 it be more appropriate for the damages to be assessed by

23 the ordinary court or would it be more appropriate,

24 because these are economic issues, for the damages to be

25 assessed by a specialized tribunal.

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1       MR. LOWE: Just to make one distinction, once we

2 have established liability, then there is a sanction,

3 and the sanction itself acts presumably in most

4 instances as a deterrent to future action of the same

5 kind, and normally speaking, it would be accompanied by

6 a cease and desist order on the particular practice

7 concerned.

8       Now, if we impose a fine, the assumption is that

9 the corporation itself should reasonably have been aware

10 that it was in infringement of Article 82; therefore, it

11 is incumbent on us to prove that there was either

12 negligence or, indeed, intention in pursuing certain

13 practices.

14       As to the remedies, well, if you intervene to

15 solve a market failure caused by an anticompetitive

16 practice and you think that practice cannot be resolved

17 and competition conditions cannot be restored to their

18 situation ex ante simply by a cease and desist order,

19 then it is incumbent on us to indicate what the remedy

20 should be, and that forms part of our decision. We have

21 done that in Microsoft. We haven't done it in 6 Tomra/

22 Prokent because the cease and desist order was

23 sufficient, and for AstraZeneca, which was an historical

24 situation. So, we have to assess whether the remedy

25 will be effective.

83

1       By the way, if a remedy cannot be identified as

2 effective, then that, in itself, could cause an agency

3 to bring a case to an end.

4       Finally, on private enforcement, you know that

5 it's very underdeveloped in Europe, that we are trying

6 to develop that. Clearly, if we have proved an abuse,

7 then the possibility of a follow-on action by private

8 corporations or individuals increases the complex of

9 deterrents which exists against anticompetitive

10 behavior.

11       MR. MASOUDI: Eduardo, in your present --

12       MR. NAKAJIMA: May I just --

13       MR. MASOUDI: Sure, Mr. Nakajima.

14       MR. NAKAJIMA: Let me make a short comment about

15 what Sheridan mentioned. Regarding damage action, the

16 Antimonopoly Act has provisions that a court dealing

17 with a private damage action can request the comments

18 from JFTC on the damage or assessment of damages.

19       Actually, in case of Hokkaido Shimbun, I just

20 referred to, after Hakodate Shimbun brought the damage

21 action to the Tokyo High Court, Tokyo High Court

22 requested JFTC to make a comment on how to assess the

23 damages caused by the action of Hakodate Shimbun and

24 then we submitted a comment to the Tokyo High Court.

25       MR. MASOUDI: Eduardo, in your presentation, you

84

1 discuss how typification can provide legal certainty,

2 and, of course, there are two kinds of typification that

3 one can imagine, the first being to say that certain

4 kinds of conduct are abusive, and another type of

5 typification, of course, would be to say that certain

6 kinds of conduct will not be found to be abusive, and

7 Philip, in your presentation, you touched on the issue

8 of safe harbors, and I wonder if, perhaps starting with

9 Sheridan down at the end, if each of you could discuss

10 what, if any, safe harbors do you have in place, and

11 what, if any, safe harbors has industry suggested to you

12 might be helpful in allowing them to engage in

13 procompetitive conduct without fear of enforcement?

14       MS. SCOTT: I think the issue of safe harbors is

15 all about predictability for the business community, in

16 a sense, so that because so many of these Section 79

17 type, abuse of dominance type acts, can be very

18 procompetitive, and so when we think about safe harbors,

19 we think, first of all, about market shares, because

20 those are relatively easy to calculate, not completely

21 easy, but relatively easy, and so there is some guidance

22 that we issue through our enforcement guidelines and

23 also that the Tribunal has put in place. I mentioned

24 those in my remarks. The 35 percent and 50 percent are

25 critical market share figures for us.

85

1       But I think one can think about safe harbors

2 also through the clarification of the law, the clearer

3 what will be a contravention of our provisions is and

4 the clearer it is to the business community where we are

5 going to take enforcement actions, that, too, acts like

6 a form of safe harbor that the business communities can

7 look to, and that's why we find this most recent

8 decision of the Federal Court of Appeal useful, because

9 it has gone into much more detail about how to look at

10 those specific tests that exist during legislation than

11 perhaps ever before.

12       Now, I personally have never had any requests

13 for specific safe harbors or specific guidance, but I do

14 know that the business community is very interested in

15 having as much predictability and understanding of where

16 we are enforcing the law as possible, and we certainly

17 see that as part of our responsibilities.

18       MR. MASOUDI: Thank you.

19       Eduardo?

20       MR. PEREZ MOTTA: Yeah, well, actually, in our

21 case, our law system obliges us to work in a very

22 detailed way in the legal text, and this is precisely

23 why we lost some cases by the courts, because in the

24 article -- that was Article 10, which is the one that

25 typifies the relative practices, in the seventh

86

1 paragraph, it had a broad definition. So, it said

2 something like "some other practices that could be found

3 by the Commission," and those were specified in the

4 rulings. So, the Court said, nope, that's not possible.

5 By the Constitution, you have to have each particular

6 practice very well defined in the law.

7       So, partly I think this is just because of

8 clarity, legal certainty for economic operators.

9 Another is just because our legal system obliges us to

10 do it that way, but, of course, there is always a

11 problem that one has at least to put up with, which is

12 the fact that there is an evolution of economic

13 operators, and there is always a creativity going on,

14 and there are, of course, new practices that could be

15 created over time, and that's the challenge that you

16 have as a regulator, which is how to deal with new

17 circumstances, with new ideas, with talented business

18 people who create some other mechanisms to displace

19 competitors and that create an economic cost in the

20 society.

21       MR. MASOUDI: Thank you.

22       Mr. Nakajima?

23       MR. NAKAJIMA: Thank you.

24       As I already mentioned, JFTC has designated

25 several types of practices as unfair trade practices,

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1 and also, we have issued a series of guidelines which

2 clarified what kind of specific single-firm conduct

3 falls under unfair trade practices.

4       In addition, as Sheridan mentioned, accumulation

5 of relevant cases is, I think, helpful in further

6 enhancing predictability and legal certainty. Thank

7 you.

8       MR. MASOUDI: Philip, I don't know if you have a

9 quick point to add to your previous comment.

10       MR. LOWE: Well, I think this goes to not just

11 legal certainty, which dominates the guidelines, and

12 safe harbors, but also the focus of the work of the

13 competition agency. You have to decide, frankly, which

14 cases or investigations to concentrate on and in which

15 depth, and it seems to me that in the end, we will be

16 distinguishing between three broad categories of cases,

17 those where we can offer a safe harbor in the sense of

18 we will not be investigating, for example, cases below X

19 percent market share, because we believe that at that

20 level of market power, insofar as market share is an

21 indication of market power, there would be no prima

22 facie case of dominance, and therefore, abuse.

23       The second category, nevertheless, is situations

24 where there could be, based upon market shares and other

25 indicators, a significant market power, but

88

1 nevertheless, the level at which it is -- it could be

2 appraised could lead us to some control of specific

3 indicators and parameters which could be given as a

4 guideline to the business and legal community as to if

5 these parameters can be checked, then there would be a

6 presumption that there would be no problem.

7       And then as a third area, where we would

8 certainly have to investigate thoroughly, and, of

9 course, I have omitted also the black, per se, rule

10 possibility, which could exist, because we've got to

11 look at the combination of degrees of market power and

12 the abuse concerned, but there could in certain

13 categories be some types of abuse with a certain degree

14 of market power which we could say from the start would

15 be unacceptable, and the bright light of Areeda-Turner

16 and the AKZO (ph) rules in our jurisdiction is an

17 indication of how we can do that in predation.

18       We have tended in our discussion paper to leave

19 things slightly too open in our view and just to reserve

20 on the possibility of the need to intervene. I don't

21 think we need to be quite so prudent in our final

22 drafting of guidelines.

23       MR. TRITELL: Thanks.

24       I'll ask two concluding questions and get brief

25 reactions, the first on defenses, in particular

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1 efficiencies, which several of you have touched on in

2 your presentations. Maybe we can go a little bit deeper

3 into how you analyze efficiencies and when they come

4 into the analysis; in particular, whether you regard the

5 analysis of efficiencies as integrated into the

6 examination of whether there has been an abuse or

7 whether, having found an abuse, efficiencies come in as

8 a defense, and if so, by what standards you determine

9 whether the efficiencies are sufficient to overcome what

10 would otherwise be a finding of abuse.

11       I'll invite anyone who would like to make any

12 comments on that point.

13       Sheridan?

14       MS. SCOTT: Sure, I'm happy to start on that.

15 This is actually part of any decision that we found

16 particularly valuable.

17       As I was explaining, there are three elements to

18 our test. There is first a dominance element. The

19 second element -- and one should see these as sort of

20 screens, I guess, running through the assessment of

21 Section 79. The second one is looking at the purpose of

22 the Act, and I was mentioning in my remarks that we look

23 at whether the purpose has an exclusionary, disciplinary

24 or predatory effect or impact vis-a-vis competitors.

25 There is always a worry, we shouldn't be looking at

90

1 competitors, and certainly at the Bureau, we are looking

2 at lessening competition but that's the third element of

3 our test.

4       The second element is the screen we put out

5 looking at whether the purpose is vis-a-vis a

6 competitor, and what the Court does, it looks at the

7 overall purpose of the act to decide whether the purpose

8 is exclusionary, disciplinary or predatory, and then it

9 will look at subjective intent, which is hard to find.

10 It then looks at the effects on the competitor, because

11 one is assumed to intend the consequences of one's act,

12 and if we find that the person has an exclusionary,

13 predatory or disciplinary purpose against a competitor,

14 in effect, that's when efficiencies come into play.

15       So, the defendant can say, no, no, the purpose

16 of the act was not exclusionary, disciplinary or

17 predatory; the purpose of the act was procompetitive or

18 the rationale is a greater efficiency. So, it comes in

19 at this second element, and it can then be used to

20 defeat that second element of the three-part test that

21 we have. So, it goes to the purpose of the act.

22       I think this is sort of along the same

23 wavelength as the no economic sense test that one

24 sometimes sees. You're trying to get at the same sort

25 of matters. Why did this act take place? Does it have

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1 any economic sense? Well, we sort of look at it saying,

2 well, if it has an exclusionary, disciplinary or

3 predatory purpose, that's suggesting to us that it

4 didn't have an economic purpose, but then the company in

5 question is allowed to come back to explain -- no, it

6 did make economic sense because we had some efficiency

7 reasons or some procompetitive reasons for carrying out

8 this conduct.

9       MR. PEREZ MOTTA: Well, in our case,

10 efficiencies analysis were part of the reform that was

11 just made recently, and it comes in two ways. First,

12 that the conduct positively influenced the process of

13 competition and free market access, that's the first

14 analysis that you have to make, and second, that the

15 benefits for consumers, to consumers, outweigh the

16 anticompetitive effects which could arise from these

17 practices. So, that's how, in our law, the analysis of

18 efficiencies is approached.

19       Of course, the details of all of this will have

20 to come in the rulings which we are in the process of

21 developing. So, we have the reforms of the law. We

22 will need to change the rulings, and the case for that

23 will have to take place in those rulings.

24       MR. NAKAJIMA: In our country for private

25 monopolies or unfair trade practice, it is essential to

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1 determine whether specific conduct has substantially

2 restricted competition in the market or attempted to

3 impede fair competition in the market. As such, in our

4 nation, in the case of private monopolization or unfair

5 trade practices, an efficiency is not something which we

6 directly evaluate.

7       However, of course, in considering relevant

8 factors comprehensively, we need to pay due attention to

9 the issue of whether concerned conduct is actually a

10 legitimate or normal business behavior, business

11 activities, though I would say in our nation, efficiency

12 is not so much paid attention so far in our cases.

