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	UNDERSTANDING SINGLE-FIRM BEHAVIOR:
9	TYING SESSION
10	WEDNESDAY, NOVEMBER 1, 2006
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12
13
14
15	HELD AT:
16	UNITED STATES FEDERAL TRADE COMMISSION
17	HEADQUARTERS BUILDING, ROOM 432
18	600 PENNSYLVANIA AVENUE, N.W.
19	WASHINGTON, D.C.
20	9:00 A.M. TO 1:00 P.M.
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22
23
24	Reported and transcribed by:
25	Susanne Bergling, RMR-CLR

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1	MODERATORS:
2	MICHAEL SALINGER
3	Director, Bureau of Economics
4	Federal Trade Commission
5	and
6	JUNE LEE
7	Economist
8	Antitrust Division, U.S. Department of Justice
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10	PANELISTS:
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12	David Evans
13	Robin Cooper Feldman
14	Mark Popofsky
15	Donald J. Russell
16	Michael Waldman
17	Robert D. Willig
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19
20
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24
25

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1	C O N T E N T S
2
3	Introduction
4
5	Presentations
6	David Evans
7	Robin Cooper Feldman
8	Mark Popofsky
9	Donald J. Russell
10	Michael Waldman
11	Robert D. Willig
12
13	Moderated Discussion
14
15	Conclusion
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23
24
25

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1	P R O C E E D I N G S
2	- - - - -
3	MR. SALINGER: Good morning. I am Michael
4	Salinger. I am one of the moderators of this session.
5	My co-moderator is June Lee from the Antitrust Division
6	at DOJ.
7	Before we start, I have a few housekeeping
8	matters. First, please turn off your cell phones,
9	BlackBerries and any other devices that might ring in
10	the middle.
11	Second, the men's room is immediately to the
12	left through the double doors you just came through.
13	The women's room is on the left on the far side of the
14	elevator banks.
15	Third, one safety tip, particularly for
16	visitors. In the unlikely event the building alarms go
17	off, please proceed calmly and quickly as instructed.
18	If we must leave the building, take the stairway, which
19	is to the right on the Pennsylvania Avenue side. After
20	leaving the building, please follow the stream of FTC
21	people, we have practiced this many times, and we will
22	all go to the Sculpture Garden, which is across the
23	intersection of Constitution Avenue and Seventh Street
24	at the other end of the building.
25	DR. WILLIG: And have lunch?

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1	MR. SALINGER: It is a very nice place to have a
2	fire drill on a day like today.
3	Finally, we request that you not make comments
4	or ask questions during the session. Thank you.
5	We are honored to have assembled a distinguished
6	panel of practitioners and professors who are well
7	versed in the issue we will tackle today involving tying
8	and product design. Our panelists this morning are
9	Michael Waldman, the Charles H. Dyson Professor of
10	Management and Professor of Economics at Cornell; David
11	Evans, who is the managing director of LECG's Global
12	Competition Policy Practice and is Chairman of
13	eSapience; Donald Russell, a partner at Robbins,
14	Russell, Englert, Orseck & Untereiner; Mark Popofsky, an
15	Adjunct Professor at Georgetown University Law Center
16	and a partner at Kaye Scholer; Robin Cooper Feldman, an
17	Associate Professor of Law at the Hastings College of
18	Law at the University of California; and Robert Willig,
19	Professor of Economics and Public Affairs at the Woodrow
20	Wilson School at Princeton, Director of Competition
21	Policy Associates, and a former Deputy Assistant
22	Attorney General in DOJ's Antitrust Division.
23	In Jefferson Parish, the Court argues, "It is
24	far too late in the history of our antitrust
25	jurisprudence to question the proposition that certain

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1	tying arrangements pose an unacceptable risk of stifling
2	competition, and therefore, are unreasonable per se."
3	That was in 1984. We are now even later in the
4	history of our antitrust jurisprudence, and yet we find
5	ourselves reconsidering that question. We are doing so
6	I think because the tying doctrine has turned out to be
7	such a central issue in many of the most important
8	antitrust cases of recent years.
9	I suspect, although I probably should not make
10	forecasts of this sort, that the easy part of today will
11	be to get agreement on the proposition that per se
12	treatment is inappropriate. Indeed, I read the passage
13	I just quoted as, in fact, an admission that if we were
14	to start over, that the Court would not choose per se
15	treatment.
16	The harder task is to figure out how, if the
17	Court moves to a rule of reason, as many people think it
18	might, how to go about deciding whether a tie is
19	reasonable; how, in principle, you distinguish a
20	competitive from an anticompetitive tie; and what sort
21	of evidence you need. Do you rely on company documents
22	about the rationale behind a tie, or if you are
23	skeptical of the ability to use company documents to
24	determine intent, what objective factors would you look
25	to?