13       Thank you.

14       MR. LOWE: I've referred initially to the need

15 for a test of dominance as a prima facie -- at least a

16 screen for a subsequent in-depth analysis of alleged

17 abuse, and I say this perhaps more personally than my

18 agency for the moment, because we haven't written the

19 final version of our guidelines. We would regard the

20 assessment, in-depth assessment of an alleged abuse of a

21 dominant firm and its possible objective justification

22 of efficiencies, as an integrated one but not

23 necessarily one which has a specific chronology. It

24 nevertheless is an iterative process.

25       It starts off with the plaintiff and/or the

93

1 agency alleging abuse, affording evidence, collecting

2 evidence with respect to the anticompetitive effect with

3 consumer harm of the practice concerned. Then it is

4 certainly incumbent on the defendant to show that the

5 practices cannot be regarded as abuses because they have

6 either an objective justification or they have

7 efficiencies which are passed on to consumers.

8       In the final analysis, it is for the agency, if

9 it is to uphold a decision against the firm, to balance

10 the probability of the actual likely anticompetitive

11 effects against the supposed benefits which the

12 defendant firm puts forward. So, in a sense,

13 intellectually speaking, this is an integrated

14 assessment. There is no specific chronology as to how

15 one reaches the final result; however, there are

16 specific responsibilities on the agency and the

17 plaintiff and on the defendant and finally on the agency

18 to balance the process.

19       MR. TRITELL: Thank you.

20       I think given the time, we will close this

21 morning's session, which I have found extremely valuable

22 and I know will be very valuable in informing our

23 hearings process. At this point we will adjourn. We

24 will reconvene at 1:30. I hope you will be able to join

25 us for what will be a superb panel with four members

94

1 from the private sector. So, at this point I would just

2 ask you to join Jerry and me in expressing our

3 appreciation to our excellent panel this morning.

4       (Applause.)

5       (Whereupon, at 12:14 p.m., a lunch recess was

6 taken.)

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95

1 AFTERNOON SESSION

2 (1:30 p.m.)

3       MR. TRITELL: Thank you for assembling back

4 promptly at 1:30 as we begin the second session of our

5 hearings today. I apologize to those who have already

6 endured these announcements this morning, but I am

7 compelled to repeat them, so here we go.

8       Again, I am Randy Tritell, the Assistant

9 Director for International Antitrust at the Federal

10 Trade Commission, and I will be moderating this session

11 along with Jerry Masoudi, the Deputy Assistant Attorney

12 General from the Department of Justice, which is

13 co-sponsoring these hearings with the FTC.

14       For our housekeeping matters, I ask everybody

15 again to turn off cell phones, Blackberries, and other

16 devices. The restrooms may be found outside of the

17 double doors across the lobby. If you hear alarms,

18 proceed calmly to the lobby, follow the FTC employees to

19 their gathering point, and wait for further

20 instructions.

21       This afternoon will consist of presentations by

22 our panelists and interchange with the moderators, but

23 we will not be able to provide an opportunity for any

24 audience interchange at this session.

25       I want to reiterate the thanks of this morning

96

1 to all the FTC and DOJ staff who worked hard to organize

2 this hearing.

3       This afternoon, we are very honored to have a

4 distinguished panel of practitioners and academics.

5 They are going to provide their perspectives on how

6 multinational companies deal with diverse antitrust

7 regimes around the world, especially as they relate to

8 the application of antitrust laws to single-firm conduct

9 and abuses of dominance.

10       We have with us George Addy, Margaret Bloom,

11 Phil Lugard, and Jim Rill, who Jerry will introduce at

12 greater length, and I also direct your attention to the

13 packet of biographical materials that are outside the

14 room.

15       This is the fourth in the series of ongoing

16 hearings by the agencies, looking at single-firm

17 conduct. We've had an opening session on June 20th,

18 followed by a session on June 22nd on predatory pricing

19 and predatory buying, and on July 18th, on unilateral

20 refusals to deal. There are transcripts and other

21 materials from those sessions available on the DOJ and

22 the FTC web sites.

23       We are going to ask each of our panelists to

24 speak for about 10 to 15 minutes to make an initial

25 presentation. We will then take a break. When we

97

1 return from the break, we will invite the panelists to

2 react to both what they've heard this morning from the

3 government session and to each other's presentations,

4 followed by a discussion that Jerry and I will

5 co-moderate, and we're scheduled to wind up at about

6 4:00.

7       So, with that, let me turn the podium over to

8 Jerry Masoudi.

9       MR. MASOUDI: Our first speaker today will be

10 George Addy. George heads the Competition and

11 International Trade Group at Davies Ward Phillips &

12 Vineberg, LLP in Toronto. Before joining the firm,

13 Mr. Addy was head of the Mergers Branch of Canada's

14 Competition Bureau from 1989 to 1993 and was appointed

15 by the Canadian Cabinet to head the Competition Bureau

16 in 1993. He's a director of the Canadian Chamber of

17 Commerce and chairs its Policy Committee. He's also a

18 Vice-Chairman and Member of the Executive Board of

19 Business and Industry Advisory Committee to the OECD,

20 otherwise known as BIAC.

21       Mr. Addy?

22       MR. ADDY: Thank you.

23       Thank you, Jerry. It's indeed an honor for me

24 to be here today, and it's also an honor to share the

25 spotlight with such a distinguished panel, so thank you.

98

1       I would just add that I am going to try to bring

2 to my comments a perspective not only from my public

3 sector experience but private sector experience and

4 business experience. Hopefully my comments will either

5 inform the debate or at the very least be provocative.

6       At the outset, it's important for us to recall

7 the role of antitrust or competition agencies and their

8 related institutions, and I roll into "related agencies"

9 that the courts and tribunals and so on, are to play,

10 and I think Chairman Majoras on the first day put it

11 well. She said the FTC and Antitrust Division have the

12 responsibility to "ensure that competition in U.S.

13 markets is free of distortion and that consumers are

14 protected not from markets but through markets

15 unburdened by anticompetitive conduct and

16 government-imposed restrictions," and that last bit is

17 something I'll come back to. I would include within

18 "government-imposed restrictions" overly aggressive

19 enforcement in this area of the law, and I'll tell you a

20 bit more about that in a moment. But that type of

21 characterization of what the roles of the institutions

22 are applies equally to Canada, and frankly, I expect in

23 other jurisdictions.

24       The issue we're dealing with is obviously a

25 serious one. We wouldn't be having these hearings if it

99

1 wasn't. We live in a world and era characterized by

2 globalized markets and increasing concentration levels

3 in many sectors. Ensuring the right approach to

4 assessing allegations of abuse in this context is

5 critical. It's not only important from the perspective

6 of economic rents, who gets them, but it also poses a

7 challenge, the globalization of entities and conduct

8 poses a challenge to domestic antitrust agencies,

9 competition agencies, who must enforce their domestic

10 law in that environment, and there are many challenges

11 that flow from that.

12       One of the issues in trying to grapple with that

13 challenge is trying to balance the tension that arises

14 between the desire for very defined and detailed and

15 predictable rules that will readily identify an

16 unacceptable abusive conduct and the fact that most of

17 the conduct that falls within this gray zone is,

18 frankly, procompetitive and should not be inadvertently

19 chilled. So, the theme of my remarks today is

20 essentially as consideration is given to the various

21 presentations at these hearings, one should be very

22 cautious about what you do with that information by the

23 way of changing your enforcement practices. So, with

24 that backdrop, a few brief comments.

25       First, a few cases are obvious in this area,

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1 obviously problematic, most are not. The practice or

2 behavior that we are trying to target is conduct which

3 lies in the gray zone between acceptable and

4 unacceptable. The cases outside the zone, frankly,

5 everybody can spot them. What we're dealing with here

6 is this gray zone, and I think when you compare these

7 provisions to other provisions of the competition laws,

8 be they conspiracy provisions or even merger provisions,

9 there's a lot more gray in the spectrum when you're

10 dealing with potentially abusive behavior than there is

11 in some of the these other areas.

12       That grayness was recognized by our Canadian

13 Parliament in 1986 when they decriminalized the

14 provision and converted it into what we call a

15 reviewable practice, and Sheridan Scott took you through

16 some of that background this morning. There is no

17 presumption in our law, rebuttable or otherwise, that

18 any particular conduct is unlawful. Market behavior is

19 subject to study by the Commissioner, and if the

20 Commissioner has a problem with the behavior, the

21 behavior is then brought before an administrative

22 tribunal for an adjudication in an adversarial,

23 litigious process, and that tribunal in Canada is a

24 mixture of lay and judicial members.

25       The choice of the Tribunal being structured that

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1 way in Canada was not accidental; it was deliberate.

2 Given the nature of the conduct subject to challenge

3 under the Act, Parliament thought it wise to have the

4 adjudication benefit not only from judicial members

5 bringing the legal expertise to the table, but also the

6 business people who would be perhaps closer to the world

7 of business and business decision-making.

8       As a side observation, one of the criticisms I

9 would bring to the way the model has worked to date is

10 we haven't heard enough from the lay members of the

11 Tribunal. It tends to be a very, very judicialized

12 process, perhaps overly so.

13       The second comment I would make is that there is

14 going to be a tension or a battle between a desire for

15 predictability and the need for some flexibility or

16 uncertainty. It will, indeed, be difficult to reconcile

17 the desire of many participants, and among those are

18 included counsel, business people, even competition

19 agencies, to have clear and detailed rules that provide

20 predictability of treatment of behavior under antitrust

21 scrutiny with the need for some flexibility on the part

22 of the agencies and creative competition and freedom and

23 a healthy measure of uncertainty in the marketplace.

24       Trying to develop general principles to guide

25 agencies and businesses faced with this behavior with a

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1 better understanding is a very, very worthwhile pursuit,

2 and the principles outlined earlier on in these hearings

3 by Chairman Majoras and Assistant AG Barnett are an

4 excellent place to begin, and perhaps those principles

5 can be refined even further, but I don't think we should

6 expect the kind of detail or precision that some

7 proponents might advocate.

8       There's already been testimony earlier in these

9 proceedings about potential problems associated with

10 various tests, whether it's the "but for," the "no

11 economic sense" or any other test. There's also been

12 evidence of some problems with the tools used. The

13 transcripts of those proceedings were actually quite

14 entertaining to read in preparation for today, whether

15 it's marginal or variable cost or what have you.

16       I think what that tells you is that whatever

17 tool you pick, there's going to be controversy and

18 there's not going to be the certainty that some people

19 might be seeking. There is no -- as somebody mentioned

20 this morning -- there is no Holy Grail. So, while many

21 of the tools and screening devices will be helpful, and

22 frankly, they will probably keep many of us in

23 government and the private sector gainfully employed for

24 the foreseeable future, I think we shouldn't lose

25 sight -- and particularly in this post-Enron/ WorldCom

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1 environment we shouldn't lose sight of the fact that

2 understanding business behavior is a lot more than just

3 doing arithmetic, and whatever screening device you use,

4 cost measure or otherwise, you have to be very, very

5 sensitive to the broader needs of the analysis, and one

6 of those issues obviously is intent.

7       There's also, as I mentioned, a lot of merit in

8 providing guidance through guidelines or elaborating on

9 general principles, just as the competition regimes of

10 the world have proliferated, and that has driven an

11 increase in the need for guidance across the sector, the

12 business communities, counsel, et cetera, on what the

13 law is meant to do.

14       It's also provided a lot of learning to people

15 on potential strategic uses of competition law, and to

16 the extent that guidelines or safe harbors can be

17 developed, I think it would serve a dual purpose of

18 informing people who want to engage in legitimate

19 behavior and also perhaps foreclose strategic litigation

20 in this area.

21       In Canada, as Sheridan mentioned, we do not have

22 private actions in this area of the law. I think part

23 of the resistance behind that is the concern about the

24 chill and strategic use of that type of litigation.

25 Indeed, when the Act was amended a few years ago to

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1 allow very limited private access to the Tribunal,

2 procedural screens were developed and limitations on

3 remedies were introduced to minimize the strategic

4 litigation type of risk.