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1	We have a really distinguished panel today to
2	help us sort through those issues, and so I would like
3	to thank them now, and I will probably do it again, but
4	I wanted to take the time to do that.
5	Now I will turn the microphone over to June to
6	make some introductory remarks of her own and to give a
7	more complete introduction of the speakers.
8	MS. LEE: Welcome to the tying panel, part of an
9	ongoing series of hearings into single-firm conduct.
10	The Department of Justice's Antitrust Division and the
11	Federal Trade Commission are jointly sponsoring these
12	hearings to help the advancement of the development of
13	the law of Section 2 of the Sherman Act. Transcripts
14	and other materials from previous sessions can be found
15	on the Department of Justice and Federal Trade
16	Commission web sites. Upcoming panels include exclusive
17	dealing on November 15th and bundled loyalty discounts
18	on November 29th, so mark your calendars.
19	Today's session concerns the law and economics
20	of tying. As Michael has noted, the treatment of tying
21	under the antitrust laws has shifted significantly over
22	time. Courts are far less likely to condemn ties today
23	than 50 years ago when Justice Felix Frankfurter stated
24	in Standard Stations that tying arrangements serve
25	hardly any purpose beyond the suppression of

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1	competition. While economists, some of whom are on this
2	panel today, have identified situations where ties pose
3	a threat to competition and situations where ties result
4	in efficiencies, assessing likely competitive effects in
5	a given situation remains a challenge.
6	I look forward to learning more about this
7	complex topic today. I would like to thank my
8	colleagues at the FTC and DOJ for organizing this
9	hearing. In particular, I thank Don O'Brien and Joe
10	Matelis, and I again reiterate Michael's thanks to the
11	panelists for participating in today's panel.
12	The organization of the panel is as follows:
13	The first four panelists will speak. We will then have
14	a short break, followed by the final two panelists.
15	Those speakers will then have an opportunity to respond
16	to each other's presentations, and this will be followed
17	by a moderated discussion.
18	Let me now introduce the first speaker. More
19	complete biographical descriptions can be found in the
20	handout and also can be found on the Antitrust Division
21	and FTC's web sites.
22	Our first speaker is Michael Waldman, who holds
23	the Charles H. Dyson Chair in Management and is a
24	Professor of Economics at the Johnson Graduate School of
25	Management at Cornell University. Professor Waldman's

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1	main research area is applied microeconomic theory, and
2	his main fields of interest are industrial organization
3	and organizational economics. In these areas, he is
4	best known for his work on learning and signaling in
5	labor markets, the operation of durable goods markets,
6	and the strategic use of tying and bundling in product
7	markets.
8	Professor Waldman's work has been published in
9	many of the top journals in economics, and he is
10	currently a co-editor at the Journal of Economic
11	Perspectives and an associate editor at the quarterly
12	Journal of Economics.
13	Michael?
14	DR. WALDMAN: Thank you.
15	Sorry, I am used to using overheads, and they
16	are not set up for that.
17	So, I want to start just by saying that a lot of
18	my work on or a lot of my thinking on tying comes out of
19	discussions with Dennis Carlton, so although Dennis is
20	not responsible for any mistakes I make in the
21	discussion, he is responsible for lots of the smart
22	things I say during the discussion.
23	Okay, so basically tying behavior has become a
24	lot more focused in the economic theory literature over
25	the last, say, 10 or 15 years, and the rationale for

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1	that is that with the Microsoft case, there has been a
2	lot more attention to it, and what has happened since
3	the Microsoft case is there has been a lot of
4	theoretical contributions trying to focus on getting a
5	better understanding of tying. So, you know, as of 15
6	years ago, there was this sort of Chicago School
7	argument sitting out there, and then Mike Whinston came
8	along and sort of tried to sort of get a better sense of
9	the Chicago School argument, and then when the Microsoft
10	case came out, there has been lots of theory, some by me
11	and Dennis, Choi and Stefanides, Barry Nalebuff, to try
12	and get a better understanding of the theory associated
13	with tying behavior, and there has been a lot of
14	progress in terms of that issue, in terms of getting a
15	better understanding of tying.
16	But in terms of antitrust, it is not so
17	clear-cut. So, there is lots of progress on the theory
18	side, less progress or less consensus, I should say, in
19	terms of what the progress on the theory side tells us
20	for what the right policies concerning antitrust should
21	be given our advances in terms of the theory.
22	So, what I am going to try to do in this
23	presentation is use theory and to some extent the old
24	theory and the new theory to use as a guide to think
25	about, okay, now, if we want to think about

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1	reformulating optimal antitrust policy, which is what
2	the panel is about, what does the theory tell us about
3	that?
4	So, in the talk, what I am going to do is I am
5	going to review various theories concerning sort of
6	theoretical perspectives concerning tying, efficiency,
7	price discrimination, exclusionary motivations and other
8	strategic motivations, and then use the lessons of the
9	various theories to talk about what that means in terms
10	of optimal antitrust policy, and basically kind of jump
11	to the conclusion.
12	Although Dennis and I have been involved in
13	writing a number of papers talking about how tying can
14	be used for exclusionary or other types of behaviors
15	that lower social welfare, my sense is that, in general,
16	one should be very hesitant in terms of intervening in
17	terms of tying policies. Although there certainly are
18	cases -- and my view is the Microsoft case would be a
19	good example -- where tying was used in an
20	anticompetitive way that lowered social welfare, it is
21	very difficult, given the frequency with which ties
22	either have a positive social welfare effect, say
23	through efficiency rationales or ambiguous social
24	welfare effect through price discrimination rationales,
25	it is very hard to kind of have -- I think it is wrong