5       My third comment is that the risk of chill is

6 real, and the economic costs associated with

7 inappropriate or inadvertent chilling of legitimate and

8 competitive conduct is in my view significant, but I

9 readily admit it's very, very difficult to measure. I

10 will give you just one little illustration, and to

11 protect the innocent it won't be in the antitrust area.

12       It has to do with in the telecom field,

13 actually, when I was a senior executive with a teleco in

14 Canada, we were at a meeting and we had to decide what

15 to do. We had about a hundred million dollars to

16 invest, and the discussion came up about where are we

17 going to invest that money. It wasn't a long

18 discussion, and the decision was ultimately made --

19 Margaret, you will appreciate this -- to invest in the

20 UK. And why? The decision wasn't that the rate of

21 return from the investment would be better. The main

22 driver behind the decision was the perception -- and I

23 think a valid one -- that at that time, at least, the UK

24 teleco regulators were a lot more business and market

25 friendly than the Canadian ones.

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1       I use that illustration to underscore how

2 important the perception of the enforcement of this area

3 of the law is to business and decision-makers. I think

4 it was Doug Melamed who mentioned, and I echo his views,

5 that the signals you send to the business community are

6 much more important, frankly, than whether the case is

7 right or wrong. I want to underscore the importance of

8 that chilling.

9       The chill not only affects the parties who may

10 be subject to that particular enforcement action or

11 their affiliates or competitors in the same field, but

12 it also extends to those observers of the trade, people

13 in other markets, people in other industries, counsel,

14 advisers, who see the outcome of these proceedings and

15 are then chilled in their behavior, you know, "I don't

16 want to get drawn into that lengthy kind of litigation

17 by even coming close to what may or may not be

18 permissible." So, that's another type of chill that we

19 have to watch out for.

20       I just want to be sensitive to time here. I

21 guess we have heard from many witnesses today as well

22 that the goal of antitrust is to protect competition and

23 not competitors. That theme is well enshrined in the

24 guidelines that Sheridan was mentioning earlier today,

25 and to make it patently clear, "the objective of the

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1 abuse provisions is to promote efficient competition,

2 effective competition, and not the interests of any one

3 competitor or group of competitors. The provisions are

4 not intended to be used to attempt to tilt the playing

5 field in favor of market participants, who, for example,

6 lack the ability to compete with a more efficient or

7 better managed rival."

8       The take-away from that in this portion of my

9 remarks is that only in the clearest cases should

10 enforcement agencies intervene. To the extent that

11 there's any doubt as to the competitive legitimacy of

12 some behavior, I think more often than not the doubt

13 should be resolved in favor of the potential defendant

14 or target.

15       So, in response to Assistant Attorney General

16 Barnett's question, whether agencies should be more or

17 less aggressive in this area, I would urge caution, and

18 I will answer that as a yes, they should tend towards

19 being less aggressive.

20       This notion of risk was also addressed in one

21 case by the Competition Tribunal, language that sort of

22 tracks Trinko, where they said, "It would not be in the

23 public interest to prevent or hamper even dominant firms

24 in an effort to compete on the merits. Competition,

25 even tough competition, is not to be enjoined by the

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1 Tribunal but rather only anticompetitive competition.

2 Decisions by the Tribunal restricting competitive action

3 on the grounds that the action is of overwhelming

4 intensity would send a chilling message about

5 competition, that is, in our view, not consistent with

6 the purposes of the Act."

7       The statistics on enforcement history in Canada

8 I think reflects this concern about dominance. The

9 earlier cases -- and if people want to hear about them,

10 we can deal with them later -- were clearly ones in my

11 mind that were at the obvious end of the scale. They

12 weren't even -- they may have been charcoal but

13 definitely not gray, and we have had five contested

14 cases in the 20 years since the legislation was adopted.

15 Orders were issued in four. The fifth is under -- is

16 the one, the Canada Pipe case, and it's likely -- how

17 can I put this -- it's likely that an appeal to the

18 Supreme Court of Canada will be sought in that case.

19       The last comment I will share with you is, as

20 Sheridan Scott took you through the tests, is there

21 dominance, is there an anticompetitive purpose, has it

22 reached the effects threshold, that this concern about

23 the chill is reflected in that section, because at the

24 very end, even if you've met all of these three tests,

25 the Tribunal is still left with the discretion not to

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1 issue an order. It's not a "shall." It's "the Tribunal

2 may." So, I think that's reflective of concern by

3 Parliament of this chill, and with that, I will turn the

4 mike over to Margaret.

5       MR. MASOUDI: Thank you, George.

6       (Applause.)

7       MR. MASOUDI: Our next speaker will be Margaret

8 Bloom. Margaret is a visiting professor in the School

9 of Law at King's College of London and is Senior

10 Consultant at Freshfields Bruckhaus Deringer. Between

11 1998 and 2003, Ms. Bloom was Director of Competition

12 Enforcement at the United Kingdom's Office of Fair

13 Trading, where she headed the Competition Enforcement

14 Division. Before joining OFT, Ms. Bloom worked in the

15 United Kingdom's Cabinet Office and Department of Trade

16 and Industry on Privatization, Competition Policy, and

17 Public Sector Finance. She was Vice-Chair of the OECD

18 Competition Committee for six years, and she is a

19 Commander of the Order of the British Empire based on

20 her work at the Office of Fair Trading. Very

21 impressive, Margaret.

22       MS. BLOOM: Thank you, Jerry. I'm pleased to be

23 here today to present some experience from overseas.

24 There are three areas I am going to talk about.

25 Firstly, look at the question of whether all

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1 jurisdictions should have the same approach to

2 single-firm conduct, then look at some action to

3 increase convergence worldwide in the treatment of

4 single-firm conduct, and then spend a bit more time in

5 drawing some lessons which come from all the discussion

6 there's been in Europe on the review of Article 82.

7       So, turning to the first question, should all

8 jurisdictions who are addressing single-firm conduct

9 take the same approach? Let's make the assumption --

10 and it's just an assumption -- that every jurisdiction

11 applying single-firm conduct is seeking to maximize

12 consumer welfare. I know that's not necessarily the

13 position, but assume it is. In that circumstance,

14 should they all approach single-firm conduct in exactly

15 the same way, or should there be some differences in

16 order to maximize consumer welfare worldwide? I think

17 there are some small differences, though I think they're

18 not nearly enough to explain the different approaches

19 between jurisdictions.

20       My first set of differences is, if you compare

21 the United States with Europe and you look at the market

22 structures, in Europe, there are a fair number of

23 powerful companies that were formerly state-owned

24 monopolies. They did not become powerful; they didn't

25 become dominant because they were so successful through

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1 rivalry in the marketplace. They were awarded a state

2 monopoly.

3       Secondly, if you look at Europe, many of the

4 markets are just national markets, so they are quite

5 small. Certainly in some of the Member States, you may

6 have very few significant players in these smaller

7 markets. If you have that sort of market structure

8 compared with the U.S., where the big firms have more

9 won their position by being successful in the

10 marketplace and there's much more rivalry within a

11 market, should enforcers take a closer look at

12 single-firm conduct in Europe? Probably yes. Should

13 they intervene a bit more readily? Possibly. I think

14 there could be some grounds for it.

15       Let's look at a second point. A number of

16 commentators have said that in the U.S., because of the

17 attraction of treble damages suits, the courts have

18 sought to narrow the application of Section 2. We

19 haven't had the same pressure in Europe. There are very

20 few private actions before the courts. If there are

21 more private actions in the future, might that lead the

22 national courts to seek to narrow the application of

23 Article 82? Possibly, but we're never going to have

24 anything like the extent of private actions, I guess,

25 that you have here.

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1       As I say, I think these are relatively small

2 reasons for the differences. The main reason for the

3 differences between jurisdictions probably lies with the

4 different judgment over what's the right balance between

5 false negatives and false positives. Personally, I

6 think the U.S. is right to be duly nervous about false

7 positives. I think in Europe, we're a bit too ready to

8 intervene too often.

9       Okay, let's look at the next area. What action

10 might be taken to increase convergence worldwide?

11 Clearly there's already a lot of work being done through

12 the ICN, the OECD, the U.S. agencies and others. I just

13 want to touch on three areas which from my personal

14 experience are particularly valuable in terms of

15 increasing convergence.

16       The first one is training and sharing

17 experience. I think the direct training and sharing

18 between enforcers so that they can work with other

19 enforcers in other jurisdictions is extremely valuable.

20 It's a very good way of helping to understand why other

21 countries and other jurisdictions are doing things

22 differently and maybe make you think, well, perhaps I

23 should learn from that one, and two examples of this are

24 in the area of cartels and in mergers.

25       Firstly, in cartels, the International Cartel

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1 Enforcers workshops that were initiated by the

2 Department of Justice, then a year later, the Office of

3 Fair Trading in the UK hosted the workshop, and the

4 following year, the Canadian Bureau in Canada. They

5 were all involved enforcers exchanging experience

6 actively among each other. On the merger side, my

7 example is from the ICN Investigative Techniques for

8 Mergers workshop.

9       The second area is guidelines. The ICN Merger

10 Guidelines Workbook that was launched this year at the

11 annual conference in Capetown, is an extremely good

12 document. It was put together through extensive work by

13 experienced agencies and the private sector. It's been

14 very well received, not only by developing countries,

15 but also by experienced individuals in developed

16 countries, and I know of at least one law firm in which

17 the associates find it very useful in knowing how to

18 address competitive effects in mergers.

19       So, thinking about that workbook, I was

20 reflecting on the fact, how do other countries learn

21 about the good U.S. practice in relation to single-firm

22 conduct? I know you have plenty of case law with

23 judgments and opinions, and you've got lots and lots of

24 books and articles, but there's no user friendly

25 guideline. It is actually remarkably difficult for

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1 people overseas, unless they are going to spend a long

2 time reading a lot of material, to get a proper feel of

3 how one should go about conducting a single-firm conduct

4 analysis, what kind of cases you should take and you

5 shouldn't take.

6       You should not overestimate the knowledge

7 overseas of what is taking place in the United States,

8 and I know that the American Bar Association is strongly

9 encouraging the European Commission to issue guidelines

10 on Article 82 when the current discussion is complete.

11       The last area is staff exchanges, and in that

12 I'm talking about exchanges of staff between agencies.

13 That's quite common in Europe. It may either be between

14 the national agencies and staff may move for a

15 relatively small period of time, or it may be between

16 the national agencies and the European Commission. It's

17 another very good mechanism in increasing knowledge and

18 understanding. If it was possible for the American

19 agencies to take part in that I think it would be very

20 valuable. I recognize it's quite a challenge, but it

21 would be very valuable if it's possible.

22       Let me then turn to the lessons. These lessons

23 are from the Article 82 review. They are not

24 necessarily all going to be adopted in the review, but

25 they are lessons which I've personally drawn in terms of

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1 thinking about what would be some sound rules for good

2 single-firm conduct enforcement. There are eight of

3 these.

4       The first one is you need clear objectives on

5 what you're seeking to do. The Article 82 discussion

6 paper says that the objective is to enhance consumer

7 welfare and efficiency. Theses are clearly good

8 objectives. Though I must admit that throughout the

9 discussion paper, it isn't entirely obvious in places

10 that those objectives are the ones that would be

11 achieved by some of the proposals in the paper.

12       More of a problem, and Philip Lowe mentioned

13 this this morning, is the fact that much of the European

14 case law is influenced by other objectives, in

15 particular, protecting the structure of competition and

16 protecting the rights and opportunities of market

17 operators, not obviously a perfect match for enhancing

18 consumer welfare.

19       Lesson number two, before any intervention,

20 there should be a plausible theory of consumer harm.

21 This may be actual harm, possibly it will be likely

22 harm, because that's easier to demonstrate than actual

23 harm, but you must have a plausible theory before you

24 should be able to intervene or before a plaintiff will

25 succeed in a court.

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1       The third lesson, avoid overly complicated

2 rules. Even if the economics indicate that a perfect

3 rule, for example, for discount would be some rather

4 complicated measure, that's not going to work

5 effectively for business, and also it will probably be

6 difficult for a agency.

7       Fourth, efficiency benefits should be assessed,

8 but they should be a part of the analysis of conduct.

9 They shouldn't be just a limited defense.

10       Number five, use safe harbors rather than

11 presumptions of dominance or presumptions of monopoly

12 power or presumptions of abuse. The reason why I would

13 suggest safe harbors rather than presumptions is that as

14 long as the safe harbors are large enough, they are

15 going to give business certainty. On the whole, it's

16 likely to be more economically rational to have a safe

17 harbor than a presumption. Also, if there is a

18 presumption, you should not reverse the burden of proof

19 and then put it on the company or on the defendant.

20       Let me just give you two examples of safe

21 harbors in the question of substantial market power,

22 dominance or monopoly power. Assuming you can define

23 the market in single-firm conduct, and that's a pretty

24 tough assumption, but say you have got a reasonable idea

25 of the market. If the firm has a low market share, it

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1 cannot have substantial market power because you've got

2 plenty of existing competitors. But if a firm has a

3 high market share, it is not a safe presumption that it

4 has substantial market power. There may be low barriers

5 to entry so that they've got potential competitors.

6 There might be buyer power.

7       If you turn to abuses in single-product loyalty

8 discounts and predation, a useful safe harbor would be

9 price above average avoidable cost, or if you prefer,

10 average variable cost, but I think average avoidable

11 cost is probably a better measure and better for

12 business to assess.

13       The sixth question, it should not be too easy to

14 find a firm is dominant or it has monopoly power.

15 Again, my preference would be to follow the U.S.

16 approach rather than the EC approach, where it is too

17 easy to find a firm is dominant and this puts too many

18 companies at risk of being found to have abused a

19 dominant position, because you don't need much market

20 power before you're found to be possibly dominant.

21       The last two lessons. First of all, number

22 seven, avoid what I've called "abuse shopping."

23 Different abuses will have the same economic effect, but

24 in Europe, these different abuses may well have

25 different tests or different cost benchmarks, although

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1 the economic effect is the same, and sometimes, it's

2 easier to prove one form of abuse than another. That

3 shouldn't be the position. It should not enable the

4 agency to abuse shop, to use the easiest form of abuse

5 to prove.

6       If you look at predation and single-product

7 loyalty discount, same economic effect, but one is much

8 easier to prove than the other in Europe. Or if you

9 look at a margin or price squeeze (the difference

10 between the price upstream and the price downstream at

11 the retail level), you can either address the margin or

12 you could look at predation downstream in the retail

13 market or refusal to deal upstream. They would have

14 different tests, and some of them are easier to prove

15 than the others.

16       Then the last and the eighth lesson, we may need

17 more than one test of harm to cover different types of

18 exclusionary conduct. That seems to me not a problem

19 provided that it is absolutely clear which test of harm

20 is going to be used for which exclusionary conduct. If

21 we're only going to have one test of harm, on balance, I

22 would prefer the no economic sense test to the equally

23 efficient competitor, because I think the former is

24 probably easier or less difficult for business to

25 understand and to apply. Also, I think it's less likely

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1 that agencies will intervene as readily in the no

2 economic sense test as with the equally efficient

3 competitor test.

4       Thank you.

5       (Applause.)

6       MR. MASOUDI: Thank you, Margaret.

7       Our next presenter will be Paul Lugard. Paul is

8 the Global Head of Antitrust of Royal Philips

9 Electronics NV. He is a member of the editorial board

10 of two Dutch magazines on competition law and regularly

11 publishes himself, recently on intellectual property

12 licensing and patent pools, nonhorizontal mergers, the

13 Article 81(3) notice, and exclusive dealing under

14 Article 82.

15       He represents Royal Philips Electronics in the

16 European Round Table and is a Co-Chair of the Commission

17 for Competition of the Dutch Employers' Association

18 VNO-NCW. He is a Vice-Chair of the ICC Competition

19 Commission and chairs the ICC Task Force on Vertical and

20 Conglomerate Mergers of the ICC Competition Commission.

21       Thank you, Paul.

22       MR. LUGARD: Thank you.

23       Good afternoon. My perspective is that of an

24 in-house antitrust practitioner working for a technology

25 company with activities in the U.S., Europe and Asia. I

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1 appreciate that I'm the only person from a company, and

2 I will try not to be intimidated this afternoon.

3       The nature of Philips' international activities

4 in part explains my concern about diverging standards

5 between jurisdictions, not only between the EU on the

6 one hand and the U.S. on the other hand, but to an

7 increasing extent also with Asia. I believe that the

8 divergence in the area of unilateral conduct is larger

9 than in any other area of antitrust or merger control

10 law. At the same time, the need for convergence in this

11 specific area is most pressing, because different and

12 inaccurate standards for exclusionary conduct involving

13 firms with significant market power, are most likely to

14 defeat procompetitive conduct, that ultimately benefits

15 consumers.

16       The problem is that convergence in this area is

17 most difficult to achieve not only because of the

18 problems inherent in convergence and convergence

19 initiatives, but also because in key jurisdictions,

20 there is no clear analytical framework to assess

21 unilateral conduct.

22       In other words, if the U.S. agencies and DG COMP

23 would be able to come up with a more refined analytical

24 framework, then I believe that convergence will be much

25 easier to achieve. I'm very much in favor of the

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1 initiatives that are taking place within the framework

2 of the ICN and also the ECD, and I can only say that

3 there's not enough of those initiatives, but as I said,

4 I believe that a clearer analytical framework both on

5 this continent and for Europe would spur convergence

6 initiatives even more.

7       The experience I have with the transactions that

8 my company is involved in makes one thing clear to me.

9 We need a proper analytical framework that takes account

10 of both static and dynamic effects, and if the agencies

11 would be able to tell us how, in particular, dynamic

12 efficiencies could be factored into the analysis of

13 unilateral conduct, that would be an immense step

14 forward. So, in my view, there is an urgent need for

15 the two key jurisdictions, the EC and U.S., to align

16 their approach towards unilateral firm behavior. But I

17 believe that there is an even clearer and more urgent

18 need to first develop a coherent and clear framework

19 analysis in both of the home jurisdictions.

20       I would hope that since both agencies, the two

21 U.S. agencies and the European Commission, are at the

22 same point in time reflecting on the proper approach

23 towards dominant firm behavior, the U.S. agencies would

24 be inclined to even more participate in the debates with

25 Europe on the proper scope of Article 82 and vice versa.

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1       So, if there is a need for a clearer analytical

2 framework, then the question arises, why doesn't that

3 framework exist already? I am talking about the U.S.

4 Coming from Europe, I am, of course, a little bit on

5 thin ice here, but there may be two reasons.

6       The one reason might be that in the U.S.,

7 Section 2 offenses are litigated in courts, which in

8 most cases means that one party either loses or wins

9 depending on whether the other party meets its burden of

10 proof. I believe that the court in Microsoft mentioned

11 that, in the end courts may be called upon to balance or

12 to determine the net effect of dominant firm behavior.

13 However, the reality is also that balancing or trying to

14 assess and quantify that negative effect in practice

15 hardly ever takes place.

16       The second reason might be that in many courts,

17 as well as outside courts, if we talk about exclusionary

18 behavior, there is too much, "I know it when I see it,"

19 and that doesn't help to come up with a proper general

20 framework or methodology.

21       To me, the proper benchmark is long-term

22 consumer surplus. If one of the standards that is

23 currently proposed would be able to distinguish good

24 from bad behavior and would be able to distinguish

25 whether consumer surplus goes up or down, then that

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1 would be wonderful. I don't think that the business

2 community would mind whether there is more than one test

3 to discriminate between those types of behavior, but if

4 it's true that all these tests are either over-inclusive

5 or under-inclusive, then I ask myself whether it

6 wouldn't be more logical to look at what's happening in

7 the market, certainly in ex post evaluations, and then

8 try to assess whether consumers are benefited or not

9 from the behavior at issue.

10       I was very impressed by Professor Salop's recent

11 reflections on the consumer welfare effects standard in

12 the Antitrust Law Journal, I believe it was the July

13 issue of this year, although I believe that much can be

14 said about his suggestion to apply that standard on an

15 ex ante basis only and the application of that test to

16 "more efficient" firms.

17       Now, if we were to assume that the consumer

18 surplus test in some form is the right thing, then a

19 number of issues are required. First, we need to know

20 whether the agency or plaintiff should not only prove

21 some kind of output reduction or other loss of

22 efficiency as a result of the exclusionary conduct, but

23 in addition, also to quantify that loss, and I know that

24 in the U.S., quantification is probably not a strict

25 standard, but oddly enough, the EU approach is

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1 different. You may recall, that there were some remarks

2 on the Article 83 Notice this morning, and I would also

3 take the position that the Article 82 discussion paper

4 itself is based on the assumption that consumer surplus

5 and negative effects on consumers could, to some extent,

6 be quantified and could be used as a tool to distinguish

7 good from bad behavior.

8       Secondly, we would need to know how agencies and

9 courts balance foreclosure effects against dynamic

10 efficiency effects. How do we arrive at the effective

11 identification of the net effect? Obviously this is

12 particularly important in sectors that undergo rapid

13 technological changes, because it is in those sectors

14 where dynamic efficiencies may be most important.

15       Thirdly, to ensure that courts arrive at the

16 right outcome, and perhaps as an additional safeguard

17 against false positives, there should be a requirement

18 that there is a clear articulation of the theory of

19 harm. Many of the post-Chicago economic theories that

20 seek to explain anticompetitive effects arising from

21 exclusionary conduct require the presence of some sort

22 of externality, and interestingly enough, in July of

23 2005, a report was issued by the EAGCP, a think tank, if

24 you wish, reporting to the European Commission that

25 recommended that in each case where the Commission

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1 identifies exclusionary conduct, it should be forced to

2 identify the externality at work, so that there would be

3 an additional requirement to identify the theory of harm

4 causing the negative effects on competition.

5       I was interested to hear Philip Lowe's remark

6 this morning about the likely effects which would

7 require some sort of articulation of the theory of harm,

8 but that that might not necessarily be required if the

9 evaluation of is of an ex post nature. In that case,

10 there would be actual effects in the markets, and it

11 should be much easier to be capable of finding a

12 violation. My sense is that still in an ex post

13 evaluation, it would be needed to come up with a

14 plausible theory of harm.

15       There are other subjects that should be

16 reflected upon in the context of Section 2. In the

17 U.S., there is the Doctrine of Patent Misuse. There is

18 no such an equivalent in Europe. Especially for

19 European companies doing business in the U.S., it would

20 be helpful if there would be some sort of alignment to

21 the Section 2 policy and the policy of patent misuse.

22       Secondly, it would be helpful if more clarity

23 would be given with respect to the difficult subject of

24 incompatible design changes, technological tying cases,

25 and an explanation how those cases should be analyzed in

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1 the framework of a consumer surplus or other standards.

2       And finally, what should be done about the soon

3 to be effective Chinese antimonopoly law? China

4 proposes legislation that contains a number of vague and

5 elusive definitions regarding both dominance and abuse,

6 in particular in the field of intellectual property, and

7 I would hope that the Chinese authorities would obtain

8 input both from DOJ and FTC, as well as DG COMP for a

9 rational implementation of those concepts.

10       Thank you very much.

11       (Applause.)

12       MR. MASOUDI: Thank you, Paul.

13       Our final panelist is Jim Rill. Jim is a

14 partner at Howrey LLP here in Washington, D.C. He's

15 served as the Assistant Attorney General in charge of

16 the Antitrust Division at the Department of Justice from

17 1989 to 1992 and was chair of the ABA's Antitrust

18 Section from '87 to '88. While he was Assistant

19 Attorney General, Jim negotiated the U.S.-European Union

20 Antitrust Cooperation Agreement of 1991. In 1997,

21 Attorney General Janet Reno and Assistant Attorney

22 General Joel Klein appointed Mr. Rill to serve as

23 Co-Chair of the United States Department of Justice's

24 International Competition Policy Advisory Committee.

25       Jim, thank you for joining us.

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1       MR. RILL: Thank you, and let me echo the

2 comments of the prior panelists, that I'm honored and

3 grateful to be a participant in this round table, both

4 with the eminent enforcers that appeared this morning

5 and my distinguished colleagues this afternoon.