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1	to have a very interventionist policy, because on net,
2	given the difficulty the courts have in trying to
3	identify the relevant motivations, very aggressive
4	interventionist policy is likely to lower social welfare
5	more often than raise it.
6	So, here is what I will go through. I will talk
7	briefly about efficiency rationales, price
8	discrimination rationales. I think everyone is pretty
9	familiar with those. I will not spend too much time
10	talking about them. Then I will talk some about where
11	most of the new literature has appeared, which is the
12	exclusionary tying, start with the Chicago School
13	argument and then talk about some of the more recent
14	literature which talks about, you know, sort of how
15	robust or in some sense when doesn't the Chicago School
16	argument hold, both in terms of monopolies and tying,
17	the tied market, and monopolizing the tying market. I
18	will talk about a few other strategic rationales
19	associated with tying and then get back to kind of
20	antitrust perspectives, which I just very briefly
21	mentioned.
22	One of the reasons that it is hard to think
23	about antitrust intervention in terms of tying is
24	because there are so many efficiency reasons associated
25	with tying. So, if I just think about it from a

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1	transactions costs standpoint, there are very many
2	reasons to tie goods. So, you would have right shoes
3	and left shoes. People do not want to go shopping for a
4	right shoe and then go to a different box for a left
5	shoe. You know, cars and radios, people typically want
6	to have the radio put directly into the car. So, there
7	are lots of efficiency rationales for tying, and in some
8	sense, almost any good you can find, defined in some
9	sense, is a tying of various goods. So, when I bought
10	this shirt, clearly the buttons were in some sense tied
11	on, both figuratively and literally, okay?
12	So, other efficiency rationales are search and
13	sorting, which goes back to the old Kenney and Klein
14	argument, and then you have variable proportion. So,
15	the variable proportions arguments says that, well,
16	suppose you have two goods, one that is someone with
17	power and one without, if the goods are not tied, then
18	there is going to be this inefficient substitution that
19	consumers are going to do trying to substitute away from
20	the product with market power which has an above
21	marginal cost price.
22	There has been a fair amount of research on that
23	idea, Malella and Nahata has an early paper talking
24	about it, Tirole talks about that, in terms of extending
25	to after-market monopolization, and I have a paper with

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1	Dennis and a paper with a Dr. Morita showing how you can
2	sort of take that same idea and extend it to
3	after-market monopolization by competitive selling.
4	I am going to skip over the details of
5	after-market monopolization and go straight to price
6	discrimination. So, another important reason that one
7	might tie is for price discrimination reasons. So,
8	there are sort of basically two arguments there. The
9	initial argument goes back to a paper by George Stigler,
10	1968, which talks about negative correlations of values,
11	and in Stigler -- so, there is just a simple example.
12	Suppose you have an individual one who has a valuation
13	on product A of 10 and product B of 6, and individual
14	two has the reverse, product A of six and product B of
15	ten, well, if you try to sell just product A or if you
16	try to sell just product B, you have these heterogenous
17	valuations, and so you cannot extract all the consumer
18	surplus. By tying them together, creating a bundle, you
19	have homogenized the valuations, you are able to extract
20	all the surplus.
21	Since that initial paper, it has been pointed
22	out by a number of authors, in particular McAfee,
23	McMillan and Whinston, that, in fact, this negative
24	correlation of values is not required to get their
25	argument to go through, and so there, I just give an

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1	example where the valuations are actually independent of
2	each other, equal probabilities, and if you worked out
3	the profits associated with it, you will see the same
4	basic result that Stigler found even though there is no
5	negative correlation of values.
6	The second price discrimination story is the
7	classic metered sales story that goes back to the old
8	IBM punch card case kind of concerning -- actually,
9	before computers, concerning -- oh, what is the term --
10	well, anyway, and basically the idea that you have punch
11	cards and you have, let's say, computers -- it was not
12	computers -- and what you are doing is you are trying to
13	price discriminate. You are trying to give the higher
14	price to the individuals who use the good more
15	intensively. If the individuals who use the good more
16	intensively use the variable commodity, in this case the
17	punch cards, at a higher rate, what you do is then you
18	can charge a higher price for the variable commodity,
19	the punch cards, a lower price on the machine, and that
20	allows you to price discriminate.
21	Clearly there are social welfare implications.
22	It is well known that price discrimination has ambiguous
23	social welfare implications, so from the standpoint of
24	tying behavior in terms of antitrust, it is not clear
25	why you would want to eliminate the ability to use tying

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1	for price discrimination and allow price discrimination
2	in lots of other types of activities. That is likely to
3	cause distortions in terms of people trying to price
4	discriminate in other ways and might create additional
5	distortions.
6	Okay, the more recent literature is focused on
7	exclusionary tying, and it starts with the Chicago
8	School arguments. So, the Chicago School argument says
9	you would never tie to extend your market power from
10	market A to market B if you are already a monopolist in
11	market A, and the standard example that is given is
12	think about right shoes and left shoes, and there I just
13	work through a little example of suppose P equals A
14	minus bX as demand for pairs of shoes and there is a
15	constant marginal cost for shoes, then by basically
16	being a monopolist on right shoes, you can extract all
17	the monopoly power into left shoes as being sold
18	competitively.
19	Mike Whinston, in a very important paper, shows
20	that that argument is correct in some settings but is
21	not completely robust. What he shows is that in a
22	one-period setting, if the monopolist's primary good is
23	essential, then that argument goes through, but if
24	you -- for various reasons or in various ways, if you
25	move away from that basic one-period essential setting,