6       I can't resist some preliminary comments to the

7 thoughts and suggestions I would make and perhaps set a

8 pattern for the issues that we're confronting. One,

9 with the increasing proliferation of antitrust

10 authorities across the world and the dynamics of the

11 modern economy imbued with a high level of intellectual

12 property and cross-border technology, the actions of an

13 agency in one jurisdiction cannot help but have

14 ramifications beyond that jurisdiction and throughout

15 the rest of the world.

16       I remember in a Conflicts of Law textbook I had

17 a picture on the front page was, "Can the laws of the

18 island of Tobago protect and preserve the laws of the

19 entire British Empire?" I think we're faced with a

20 greater challenge than that today, although I don't

21 pretend to be an expert on the laws of Tobago.

22       Secondly, the different approaches of the

23 different antitrust agencies across the world provide a

24 daunting task to the ability of multinational firms,

25 firms practicing and doing business, operating in more

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1 than one jurisdiction, to plan business strategies with

2 any confidence that they will avoid antitrust challenge.

3 As a result, there's a definite threat of a chill, the

4 least common denominator approach in business counseling

5 that can discourage procompetitive business activity and

6 adversely affect consumer welfare.

7       Thus, the very complexity in the analysis of

8 single-firm conduct calls on us to take significant

9 caution and challenges the steady approach towards

10 convergence and certainly that we have seen in such

11 areas, for example, as horizontal mergers, especially

12 since I'd suggest that in the area of single-firm

13 conduct, particularly where one is dealing with a highly

14 innovative, procompetitive, dominant firm, there's a

15 real tendency, an appetite, for competitors who are hurt

16 by efficiency and procompetitive conduct to engage in

17 forum shopping, or as Hew Pate put it in a recent speech

18 when he was in office, to take an opportunity for every

19 agency across the world to have at least one whack at

20 the pinata to see if the competitor can't find an agency

21 somewhere, somehow, that's going to go after the pro --

22 what is, I would submit, arguably, is the procompetitive

23 conduct.

24       So, the thought I'd like to address today is the

25 crying need, if you will, for transparency, at a minimum

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1 certainty, and at least some mechanisms for the ability

2 of agencies to achieve, in time, convergence in

3 single-firm or dominant firm, if you will, conduct

4 across borders, and I would suggest that in those areas,

5 mechanisms should be employed to establish safe harbors,

6 which was discussed this morning, and in more complex

7 areas where safe harbors seem not to be appropriate.

8 Where more intense analysis is required, the agencies

9 should focus on principles towards certainty and

10 transparency, and there are institutional mechanisms

11 which already exist that can be implemented and followed

12 in greater depth to promote these ends.

13       There has not been nearly the progress towards

14 certainty, transparency, much less convergence, in the

15 area of single-firm conduct as in, for example, in the

16 case of horizontal mergers. Thus, our job as

17 counselors, to have some confidence that we're giving

18 advice that can be used across the world concerning

19 antitrust risk, is very challenging, particularly in the

20 areas of pricing, intellectual property licensing,

21 marketing programs and so forth.

22       Even where at least most agencies would agree

23 that consumer welfare is an abiding and generally

24 applicable principle, the term itself has ambiguous

25 meanings. Does consumer welfare mean simply enhanced

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1 rivalry? Are we talking about consumer welfare in terms

2 only of above marginal cost -- marginal cost pricing, or

3 are we talking about consumer welfare in the sense of

4 total welfare, or are we simply giving lip service to

5 the term "consumer welfare" as we go on about

6 protectionist policies?

7       The application of this concept, even where it's

8 agreed upon, and it's not universally agreed upon, to

9 dominance, to market definition, is ambiguous in many

10 jurisdictions, and when it's applied to conduct, the

11 challenge is exacerbated. When one looks at refusals to

12 deal -- look at the laundry list we saw this morning in

13 one agency, that single-firm conduct can be challenged

14 where it's a tied sale, exclusive dealing, refusals to

15 deal, predation, discounts, cross-subsidization or

16 raising rivals' costs.

17       Now, apply that, if you will, to a situation

18 where you are trying to advise or you are a company

19 trying to maximize your own legitimate business

20 strategies and run that laundry list and see what those

21 meanings have, and also, when we see in the concepts

22 underlying many of the statutory provisions relating to

23 single-firm conduct terms such as "unfair." I remember

24 George Will in a speech recently said, "In my family, we

25 eliminate the four-letter word starting with F, fair."

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1 Unfair, unjust, preference, undue advantage. When you

2 try and apply those in a concrete sense, frustration

3 abounds.

4       Let me suggest this: There is a need for at

5 least safe harbors for several purposes. One, they

6 certainly contribute to certainty and minimize

7 unwarranted frustration and procompetitive conduct.

8 Two, they can spare enormous expense, if you will, to

9 business in attempting to identify all levels of conduct

10 or baseline minimal levels of conduct that take place

11 across borders or can have ramifications across borders.

12 And three, they can actually help the agencies focus

13 their own resources in areas where those resources need

14 to be arrayed in order to prevent or at least

15 investigate practices that carry the real threat of

16 anticompetitive effect.

17       First, let's look at structural safe harbors,

18 and a two-step approach is called for here, market

19 definition and market share, and as I say that, and I'm

20 very well aware that market definition is only a proxy

21 for market power and an inexact proxy and one that some

22 practitioners, myself not included, think should be done

23 away with. Static market share becomes even more

24 unreliable in today's economy where industries are

25 traditionally characterized by overnight transformation

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1 of market position and market innovation. So,

2 nonetheless, market share and market definition remain

3 an informative indicator to the potential for a firm to

4 exercise unilateral market power, and I say, somewhat

5 from a practical standpoint, market definition and

6 market share is produced by the agencies as a starting

7 point for their analysis, so I shouldn't really ignore

8 what they're doing.

9       But having said that, of course, there are a

10 variety of approaches, and I don't need to get into them

11 today, a variety of analytical approaches, an array of

12 different terminology used to define markets, and in

13 addition to the analytical divergence, there's a

14 practical divergence in the evidentiary basis that is

15 used for the definition of the markets, and they vary

16 from jurisdiction to jurisdiction.

17       One, high market share -- I mean, let's be very

18 clear in this proposal, that a high market share should

19 not be an indicator -- certainly not an exclusive

20 indicator or a reliable or terribly important indicator

21 of the existence of market power. It can, however,

22 serve as a minimal tool, a realistic minimum, that would

23 provide a safe harbor and certainty for all the reasons

24 that have been mentioned certainly. The benefit of it

25 is many competition agencies, at least some competition

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1 agencies, already employ a structural safe harbor.

2       The selection of an appropriate level is needed

3 to be -- evokes a continuing dialogue. If the threshold

4 is too low, there are two dangers. One, it's too low,

5 so it provides no realistic certainty. Two, the bottom

6 line can become the -- the top line can become the

7 bottom line, so anything then above the safe harbor as a

8 practical matter could be employed by the agency to

9 stimulate unnecessary investigation and possible

10 challenge. In short, the threshold as low as 20 percent

11 or 10 percent, as we've heard, really isn't going to

12 provide much guidance, much comfort, much help to the

13 enforcement agency or, for that matter, the businesses.

14 Structural safe harbors are not enough.

15       I was very encouraged today in reading the

16 discussion draft on Article 82 of the effects analysis

17 approach in the EU. The question simply at the conduct

18 level of the safe harbor is what's the exclusion, who is

19 excluded, and what is the anticompetitive effect. Some

20 conduct should be characterized categorically as a safe

21 harbor type of conduct. We made approaches to this in

22 the U.S. and elsewhere in the area of predatory pricing,

23 and work in this area is being done by Greg Werden, and

24 comments were made by Philip Lowe in the area as well of

25 the development of conduct safe harbors, and it

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1 suggested candidates for safe harbors would consist of

2 patently procompetitive conduct that include new product

3 introduction, improved product quality, cost reducing

4 innovation, energetic market penetration, successful

5 research and development, and the potential for the

6 development Paul Lugard was talking today about an

7 appropriate measure.

8       How do we get there? First, as Margaret

9 mentioned earlier, there's much room for improved

10 case-by-case cooperation. That cooperation, at least

11 between the U.S. and the EU, is underway and has been

12 very effective in the merger area with working groups

13 and actual cooperation on particular cases. Business

14 can facilitate this cooperation by properly designed or

15 properly limited waivers in confidentiality. The OECD

16 round tables and the OECD work has been highly useful in

17 this area.

18       There have been programs on single-firm conduct.

19 The OECD seminal work with the business community on

20 merger procedure is a good litmus to be followed in this

21 area. The 30 OECD countries submit their papers on the

22 types of conduct that will be considered both illegal

23 that are case based and also conduct that might fall

24 within safe harbors. One benefit here would be if those

25 jurisdictions would be more forthcoming and in depth as

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1 to why a particular course of conduct would be

2 considered unlawful single-firm conduct, again, back to

3 the concept of who was excluded and why.

4       Some of the cases that I saw this morning, I

5 wanted to reach out and say, okay, so you're prescribing

6 a particular bid formula or prescribing particular

7 specifications, and? That was unlawful because? And I

8 think having more forthcoming descriptions of where that

9 exclusion occurred and why would be very helpful in the

10 context of the OECD.

11       I want to commend the International Competition

12 Network's launch of a working group on single-firm

13 conduct. I think the group has made progress already on

14 developing a sound work plan which promises to be highly

15 beneficial in spearheading more transparency and

16 ultimately convergence in this area. I think in that

17 area, the stock taking would be very useful, taking it

18 in depth and analyzing with some degree of thoroughness.

19       Guidelines have been mentioned. I must say I

20 haven't read the Canadian Guidelines, but I will have to

21 run home and do that, but I worry in principle -- not

22 referring to the Canadian Guidelines -- some people

23 might stop me, but I think that one thing that could be

24 said is that guidelines can unduly sometimes stultify

25 and set in concrete the wrong decision. I would not

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1 want to live today with the Turner Guidelines For

2 Horizontal Mergers.

3       So, to come back to the basic principles, I

4 think that guidelines for transparency or convergence

5 can follow three basic principles. They need to be

6 workable and understandable; they need to be

7 sufficiently flexible to be adapted to changing,

8 improving, we like to think, economic thinking; and they

9 need to be based ab initio on the best sound legal and

10 economic thinking available today.

11       So, those are the steps I would recommend for

12 transparency, and thank you very much for allowing me to

13 be here.

14       (Applause.)

15       MR. MASOUDI: Thank you very much to all of our

16 panelists for very interesting comments. I think what

17 we will do now is take a break for about 15 minutes, and

18 then we will reconvene when we'll have some discussion

19 by the panelists about each other's presentations as

20 well as some questions. So, let's reconvene at about I

21 guess ten minutes to 3:00.

22       (A brief recess was taken.)

23       MR. MASOUDI: Okay, I think we'll get started

24 again. We tried to offer some light into the room, but

25 apparently the shutters are set to turn down

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1 automatically.

2       I think we'll get started now, and I think what

3 we will do is similar to what we did this morning. We'd

4 like to give each of the panelists an opportunity to

5 comment for a few minutes on what the others have said,

6 and we will start with you, George.

7       MR. ADDY: Thank you.

8       As much as I consider jurisprudence a public

9 good, and some would say we can never have enough of

10 that, I'm not advocating increased enforcement in this

11 area but I think greater clarity as to what the rules of

12 the game are would be useful, both to agencies and

13 businesses.