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1	the argument breaks down. So, in Mike's initial paper,
2	he says, well, suppose that the primary good is not
3	essential, and so there are some uses for the
4	complementary good that do not use the primary good,
5	then in some cases, what you can do is you can tie, you
6	can drive out the competitors in the complementary
7	market, and that allows you to monopolize this part of
8	the market that does not use the primary good.
9	He and Barry Nalebuff also have arguments where
10	the goods are independent and show that tying can
11	sometimes be used to get the monopolist to become a more
12	aggressive competitor, and that can cause exit, which
13	again, is similar to his original argument, and then
14	improve profitability.
15	Dennis and I have a working paper where we move
16	away from the one-period setting, and you still have
17	this essential nature of the good, but by moving away
18	from the one-period setting as we specifically do in
19	terms of durable goods, we show that tying can be used
20	to capture later profits given upgrades and switching
21	costs, which are common in durable goods markets.
22	So, just a very quick summary in terms of tied
23	good markets. If it is a one-period setting and the
24	product is essential, then tying cannot be used to
25	improve profitability, to monopolize this other market.

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1	It is not going to be a profitable thing to do, but
2	there are various reasons that that old Chicago result,
3	classic Chicago result is going to go away as you move
4	away. It is not as robust a finding as people have
5	thought.
6	Another basic argument is monopolizing the tying
7	market, and there are a number of papers looking at
8	that. So, the arguments that I just talked about with
9	saying I am going to use tying to take a monopoly in
10	product A and in some sense move it to product B and
11	increase my profitability this way, there are a number
12	of papers. Whinston in his initial paper has an
13	argument along these lines. Dennis and I have an
14	argument in a Rand paper of 2002 basically saying that
15	what you can sometimes use tying to do is increase or
16	preserve your market power in that initial monopolized
17	market. In some sense, the paper that Dennis and I have
18	formalized the Justice Department argument in the
19	Microsoft NetScape browser case, and Choi and Stefanides
20	also has an article along those lines.
21	There are other strategic rationales I will talk
22	about somewhat briefly. There are a pair of nice papers
23	by Carbajo, De Meza, Seidman and Chen in 1977, and they
24	basically show how tying can sometimes be used as a
25	product differentiation device, and the basic idea is if

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1	you have this alternative product where, say, Bertrand
2	competition with identical products, then you know there
3	is going to be zero profits in that market, and what
4	they show is that by tying, you get away from that
5	Bertrand competition/zero profit result, and that can
6	actually improve profitability.
7	The other one which I will just mention very
8	briefly is Dennis and I, along with Joshua Gans from the
9	University of Melbourne, are looking at an argument
10	where tying is used to shift rents from an alternative
11	producer to the monopolist. The sort of novel part of
12	that argument is that what happens is actually you tie,
13	and the consumers still use the alternative producer's
14	product, but that you have changed the nature of the
15	pricing game, and it moves some of the profits from the
16	alternative producer to the monopolist, and that turns
17	out to be, in general, not a good thing for social
18	welfare, because the monopolist is spending resources
19	producing this alternative product, in which stuff winds
20	up not getting used. We are hoping to have a finished
21	product in just a month or two.
22	So, just in terms of summary, there are a number
23	of different rationales for tying, and they have
24	different social welfare implications. Efficiency
25	rationales tend to increase social welfare when there is

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1	tying. Price discrimination results tend to be
2	ambiguous. Exclusionary tying, social welfare tends to
3	fall if you go through the details of these analyses,
4	though it is not always guaranteed to do so, and the
5	other strategic rationales, the product differentiation
6	argument tends to have ambiguous welfare consequences,
7	while the rent-shifting argument tends to lower social
8	welfare.
9	So, now let's turn to what this means in terms
10	of antitrust policy. So, I think what it means in terms
11	of antitrust policy is that for various types of tying,
12	the tying should basically be allowed. So, if it looks
13	like efficiency, then clearly there is no reason to
14	intervene. If it looks like price discrimination,
15	again, price discrimination could hurt, but it could
16	also help. Price discrimination has ambiguous social
17	welfare consequences, and generally, given that price
18	discrimination is allowed in lots and lots of other
19	types of activities, it seems odd and probably decreases
20	social welfare to just rule this particular type of
21	price discrimination illegal.
22	Product differentiation, again, if you go
23	through the details of those analyses, it tends to be
24	ambiguous social welfare effects, and finally, our sense
25	or my sense is if the motivation is unclear but the

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1	primary market is competitive, like in the 1992
2	U.S.-Kodak case, it basically makes sense to allow the
3	tying, because we know that competitive markets tend to
4	maximize social welfare, and in particular, in that
5	case, I think that the courts made a mistake, because
6	sort of the theory for what was going on there had not
7	been spelled out, and they went with some very
8	speculative theories. I think the right theory was
9	actually one where they were using it to increase
10	profits.
11	When might courts think about intervening?
12	Well, they might think about intervening in cases of
13	exclusion or rent shifting, although I think the
14	rent-shifting argument, which Dennis and Joshua and I
15	are working on, is one that is very difficult, because
16	the details of that argument say that that only works
17	when, in fact, there is an efficiency associated with
18	the tie if the tie had actually been used. So, I think
19	it is very hard in that case to sort of say that there
20	was not an efficiency possibility in that.
21	So, evidentiary hurdles should be high in these
22	cases. Why should the evidentiary hurdle be high? They
23	should be high because it is very difficult to judge
24	motivation, and as I was just saying earlier on, in the
25	absence of being able to judge motivation, if you try to

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1	intervene aggressively, you are going to wind up hurting
2	social welfare more often than helping social welfare.
3	I do believe that it makes more sense to intervene on
4	contractual ties rather than product design ties,
5	because in product design ties, you are getting into the
6	kind of internal workings of the firm, and it is a very
7	dangerous thing for firms to be doing.
8	So, I know we do not have any time, so just to
9	give a 15-second conclusion, there has been a lot of
10	recent progress in terms of the theory of tying sort of
11	going beyond the old Chicago School argument. Although
12	we have identified various reasons for why tying could
13	make sense from an exclusionary standpoint and we have a
14	much better sense of that than before, I think at the
15	end of the day, even with those extra things in the
16	literature by Barry Melba (ph), myself, Mike Whinston,
17	given the difficulty courts have in terms of judging
18	motivation, there still should be a very high hurdle
19	before intervening in a tying case.
20	Okay, thank you very much.
21	(Applause.)
22	MS. LEE: Thank you.
23	Our next speaker is David Evans, who is the
24	Managing Director of LECG's Global Competition Policy
25	Practice and Chairman of eSapience. The author of four

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1	books and over 70 journal articles, he is an authority
2	on the economics of high technology and patent-based
3	businesses, primarily as it relates to competition
4	policy and intellectual property, both in the U.S. and
5	the EU.
6	He has served as an expert and testified before
7	courts, arbitrators, regulatory authorities, and
8	legislatures in the U.S. and Europe. In addition to his
9	consulting practice, David is an Executive Director of
10	the Institute for Competition Law and Economics at the
11	University College, London, where he is a visiting
12	professor.
13	David?
14	DR. EVANS: Thanks a lot. I have to say that I
15	loved Mike's talk, and I agree with most of it, so I
16	could probably just start with a "ditto" and sit down,
17	but since I have 15 minutes, I will talk.
18	So, I would like to make two points today.
19	First, the enforcement agencies really should take a
20	leadership position in ending per se liability for
21	tying, and they should abandon any form of per se
22	analysis themselves, and they should advocate change in
23	both Congress and the Supreme Court.
24	My second point is that tying is a routine
25	competitive practice, as you have heard, and the courts

24

1	and competition authorities should presume that tying is
2	efficient or at least benign in the absence of
3	significant contrary evidence.
4	So, what I would like to do is to turn to my
5	first point. So, under Jefferson Parish versus Hyde, at
6	least as it is widely understood, a firm that has market
7	power in product A is liable under Section 1 of the
8	Sherman Act for requiring consumers to take product B.
9	Now, hardly anyone in the antitrust profession
10	supports what we might call a conditional per se
11	analysis. There are lots of articles on tying, many of
12	which Michael has surveyed, but you are more likely to
13	be hit by lightning than to find a paper by an economist
14	that comes close to supporting the Jefferson Parish test
15	or anything really like it. Hardly any legal scholars
16	advocate that test either. There is just no significant
17	economic or judicial learning that supports the view
18	that tying should be an especially pernicious business
19	practice for which there ought to be an especially high
20	level of judicial scrutiny.
21	Now, despite that consensus, per se tying cases
22	keep on trucking. More than 30 private antitrust cases
23	with a per se tying claim have been filed in the last
24	five years. Recent ones, just taking a quick look,
25	include Jenson versus Oldcastle, importantly, Broadcom

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1	versus Qualcom, which is a case not only in the U.S. but
2	is pretty much worldwide, Munford versus GMNC
3	Franchising, and so forth.
4	Now, you might also recall that the biggest
5	settlement in antitrust history came just three years
6	ago after a District Court judge found that MasterCard
7	and Visa failed the major elements of the Jefferson
8	Parish test as a matter of law on summary judgment. He
9	noted, the District Court judge noted, the possibility
10	that the courts might require a showing of competitive
11	harm, and he left that issue and essentially that issue
12	alone for a jury trial. Not surprisingly, MasterCard
13	and Visa settled very soon after that.
14	Now, some commentators have suggested that
15	Independent Ink shows that the Supreme Court has backed
16	away from Jefferson Parish. I think there is a recent
17	Seventh Circuit decision that suggests just that. Now,
18	I really wish it were true in the sense that matters for
19	lower courts and businesses, but Justice Stevens appears
20	to have been quite careful, at least in my reading, in
21	saying nothing whatsoever in his decision in Independent
22	Ink that repudiates his decision in Jefferson Parish.
23	We continue to have conditional per se liability for
24	tying that follows really all too easily from having
25	market power in the tying product.