14       I'm not sure I would agree with Paul, though, on

15 this issue of convergence. I think there is a need, as

16 I say, for clarity, for clearly articulated rules, what

17 are rules of the game in country X, Y and Z, so that

18 business decisions can be made, but I think most of the

19 decision-making is typically done locally at the state

20 level in any event, although I recognize IP is a big,

21 big problem, and I don't know how you crack that nut,

22 frankly, but if you put that aside, I'm not sure how

23 much of even the globalized world, business

24 decision-making and conduct is done at the global level.

25 I think a lot of it's done at the local level.

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1       And I think there's more scope in this area for

2 countries to reasonably disagree on what they consider

3 to be the prime policy drivers in attacking single-firm

4 conduct. With cartels, you know, countries, I think,

5 are much more aligned as to what the evil is there that

6 they're seeking to attack, and I think there's probably

7 a lot more room in the area of single-firm conduct for

8 different countries to reasonably disagree as to what

9 they want to attack, but I think that the most critical

10 point to advisers in the business community is to make

11 sure that the rules are clear and understandable.

12       MR. MASOUDI: Okay, Margaret?

13       MS. BLOOM: Okay, thanks, Jerry. There are four

14 quick points I'd like to make.

15       First of all, I think it's clear from this

16 morning and this afternoon that this is an area of law

17 where there is lots of change, so it is evolving. There

18 is a lack of case law generally, and there is an

19 increasing number of jurisdictions applying single-firm

20 conduct law, which means this is an increasing challenge

21 for business in relation to legal certainty. I do not

22 underestimate the importance of the chill factor.

23       The second point, I do not think that an

24 effects-based approach need necessarily be uncertain.

25 If you have good size safe harbors -- and I emphasize

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1 the good -- if you have got decent sized safe harbors,

2 then the effects-based approach can also deliver legal

3 certainty.

4       I was very encouraged by Philip Lowe's reference

5 to the fact that he thought, in relation to Article 82

6 in Europe, we should be less defensive. One point I was

7 just reflecting on, in relation to the size of the safe

8 harbors and the impact of the chill effect, I suspect

9 that in those jurisdictions (which is most of them

10 outside the United States), where the officials have not

11 been in business and they have not got the revolving

12 door, the enforcers probably underestimate the chill

13 factor. Certainly I have been more aware of it since I

14 have moved from being an enforcer to being in private

15 practice.

16       The third point, guidelines, I have stressed how

17 important I think they can be. We need to have

18 well-based guidelines, and I endorse the three rules

19 that Jim Rill had in relation to producing useful

20 guidelines, and I very much hope we will be seeing

21 guidelines in Europe.

22       And then the last point, the scope of the law

23 point that was raised this morning. Unfair trading and

24 protection of smaller firms was mentioned for Japan.

25 It's also in the laws a fair number of the European

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1 Union Member States, and dare I mention it, the United

2 States has something called the Robinson-Patman Act. It

3 seems to me that this whole area might be one for the

4 ICN new working group to look at because it isn't just a

5 question of the abuse of dominant position Section 2

6 type conduct, but it's what laws do countries have

7 against unfair trading as well.

8       Thank you.

9       MR. MASOUDI: Thank you, Margaret.

10       Paul?

11       MR. LUGARD: I think convergence is important,

12 but it is even more important to have a basic

13 understanding of the framework of analysis, even if this

14 means that there are different approaches in key

15 jurisdictions. I fully agree with Margaret that an

16 effects-based analysis doesn't necessarily mean that all

17 is unpredictable, and I believe that there is an urgent

18 need for the international business community to know

19 how it should assess its own conduct, even if that means

20 that it has to go through very difficult analyses.

21       There is a real chill factor in particular in

22 high technology markets. Perhaps we'll discuss that in

23 a second, and among the issues that need to be addressed

24 is certainly IP, and within that category, one of the

25 first things that needs to be thought about is

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1 compulsory licensing, because that is where there's a

2 large degree of divergence, and in many of those cases,

3 the effects are not limited to one jurisdiction, but

4 instead, the decision of one agency might have worldwide

5 repercussions.

6       MR. MASOUDI: Okay, thank you, Paul.

7       Jim?

8       MR. RILL: It's always the danger of being the

9 fourth one that I tend to want to agree with everything

10 that everybody said, but I will say I think that the

11 need is for first transparency. Transparency can be

12 contributed to by safe harbors. I don't throw up my

13 hands or sit on them with the notion that convergence

14 over time is impossible. I think a great amount of

15 convergence has come with learning in the area of

16 horizontal mergers, but it takes time, it takes

17 dialogue, it takes effort.

18       I think we're a good ways away, Paul, from any

19 kind of convergence on dynamic versus static

20 efficiencies, of the appropriate definition of all the

21 important, critical factors to look at.

22       On this morning's program, I was taken with not

23 only the increasing interest and focus on dominant firm

24 conduct but the work that's being done in every

25 jurisdiction that spoke, also the U.S., on efforts to

141

1 study and add clarity to the principles being adopted by

2 or explored by the jurisdictions, rather, in that area.

3 The Canadian Guidelines, the Japanese study group, the

4 discussion draft process in the EC, the statutory

5 revisions in Mexico, all underscore the efforts that are

6 being made in the jurisdictions to bring clarity and

7 sound principles into the application of the law to

8 dominant firm conduct. Nonetheless, a lot remains to be

9 done.

10       I also picked up from this morning there's a

11 debate -- and I use that in the European sense --

12 between Japan and the EC on whether an effects-based

13 approach adds sufficient clarity. I think it could. I

14 think it does, properly applied, and I think even if we

15 sacrifice some clarity for sound economic approach, it's

16 a sacrifice that I for one would be willing to make over

17 a more traditional, formalistic approach. We still have

18 to deal with concepts and statutes that have concepts

19 such as unfair, unjust, exclusive advantage, terms that

20 I can't just at first blush add much flesh to, and I

21 think all these moves are in the right direction.

22       I was a little perplexed about this morning's

23 panel. There was very little discussion given to the

24 question of convergence and the instruments that are

25 available for at least transparency across

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1 jurisdictional lines in convergence, and I attribute

2 that to the fact that the agencies this morning were

3 quite properly focused on what was going on in their own

4 jurisdictions, but I think it's an area where, through

5 the ICN and the OECD, that the agencies can, are and

6 should do more work in the area of bringing about

7 cross-border transparency, and I suggest ultimately

8 convergence.

9       MR. MASOUDI: Thank you, Jim.

10       Now we will move on to some questions, and I

11 will hand the microphone to Randy.

12       MR. TRITELL: Thanks, Jerry.

13       Before I begin with the questions, two of the

14 speakers suggested that the U.S. agencies be engaged

15 with, for example, the EC and China on their work in

16 this area, and I just want to note that we are engaged

17 in and have been engaged in discussions with our

18 colleagues in Brussels about the Article 82 exercise and

19 remain engaged in discussions with the Chinese on the

20 evolution of their law, including in the dominance area.

21       Let me start out by tossing out a broad

22 question, which is what kind of trends do you observe,

23 looking around the legal landscape around the world, in

24 the single-firm conduct area? Do you see trends towards

25 convergence, for example, even in the basic objectives

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1 of unilateral conduct laws, towards consumer welfare, or

2 is there still work to be done there, or in the

3 analysis?

4       Where would you want to see more convergence,

5 and for those who think it's less important, are there

6 areas where you think it is still important for agencies

7 to be largely on the same page, and areas where that is

8 less important?

9       It also relates to the question that Margaret

10 asked, if you assume a consumer welfare objective,

11 should we all do it the same way?

12       Margaret, let me give you an opportunity to add

13 to your remarks, if you want to answer that question in

14 any way.

15       MS. BLOOM: Okay, would you like me to start, is

16 that --

17       MR. TRITELL: Yes, please.

18       MS. BLOOM: Okay. In terms of your first

19 question about what kind of trends, I think, first of

20 all, you've got more agencies with powers to apply

21 single-firm conduct. Every time you add a new agency,

22 then that is a tension, in a sense, to a degree away

23 from convergence, because you have got new staff

24 learning how to apply the law.

25       On the other hand, you have got, going the other

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1 way, more efforts being made, for example, through the

2 OECD, through the ICN. You have already got the

3 European Union, which is now 25 Member States, going up

4 to 27, and the European Union itself is clearly a force

5 for convergence between those states, so you have got

6 tensions going in either direction.

7       On your question about should there be more

8 convergence, yes, I think there should be as much

9 convergence as will achieve maximum consumer welfare.

10 I'm an advocate of having that as your objective.

11       As I said earlier, I think there are some small

12 reasons for differences between jurisdictions, and I

13 give the example of the U.S. against Europe. There's

14 another example I can think of with a similar sort of

15 issued. If you have a very small market, say you're an

16 island, say Iceland, for example, is your approach to

17 single-firm conduct different from the approach that

18 should be taken in the United States with a large market

19 with many players? It might be. I don't know what the

20 answer is. I think there is an argument that you could

21 have a reason for being slightly more interventionist.

22 Maybe you need to have a price regulator, although I

23 know a permanent regulator is very much a second best.

24       MR. TRITELL: I invite anybody else who would

25 like to comment on that.

145

1       MR. RILL: Let me just say, I see two somewhat

2 conflicting trends going on right now. I think we see

3 the trend towards more cooperation, if not convergence,

4 and clarity. I think that the very formation of an ICN

5 working group on single-firm or dominant firm conduct is

6 evidence of that. I see a conflicting trend, barely

7 visible but nonetheless visible, particularly in a

8 dynamic economic world where innovation creates fair

9 competitive advantages that may be short-lived,

10 competitors trying to game the system, to do forum

11 shopping, to take a number of whacks at the pinata, to

12 try and play on divergence to find an agency somewhere

13 that will accept their complaint. I applaud the ICN for

14 establishing the working group that will hopefully

15 address that issue.

16       What would I like to see more of? I think the

17 movement, at least in the U.S. enforcement agencies, and

18 from what I understand from Philip's remarks this

19 morning, towards an analysis of what is the effect of a

20 particular course of conduct, an in-depth probing of

21 that effect of, if it's exclusionary conduct that's

22 being addressed, who is excluded, what is the meaning of

23 that exclusion, and how does the conduct promote that

24 level of exclusion, with sound economic reasoning and

25 transparency of the analysis in the results achieved. I

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1 think that's the most desirable step that I would like

2 to see taken.

3       The second step, of course, is the proper role

4 of efficiencies in analysis, which Paul commented on

5 earlier.

6       MR. LUGARD: I agree with Jim that there is much

7 more cooperation between agencies, and I think that that

8 cooperation is generally producing positive effects;

9 also, for example, within the EC and European

10 Competition Network, and, of course, the ICN although

11 that's perhaps less formalized. There's more economics,

12 and perhaps paradoxically, I think a lot of the

13 convergence that we're speaking about today comes from

14 economists that tell us about the newest insights in

15 theories of harm that discipline indirectly the

16 decision-making processes of agencies.

17       I think there should be more reflection on the

18 evaluation of static and dynamic effects in one single

19 framework of analysis. I hope that the OECD round table

20 of October this year will stimulate that discussion, and

21 for the EC, I think that there is a specific issue that

22 needs to be addressed which relates to the burden and

23 allocation of proof. Again, that issue doesn't occur in

24 the U.S. because of the institutional setting, but that

25 problem is very real in Europe, and I can only hope that

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1 DG COMP will be able to come up with a sensible and

2 practical way to solve that problem.

3       MR. ADDY: If I can just piggyback on those

4 comments, and I'll try not to repeat, I think on the

5 positive trend side, the increased discussion and debate

6 in public, in a very transparent fashion, amongst

7 agencies and people in the trade about the issues

8 surrounding single-firm conduct is a very positive

9 trend.

10       Issues of concern, I would highlight what Paul

11 was saying. To the extent that people are developing

12 frameworks for analysis, I'm concerned about the use of

13 rebuttable presumptions, because even with the right

14 framework, with rebuttable presumptions, you are

15 creating this chill that I'm absolutely paranoid about

16 and I think is really, really underestimated. So, I

17 don't think that's the way to go.

18       And I wouldn't want the increased dialogue and

19 work, which I think is positive, to then lead to, a

20 notion that having done all this work, we better bring a

21 lot more cases. So, I would be concerned that there may

22 be a reaction that now that we have got this creature,

23 whatever this guideline is or this clarification, let's

24 use it.

25       MS. BLOOM: Perhaps I could just add one further

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1 thought.

2       One interesting impression, which I've noticed

3 in Europe, is that some of the large companies which

4 were former state-owned monopolies in their home

5 territory are arguing for minimal intervention, but in

6 the other Member States, where they're new entrants,

7 they're arguing for the maximum intervention.

8       MR. TRITELL: Given that we don't have complete

9 convergence at this time, what can we learn about how

10 businesses and their counselors react to different legal

11 regimes regarding single-firm conduct? George mentioned

12 the possibility of decentralizing decisions, but is that

13 really an option when you have global products and

14 markets, or does it result in what I believe Jim

15 referred to as a lowest common denominator, where a firm

16 would adapt itself to the most rescriptive rules?

17       Let's start, if we could, with Paul from the

18 point of view of company advisor.

19       MR. LUGARD: In many cases, it is possible to

20 decentralize decisions, and in many cases, it is not

21 necessary to adopt a certain conduct all over the globe.

22 In other cases, in particular in the IP sector, you may,

23 as a company, have to adapt yourself to local

24 circumstances, to a specific jurisdiction where the law

25 is not well articulated yet or where you are forced to

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1 take another course or direction, but then in some

2 circumstances, that local decision will then have

3 worldwide repercussions, and that is a major problem.

4       I do not think that overall companies are

5 looking for a way to centralize decisions. In many

6 cases, as I said, you can decentralize, but it will be

7 very costly in many cases, and it may result in

8 suboptimal solutions which may not be good for a company

9 and which may also harm consumers.

10       MR. ADDY: If I could jump in now, the issue I

11 was getting at about local decision-making and

12 businesses being primarily market-driven, so if you're

13 selling a widget in country A, you're going to take into

14 account the market circumstances in deciding your

15 business conduct. An example might be if I'm a

16 global -- I don't know, pick one -- automotive

17 manufacturer and I have suppliers and I have plants all

18 over the world and suppliers all over the world, the

19 text of my supplier exclusivity agreement in country A

20 may be quite different from the agreement in country B.

21       So, the notion that there's a huge impediment to

22 business there, I'm not convinced yet. It might be

23 there. I just haven't seen any evidence of that, with

24 the exception that Paul was addressing, IP issue.

25 Frankly, I just don't know how to get my hands around

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1 the IP issues. That is a very, very difficult area.

2       MR. RILL: I think there is also a question that

3 is probably unavoidable given the proliferation of

4 agencies with somewhat different approaches, a question

5 of transaction costs, which is huge, that we have

6 certainly run into and I'm sure everyone else has who

7 has done cross-border work, and that is just simply

8 identifying the course of conduct with some reasonable

9 confidence that it is not illegal over a multiplicity of

10 jurisdictions, and quite frankly, with some of the newer

11 antitrust regimes, it is very difficult to identify --

12 not true in the U.S. -- but very difficult to identify

13 counsel who have any experience with the legal regimen,

14 even in their home country, and be confident of the

15 advice.

16       I think decentralized decision-making from the

17 legal standpoint is necessary but needs -- I think Paul

18 would agree with this -- needs some centralized control

19 at the level of the Paul Lugards of the world.

20       MS. BLOOM: I was just going to endorse

21 everything that Paul said. For example, if you are

22 talking about discounts, then it would be possible to

23 have a different discount structure in different

24 jurisdictions. It might not benefit the business or

25 consumers, but that is possible. But for IP or the

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1 criteria of products, it may well not be possible to

2 differentiate between jurisdictions.

3       There is another issue. If you are thinking of

4 making a change in response to one agency, you may wish

5 to be careful that there are not then copycat cases in

6 other agencies. There will be some cases which it

7 started in one agency, and then other agencies picked

8 them up. It may be there is an equal problem in all

9 those other jurisdictions, but maybe not.

10       MR. TRITELL: Well, let's revisit the question

11 of presumptions and safe harbors that all of you have

12 touched upon in one way or another. George has just put

13 on the table the proposition that presumptions should be

14 avoided even if they are rebuttable. We have had some

15 endorsement in general of safe harbors, but it might be

16 interesting to hear any specific recommendations that

17 you think should be incorporated into agency policies.

18       Jim tossed out a list of some of the often

19 suggested candidates for safe harbors, and we welcome

20 your thoughts on advice to the agencies on what type of

21 presumptions and safe harbors are to be encouraged or

22 are to be avoided.

23       Jim, why don't we start down on your end.

24       MR. RILL: Well, first of all, having changed

25 from likely to sue to a presumption that the Hirfendahl

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1 level in the Merger Guidelines, I'm a little reluctant

2 to engage in self-flagellation in the establishment of

3 presumption, but nonetheless, we use those presumptions

4 very flexibly, and they are carried with the entire

5 case.

6       No, I think that the point that George makes

7 with presumptions is a good one. I think the world is

8 too dynamic right now to have any confidence in the

9 presumption of illegality perhaps beyond hard core

10 cartel activity. I think that even the presumption as

11 to tying has come under huge criticism, in which I join.

12       The safe harbor, on the other hand, if set at a

13 proper level, is a good point for all the reasons I

14 stated in my remarks. Where should it be? It should be

15 high enough so that it really is a safe harbor and not

16 something so low that it does not give any comfort at

17 all. I would throw out numbers like 70 percent market

18 share, that would just be a thought, but I think taking

19 into account the dynamics of the market, likelihood of

20 entry and expansion, just to mention a few items, but

21 beyond that, I think the point is it should not be

22 something around 10 percent, with all respect to our

23 friends in Japan, because it gives no safe harbor at

24 all.

25       I think the progress made in predation is a good

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1 one. I think in both the U.S. and Europe, we are

2 looking at some level of cost, predatory pricing, and I

3 think that concept of a cost-based test can be applied

4 to a number of other practices, including bundle pricing

5 and loyalty discounts, because I think that kind of a

6 concept will approach the trilogy that I mentioned of

7 some sound economic thinking, some flexibility, and,

8 quite frankly, some understandability compared to some

9 of the other thinking that has gone on in that area.

10       I'll footnote this, on the bundled pricing, I

11 think there is a cottage industry of economists out

12 there in the bundled pricing area that are developing

13 wild theories of what might be illegal and holding

14 themselves out to be hired by firms saying, "Your

15 practice, however, doesn't meet my theory."

16       On that note, I'll pass.

17       MR. TRITELL: Why don't we pass to Paul, if he

18 would like to offer any observations.

19       MR. LUGARD: I would be less than thrilled to

20 support the idea of safe harbors as a matter of

21 principle, but in practical terms, I am probably

22 slightly more positive. We have a number of European

23 examples, for example, the 30 percent market share

24 threshold in the vertical work exemption regulation,

25 that seems to work well. The potential problem with

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1 safe harbors is, of course, that it is uncertain what

2 happens when you are not in safe harbor, so that there

3 may be a counter-productive effect.

4       What I would support most is, as I mentioned,

5 the methodology of analysis. If, for example, we are

6 looking at the discussion paper on Article 82, then it

7 starts off really well, because the Commission has done

8 a remarkable effort in explaining how it seeks to

9 identify negative effects. The problem with the

10 discussion paper in Europe is that the second part of

11 the paper is less useful. So, I'm very much in favor of

12 a clear framework of analysis even if it is difficult to

13 apply.

14       MS. BLOOM: I already discussed this in my

15 remarks, so I will be brief. In terms of safe harbors,

16 if they are going to be useful, they need to be large

17 enough. I think Jim Rill's proposed 70 percent is very

18 tempting, but unrealistic for Europe.

19       MR. MASOUDI: It is not large enough.

20       MS. BLOOM: Okay, 90 percent.

21       In Europe, I would encourage the Commission to

22 go for 50 percent, but I recognize that is asking an

23 awful lot. What I would suggest is that it would be

24 better to have a higher safe harbor with a rider that

25 exceptionally the agency might intervene, than a lower

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1 safe harbor. If it is too low, it is not of much use.

2       In the UK, prior to the modernization of

3 European Community Law and the European Competition

4 Network, the OFT used to have a 40 percent safe harbor

5 with a rider that exceptionally it might intervene. In

6 fact, it never did.

7       On abuses, one safe harbor that I would add to

8 my cost test on my slide is we should have, in Europe,

9 recoupment for predation.

10       MR. ADDY: The only comment I would add is just

11 an observation, that we can theoretically say that under

12 our guidelines in Canada, there is a 35 percent safe

13 harbor, market share safe harbor, yet all the cases that

14 have been taken have been at the 80-plus. So, you know,

15 is there room to move that harbor up? I would probably

16 say yes, but then you get into Margaret's suggestion.

17 You have got to make sure that it is a hard number with

18 only a very exceptional or a very limited exception to

19 action, any disciplinary action.

20       MR. TRITELL: Let's turn to the role of

21 economics in the analysis of single-firm conduct. What

22 trends are you seeing in the agencies around the world

23 in the use of economics and economic evidence? What do

24 you see as the proper role for use of economics? How

25 should agencies use economic evidence and economists in

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1 investigations of single-firm conduct?

2       I will invite whoever would like to offer

3 remarks. Why don't we start, if you like, George, with

4 you and work down.

5       MR. ADDY: Sure.

6       I'm of two minds, frankly, on that -- on the

7 issue of the use of economists. There's probably --

8 with apologies to the economists in the room, so hold

9 your fire -- by the time you get to trial, of course,

10 everybody's rolling out competing economists, and you

11 get into that duel situation, which is what the process

12 yields. I'm not sure the economists are used early

13 enough at the analytical stage before the matter ever

14 becomes litigious, so I think increased use of economics

15 is a good thing.

16       Then the only other observation on that would be

17 I found the discussion paper, for instance, that

18 Philip's group put out to be heavily -- too heavily --

19 leaning towards the economics, some of the -- reading

20 that document and trying to advise a client as to what

21 this hypothetical, possibly as efficient competitor

22 might be doing a few years from now had they come into

23 the market is very troubling. I mean, that's going down

24 the other end of the scale.

25       MS. BLOOM: Perhaps I should say as an economist

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1 I am all in favor of the use of more economics -- thank

2 you, George. There is a trend to use of more economics.

3 When people talk about that, some of them are talking

4 about the use of more economics for an effects-based

5 analysis in the actual analysis itself. Other agencies

6 say, "Oh, yes, yes, we use a lot of economics," but

7 economics is used in developing the rules, and then when

8 the rules have been established, they are applied in a

9 form-based approach. It's using economics in the

10 analysis of the effects which is most valuable, though

11 if you're drawing up rules, the more they are based on

12 experience in economics, the better.

13       There are tensions which will mean that in

14 certainly some jurisdictions it will be relatively slow

15 to adopt full use of modern economics. Firstly, the

16 case precedents are quite difficult to reconcile with

17 modern economics in a number of jurisdictions.

18 Secondly, appeal courts are not necessarily sympathetic

19 to economic analysis, which is a factor that agencies

20 need to take account of. And lastly, some agencies have

21 difficulty in having enough economists trained in modern

22 economics, in I/O economics. They may find it easier to

23 recruit lawyers than economists.

24       Thank you.

25       MR. LUGARD: Copying on Margaret, I am not an

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1 economist, but I sometimes think that I should have been

2 an economist.

3       I think the role of economists is increasing,

4 and I believe that it's a good thing. Their proper role

5 might be to identify the most plausible theory of harm

6 in a particular case or to discredit the theory of harm

7 which is advanced by the agency, and secondly, to help

8 in analyzing the actual effects in a particular case.

9 If the agency takes the position that there is a

10 significant lessening of competition, then that

11 conclusion should be supported by economic evidence, and

12 obviously, the dominant company will then resort to

13 economists to try and falsify that conclusion, and I

14 think that that is a proper role of economists.