26

1	There are good vibes from Independent Ink, and
2	like many, I am optimistic that the Court will
3	eventually conclude that tying is a relic of a bygone
4	era in antitrust when populist hostility toward business
5	practices prevailed and economics had not pointed the
6	way, but the U.S. Department of Justice and the Federal
7	Trade Commission should not in my view just sit still
8	and wait another five years or ten years or whatever for
9	that to happen. So, I have, if you will, four
10	recommendations for the agencies.
11	First, the Justice Department should adopt a
12	policy that it will not file claims that companies have
13	committed a per se violation of Section 1 of the Sherman
14	Act as a result of engaging in tying. Now, I am not
15	suggesting that DOJ has, in fact, been trigger-happy.
16	In fact, as far as I can tell, the Department has not
17	filed any Section 1 tying cases in the last five years,
18	although I also do not believe that it has filed any
19	significant single-firm conduct cases of any strength in
20	the last five years. Maybe I have not counted properly.
21	Second, at the next opportunity, DOJ and the FTC
22	should encourage the Supreme Court to overrule Jefferson
23	Parish. Unfortunately, as far as I can tell, there is
24	not anything in the pipeline -- again, at least as far
25	as I know -- that would allow the Supreme Court to do

27

1	that.
2	The two enforcement agencies should also
3	encourage Congress to modify or kill Section 3 of the
4	Clayton Act. By the way, and maybe I am just not on top
5	of what is going on, it is unfathomable to me that the
6	Antitrust Modernization Commission has not considered
7	tying as part of its agenda for reform. It seems to me
8	that the antitrust laws for the 21st Century should not
9	target tying as an especially pernicious practice, and I
10	think from what we have heard thus far from Michael, I
11	think there is a consensus in the profession on this.
12	My third point for the agencies is there is a
13	bill in Congress now to repeal certain exemptions that
14	the insurance industry has from the antitrust laws.
15	This is the McCarran-Ferguson Act. Now, that is a
16	debate that I sure do not want to wade into today, but
17	HR-2401 perpetuates the mistake of treating tying as a
18	separate and presumably especially harmful antitrust
19	offense, and in my view, the enforcement agencies should
20	oppose that provision of the bill.
21	Fourth, the Justice Department should embark on
22	a global recall of American tying law, perhaps prodded
23	by the FTC's Bureau of Consumer Protection. Following
24	our lead, the courts and competition authorities in many
25	jurisdictions have subjected tying to some form of per

28

1	se or conditional per se liability. We should let them
2	know, and the Justice Department talks to the agencies
3	around the world all the time, that there is no sound
4	support for that approach.
5	Of course, saying farewell to per se liability,
6	on which I think we have a consensus, leaves open, as
7	Michael suggested earlier, the question of what approach
8	we should welcome in its place. That brings me to my
9	second proposition. The antitrust laws should set a
10	high bar for finding that tying is anticompetitive and
11	proscribe a structure to guide that analysis. To
12	explain why, let me take a brief detour.
13	I hazard to say this, and I have been advised
14	not to, but most of us I think are Bayesian at heart;
15	that is, to make decisions, we combine prior experience
16	with the knowledge at hand, we recognize that given the
17	inherent uncertainty, we will surely make mistakes, and
18	we consider the likelihood and costs of making the wrong
19	decision, and the courts have adopted precisely that
20	kind of reasoning implicitly. It really underlies the
21	whole distinction between per se and the rule of reason.
22	Moreover, the courts have adopted that kind of
23	reasoning more or less explicitly. Brooke Group is the
24	leading example in antitrust, and there are other recent
25	cases in criminal law where the courts adopt more or

29

1	less this kind of Bayesian or error cost kind of
2	analysis.
3	When it comes to single-firm conduct, I think it
4	is helpful then to think about what prior information
5	tells us, what the likelihood of error is, and the cost
6	of those errors, and with that I have three general
7	observations on analyzing single-firm conduct.
8	First and perhaps most importantly, when
9	practices are common in pretty competitive markets, we
10	have prior information that these practices are
11	efficient. That does not mean that they could not be
12	used to harm competition, but it does mean that there
13	should be a presumption that these practices are
14	procompetitive. They really could not survive otherwise
15	in competitive markets. Will Baumol and Dan Swanson
16	have made this point in their article on price
17	discrimination, and the Supreme Court recognized it,
18	precisely that point, in Independent Ink, citing their
19	paper.
20	Second, juries have a lot of trouble deciding
21	complex cases. I have testified before a lot of juries,
22	and I have a great respect for the jury system, but
23	let's face it, the single-firm cases require complex
24	assessment of facts and legal nuances. The DOJ and FTC
25	have had trouble agreeing on how to treat bundled

30

1	rebates. Asking 12 average citizens to do so, to
2	analyze single-firm conduct cases, I think really
3	invites error, and this is a particular problem, of
4	course, in private litigation and especially in treble
5	damage class action litigation involving single-firm
6	conduct.
7	My third point, and I think I am in complete
8	agreement with Michael Waldman, modern industrial
9	organization economics, at least insofar as he has
10	discussed it with respect to tying, really I think
11	emphasizes the need for caution. We can define in the
12	industrial organization literature that businesses have
13	the incentive and ability to engage in anticompetitive
14	conduct in fairly limited circumstances, and there is
15	not a lot of empirical evidence that these circumstances
16	hold in practice and not a lot of guidance on how to
17	figure them out, and, of course, that varies between
18	different practices. I want to be careful in not
19	generalizing too much, but I generally think that the
20	thrust of the IO literature really does need to suggest
21	caution.
22	Now, I am absolutely, positively not arguing for
23	the repeal of Section 2 or for gutting Section 2 in
24	practice. It plays a very important role in
25	disciplining businesses with significant market power.