15       Thank you.

16       MR. RILL: I would, first of all, endorse the

17 wider use of economists and economic learning in

18 antitrust analysis. I think that from the agency

19 standpoint as well as from the private sector

20 standpoint, the earlier the integrated analysis between

21 the economists and the lawyers takes place, the better

22 the result is likely to be.

23       I know from some times that in history, the

24 economists and lawyers have worked in totally separate

25 paths, converging only at the top level of the agency.

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1 That, fortunately, doesn't happen anymore here, and it

2 is well advised not to have it happen elsewhere.

3       One comment on economists is that they're

4 terribly creative, and I think some of the work that's

5 been done may bear little relevance to the real world,

6 particularly in some of the wilder econometric

7 simulation analyses, which if nothing else don't pass

8 the test of comprehensibility, but I think that the

9 later work that's been done in that area that emphasizes

10 the need for econometric analysis to be supportive of

11 and supported by, more particularly, actual anecdotal

12 evidence that's pertinent and in debt makes that work

13 very useful.

14       I'm suspicious of economic work that develops

15 elaborate theories of harm that could be adopted or

16 looked at with some credence but may have very little

17 relationship to the underlying facts of the market.

18       MR. ADDY: If I could just jump in on that, the

19 use of integrated case teams involving lawyers and

20 economists I think is great and to be applauded. One

21 thing about the use of economics in the actual trial of

22 a dominance case is economists suffer just as much as

23 any other type of evidence or witness: the passage of

24 time. So, if you're -- and we'll take the Canada Pipe

25 case as an example just from a chronological

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1 perspective.

2       The practice at issue started in '98, early '98.

3 The Bureau was aware of it as it started. The challenge

4 was filed with the Tribunal in 2002, so it would have

5 been the fall of 2002. The trial was in June of '04.

6 The trial decision came out in February '05. The Court

7 of Appeal came after -- so, you see this passage of

8 time, and what I'm trying to underscore is the fact that

9 you might have, as Jim says, this very elaborate model

10 trying to second-guess a business decision that may have

11 been made four or five years earlier, you have got to be

12 very careful with that.

13       MR. MASOUDI: Okay, I'd like to follow up on

14 something Jim Rill mentioned in his comments. Jim

15 talked about how guidelines can give certainty and

16 predictability but also can lead to rules being, in

17 essence, set in concrete, and if the rule isn't right to

18 begin with and it gets stuck where it is, that may not

19 be a good result.

20       In the U.S., we had some recent experience with

21 this where the United States Supreme Court considered

22 the issue of whether in a tying case, ownership of

23 intellectual property gives rise to a presumption of

24 market power, and based in part on the change in

25 position taken by the U.S. agencies in their 1995

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1 intellectual property guidelines, the Court said that

2 there would not be a presumption of market power from

3 ownership of intellectual property.

4       So, the question then arises, should agencies

5 periodically reconsider the positions they've taken

6 either on safe harbors or on presumptions or whatever

7 the issue is in the area of single-firm conduct? Should

8 there be a periodic re-examination of those principles?

9 And if so, what are mechanisms by which that kind of

10 re-examination could occur?

11       Why don't we start with Jim.

12       MR. RILL: Thanks very much, Jerry.

13       I had an interesting discussion at the break

14 with Sheridan Scott on my comment on guidelines, and I

15 think my comment should be taken as one more of the

16 structure and administrative nature of guidelines as

17 they become more like rules, if you will, or

18 regulations, not as criticism of guidance.

19       I think in the U.S., we have gotten to the point

20 where guidelines, as such, tend to be more proximate to

21 rules, and you run the risk of getting it wrong, and I

22 think a lot of people thought that the DOJ got it wrong

23 on the Vertical Restraint Guidelines in '84, which were

24 subsequently abandoned. I won't get into any political

25 analysis of that particular series of events, but I

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1 think that guidelines do change from time to time, but

2 they tend to be looked at here, and perhaps not

3 elsewhere, as having the nature structurally of rules,

4 and I think that's why I made the point that it's

5 important to get it right from the threshold. But maybe

6 in other jurisdictions, guidelines don't have that kind

7 of aura to them, or at least not treated by the courts

8 as having that kind of effect.

9       There are other ways of giving guidance. More

10 guidance is better. It can be given by agency speeches,

11 it can be given by statements of enforcement policy, it

12 can be given by, yes indeed, cases, particularly in

13 common law jurisdictions, although one wants to be a

14 little chary of some cases coming, for example, out of

15 the Third Circuit, but I don't want to get too

16 particular.

17       The fact of the matter is, I do have some

18 concern, at least with the extent to which guidelines

19 can become rules and the risk then of getting it wrong

20 and perhaps guiding the conclusion away from current

21 consumer welfare and market-oriented results.

22       MR. MASOUDI: Paul?

23       MR. LUGARD: I think nobody would deny that it's

24 important to periodically review guidelines. The

25 triggering event should be something as vague as

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1 important events in or outside your own jurisdiction.

2 There is an interesting European example where the

3 European approach towards maximum reasonable price

4 maintenance was changed after the U.S. Khan case some

5 years ago. So, that's an example where the European law

6 approach, which was laid down in the Guidelines on

7 Vertical Restraints, was changed as a result of the U.S.

8 developments. So, yes, there should be a periodic

9 review of guidelines or any other instrument that seeks

10 to help businesses and their advisers on the

11 implementation of the law.

12       MR. MASOUDI: Margaret?

13       MS. BLOOM: Thank you.

14 I endorse both what Jim and Paul said and just

15 add the comment that, of course, in Europe, there are

16 perhaps more antitrust guidelines than in the U.S., I'm

17 not sure, but They have been regularly reviewed in other

18 areas, for example, those on vertical restraints,

19 horizontal agreements, and technology transfer. It

20 seems to me the only argument against reviewing and

21 changing is you shouldn't do it so frequently that it's

22 constantly a fluid guideline. Paul's description of

23 when you should review is a rather good one.

24       MR. MASOUDI: George?

25       MR. ADDY: Thanks.

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1       Yes, I think there's no question that guidelines

2 deserve periodic updating. What that period should be

3 obviously, you know, people can differ on what they

4 consider to be reasonable, but Margaret is right, it

5 shouldn't be sort of the guidelines du jour, because

6 people are relying on them to adjust their business

7 behavior.

8       I share Jim's concern about the nature of

9 guidelines versus other means of being transparent as to

10 what their importance of weight would be. I think

11 courts would give much more credence to guidelines, by

12 way of example, than they would a speech. So, I think

13 there is a difference in how binding they are, how

14 important they are and how significant they are than

15 other means. I think they are different from sort of a

16 speech to a trade association on how the agency is going

17 to look at this industry as opposed to a particular

18 guideline.

19       MR. MASOUDI: There was some discussion this

20 morning about the nature of the types of remedies that

21 are available to public enforcers as well as to private

22 parties around the world, and then this afternoon, we

23 have had some discussion of how varying substantive

24 standards affect how companies might do business when

25 they're doing business in many markets, and I wonder,

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1 Margaret, you commented on how the availability, for

2 example, of treble damages in the United States might

3 affect how courts interpret the rules, and I wonder if

4 each of you might comment on how the different types of

5 enforcement remedies that are available throughout the

6 world might affect how companies do business in a global

7 marketplace.

8       Why don't we start with you, George.

9       MR. ADDY: I think it can have an impact. I'm

10 not sure I can help you on quantifying it. The

11 remedies, there's a whole range, you know, from just

12 cease and desist/prohibition type orders to monetary

13 penalties or what have you.

14       I think one of the big differences is private

15 action versus state-only action or agency-only action,

16 and there I am of two minds, that on the one hand, as I

17 said earlier, I believe that, jurisprudence is a public

18 good and it helps move the law ahead when you have cases

19 and judgments and decisions coming out, but I am very

20 concerned about the incentives and the creativity of the

21 plaintiff's bar as sort of -- I guess it has no bounds,

22 and I'm concerned about the extent to which you create

23 an incentive for litigation that will chill behavior and

24 could even shift investment, from one country to another

25 because of a fear of that type of litigation.

166

1       MR. MASOUDI: Margaret?

2       MS. BLOOM: When you look at the treble damages

3 that are possible in the United States, they're a scale

4 order different from anything you'll see in any other

5 jurisdiction. So, I suggest we need to set that aside.

6       So, if you're looking at anything else, it's

7 more the likelihood that there's going to be

8 intervention than what is the remedy that is going to

9 concentrate the mind as to what business thinks about

10 the different jurisdictions.

11       There is one particular issue in relation to

12 remedies I would just like to flag up, and that is, you

13 may well have conflicting remedies. One jurisdiction

14 requires something of a company which then conflicts

15 with a remedy that's required in another jurisdiction.

16 That, of course, is very problematic for business and

17 consumers.

18       And lastly, there is this issue about what is a

19 suitable remedy for a very powerful company. As an

20 economist, I would argue, in a sense, a fine is not an

21 entirely rational remedy for a very powerful company,

22 because if it's sufficiently powerful, arguably, it can

23 pass on the fine to its customers. But we still fine

24 powerful companies in Europe.

25       MR. MASOUDI: Paul?

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1       MR. LUGARD: Just a couple of loose remarks.

2       I believe that fines can be effective in the

3 sense that people that are considered to be responsible

4 for these fines may have a serious problem within the

5 firm going forward. On a more general level, I think

6 that whether private actions are available, yes or no,

7 is a very important variable, and so is the possibility

8 of criminal enforcement, but perhaps the most effective

9 remedy, if you wish, is the enforcement record of the

10 agency.

11       If the agency can prove that it consistently

12 takes enforcement action against a certain business

13 conduct, then that is a very powerful disciplinary fact

14 of life.

15       MR. MASOUDI: And finally, Jim.

16       MR. RILL: Two points. One, I think a very

17 strong case could be made for eliminating punitive, i.e.

18 treble damage type remedies for conduct beyond the hard

19 core cartel area, and I think an examination of the U.S.

20 would be very worthwhile on that score, and I think the

21 same sort of thing was proposed by former Assistant

22 Attorney General Pate.

23       On the question of criminal sanctions, I think

24 one of the best statements I've heard made in opposition

25 to the establishment of criminal sanctions for

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1 single-firm conduct was made by Tom Barnett, current

2 Assistant Attorney General, at the most recent OECD

3 round table on remedies and sanctions in single-firm

4 cases. The effect, once again, back to the effect of

5 single-firm conduct, the effect of single-firm conduct

6 can be very ambiguous, could be very easily

7 procompetitive, and to hold out criminal sanctions in an

8 area that's not so well developed in jurisprudence I

9 think has much more of a chilling effect on

10 procompetitive conduct than it has a chilling effect on

11 anticompetitive conduct.

12       MR. MASOUDI: Okay, thank you.

13       That exhausts our questions, and surprisingly,

14 we will conclude a few minutes early. Thank you all for

15 coming. Thank you to our panelists, and we'll see you

16 at our next session.

17       (Applause.)

18       (Whereupon, at 3:44 p.m., the hearing was

19 concluded.)

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1 C E R T I F I C A T I O N    O F    R E P O R T E R

2 DOCKET/FILE NUMBER: P062106

3 CASE TITLE: SECTION 2 HEARING

4 DATE: SEPTEMBER 12, 2006

5

6       I HEREBY CERTIFY that the transcript contained

7 herein is a full and accurate transcript of the notes

8 taken by me at the hearing on the above cause before the

9 FEDERAL TRADE COMMISSION to the best of my knowledge and

10 belief.

11

12 DATED: 9/25/06

13

14

15

16 SUSANNE BERGLING, RMR-CLR

17

18 C E R T I F I C A T I O N    O F    P R O O F R E A D E R

19

20       I HEREBY CERTIFY that I proofread the transcript

21 for accuracy in spelling, hyphenation, punctuation and

22 format.

23

24

25 SARA J. VANCE