31

1	I also believe, as Michael pointed out, that as economic
2	learning progresses, we may find that it is easier to
3	separate bad business practices from good ones, but for
4	now, we ought to be pretty cautious about letting the
5	courts and ultimately jurors in private litigation
6	embark on a rule of reason inquiry without some
7	structure, some discipline on it, to reduce the
8	likelihood and cost of errors.
9	So, let me apply those considerations to tying,
10	and at the risk of restating what everyone knows and
11	what the courts have acknowledged in Fortner, Jefferson
12	Parish and Independent Ink, tying is ubiquitous, it is
13	utterly common. Firms make decisions all the time on
14	how to design their products and what product lines to
15	offer. They take into account consumer demand for
16	different options. That demand depends, as Michael
17	pointed out, on transactions costs and information
18	costs, and those have critical implications for what
19	consumers want and what firms ought to offer them to
20	maximize profits, and firms take into account their own
21	costs of offering different product offerings. As a
22	practical matter, that results in product offerings that
23	could be characterized as tying pretty much all over the
24	place.
25	Mike and I, as I think many of you, have a

32

1	series of papers that go into many of these
2	considerations. Perhaps the most important observation
3	from that line of papers is that there are fixed costs
4	of offering different product combinations, and that
5	necessarily limits the variants offered by firms and can
6	result in pure bundling or tying.
7	Now, the case law sometimes talks about tying
8	denying consumers' choice. The fact of the matter is
9	that a lot of times, consumers do not want choice. They
10	want producers to make decisions for them, because the
11	producers are in a better position to really do that,
12	and consumer choice is not costless. It can raise
13	prices for all consumers as the market gets fragmented.
14	So, our prior explication, when we see tying, is
15	it is probably efficient and as a result of market
16	forces. As the D.C. Circuit noted in its unanimous
17	decision in Microsoft, "Bundling by all competitive
18	firms implies strong net efficiencies."
19	Now, that does not end the analysis. One might
20	imagine that economists have spent the last 20 years
21	researching the subject of tying and concluded that, as
22	a matter of theory, it was a highly plausible,
23	anticompetitive strategy for firms with significant
24	market power, and you might imagine that economists had
25	actually discovered empirical evidence that supported

33

1	those theories, but you would, indeed, be imagining
2	this, as Michael's presentation really emphasizes. We
3	have lots of insights, but it is very clear from the
4	literature that lots of assumptions need to be true in
5	order for us to find anticompetitive tying.
6	So, how, then, should we analyze tying going
7	forward? Well, I agree with Michael, where tying is
8	simply a device to engage in price discrimination, I
9	would make it per se unlawful. There is no strong
10	economic basis, you can have price discrimination in
11	common and competitive markets. Michael went through
12	whether social welfare increases or decreases, but I
13	think what he left out, I think many of us have strong
14	priors that in a lot of cases, price discrimination is
15	probably beneficial.
16	Now, the law of patent misuse could still
17	address whether we should limit the returns from
18	intellectual property rights by prohibiting tying, but I
19	do not think there is any basis a priori for allowing
20	patent holders to engage in price discrimination in a
21	primary market but not through mechanisms that involve a
22	secondary market.
23	Otherwise, we should leave open the possibility
24	that under the rule of reason, tying practices could be
25	found unlawful; however, there again, I agree with

34

1	Michael that plaintiffs should have a high hurdle, and
2	if I could have perhaps one extra minute, I will tell
3	you what I think that hurdle should be.
4	First, plaintiffs should, of course, as a
5	starting matter have to show that the defendant has
6	significant market power in the tying product that the
7	plaintiff has posited, and that, in itself, is a
8	movement away from Jefferson Parish, merely inserting
9	the words "significant market power" or "monopoly
10	power."
11	Second, plaintiffs should have to show that the
12	tying practice has the likely effect of excluding a
13	significant amount of competition from the market for
14	the tied product. Such exclusion, at least as I
15	understand the literature, is really the source of
16	competitive harm in really all the economic work or much
17	of the economic work in this area.
18	Third, plaintiffs should have to raise
19	significant doubts that the tying practice is not just
20	normal competitive practice that is explained by
21	efficiencies for consumers or firms. That means
22	plaintiffs should have to show that there are two
23	separate products and that in the absence of an
24	anticompetitive, exclusionary strategy, we would expect
25	that consumers would be offered the tied product without

35

1	the tying product. So, I would put that burden onto the
2	plaintiff in the first instance.
3	And fourth, plaintiffs should have to show by
4	way of economic theory and empirical evidence that the
5	defendant has, in fact, embarked on a plausible
6	anticompetitive strategy, and we can leave for the
7	discussion what that actually requires.
8	Ultimately, of course, plaintiffs need to be
9	able to demonstrate persuasively that tying will cause a
10	net reduction in consumer welfare. I do not think that
11	these are impossible hurdles by any means. Plaintiffs
12	ought to be able to find evidence to support each of
13	these tests if, in fact, a firm has engaged in tying to
14	acquire a monopoly in a secondary market or maintain a
15	monopoly in a primary market, as might be suggested by
16	some of the Carlton/Waldman works.
17	So, that is where I end up, all in all pretty
18	consistent with Michael. Thank you very much.
19	MS. LEE: Thank you.
20	(Applause.)
21	MS. LEE: Our next speaker is Don Russell, who
22	is a partner at Robbins, Russell, Englert, Orseck &
23	Untereiner. In 1977, he joined the Antitrust Division
24	of the U.S. Department of Justice, where he served for
25	24 years. He was Assistant Chief of the Communications

36

1	and Finance Section from 1986 to 1992, lead attorney in
2	the Division's 1994 monopolization case against
3	Microsoft, and Chief of the Telecommunications Task
4	Force from 1995 to 2001. He is a founding partner of
5	his law firm, where he maintains an active antitrust
6	practice.
7	Don?
8	MR. RUSSELL: Thank you. I am happy to be here
9	this morning with five very smart panelists who are
10	going to answer the hard questions, and I am going to
11	address the easy one, to a large extent repeating and
12	emphasizing, again, what you just heard from David
13	Evans, with very small areas of disagreement.
14	My basic proposition this morning -- the two
15	basic propositions I want to assert are, number one, the
16	single most important thing that the FTC and the
17	Antitrust Division can do and the easiest thing for them
18	to do in this area is to say publicly, clearly,
19	frequently and to the Supreme Court, as soon as they get
20	a chance to do so, get rid of the per se rule for tying,
21	whatever is left of it. We all recognize that it is not
22	a true per se rule, but as David explained, it is enough
23	of a per se rule that it still causes substantial harm
24	and confusion and harm to consumer welfare. So, we
25	ought to get rid of it.

37

1	The second point I want to make, and the one
2	that I want to spend most of my time on, is the point
3	that I think the Supreme Court has indicated very, very
4	clearly they are ready to take this step. Certainly
5	lower courts have recognized that it would be an
6	appropriate step, and many other people have as well,
7	and this is the area where I might have a slight
8	disagreement with David's reading of the Independent Ink
9	decision, which I will get to in a few minutes.
10	Let's start with the Jefferson Parish decision
11	in 1984. I think you are all probably familiar with the
12	basic facts there. I will point out the holding of that
13	case, which is that there was no violation of the
14	antitrust laws, no tying violation, when the defendant
15	did not have market power. That is the holding. Now,
16	there are many other things that were said in the case
17	that I would describe as dicta, the most famous part of
18	that being the one that is up on the slide now and the
19	one that Mike Salinger referred to earlier.
20	In the opinion, the majority opinion by Justice
21	Stevens, he said, "It is far too late in the history of
22	our antitrust jurisprudence to question the proposition
23	that certain tying arrangements pose an unacceptable
24	risk of stifling competition and therefore are
25	unreasonable per se." A couple of things I want to

38

1	point out about this sentence, first, as you heard
2	earlier, one very easy way to read this sentence is that
3	Justice Stevens is saying, well, we really are not sure
4	that this is right, but it is far too late to do
5	anything about it.
6	The second thing I want to point out, going to
7	the underlined language on the screen, is the sentence
8	is really fundamentally inconsistent with virtually
9	everything else that the Supreme Court has said about
10	per se rules, the proposition that certain tying
11	arrangements, but not necessarily all, pose an
12	unacceptable risk to competition. In every other
13	context the Supreme Court has said the fact that certain
14	do does not mean that you need to have a per se rule
15	that encompasses all of them. Per se treatment is
16	reserved only for those situations in which it is
17	virtually always the case that there is harm to
18	competition and virtually never the case that there is a
19	substantial efficiency rationale. Therefore, just
20	reading this sentence in that context, it makes no
21	sense.
22	Going to one of the concurring opinions in
23	Jefferson Parish signed by two of the justices, they,
24	again, make this point very clearly, that whatever merit
25	the policy arguments against the per se rule might have,

39

1	Congress has not done anything about it, and again, this
2	seems to me to be pretty clear even back then that these
3	two Justices had substantial doubts that the rule made
4	any sense, but for other reasons, they did not think it
5	was appropriate at that time to do anything about it.
6	There were four Justices in that case who, as
7	you know, came out and said very plainly and
8	straightforwardly, tying should not be regarded as per
9	se illegal in any sense, it should be evaluated under
10	the rule of reason, and the reason that they said that
11	was stated very clearly. It incurs the cost of a rule
12	of reason approach without achieving its benefits.
13	The second quote there, "The legality of
14	petitioners' conduct depends on its competitive
15	consequences, not whether it can be labeled 'tying.' If
16	the competitive consequences are not those to which the
17	per se rule is addressed, then it should not be
18	condemned irrespective of its label."
19	Now, there may be a few people in the audience
20	who have studied all of this history very carefully who
21	will realize that what I have done here is played a late
22	Halloween trick on you. The second quote there is
23	actually from the majority opinion. It is in a footnote
24	in Justice Stevens' opinion for the majority. So, even
25	then, as he is saying this is per se illegal if the

40

1	defendant has market power, he is saying in almost the
2	same breath, well, of course, you really have to look at
3	the competitive consequences, not labels, which sounds
4	to me an awful lot like rule of reason.
5	Looking more specifically at what Justice
6	Stevens said were the competitive concerns with tying,
7	he identified two. The first is that it would insulate
8	the tied product from competitive pressures, and the
9	second is that it might increase the social costs of
10	market power by facilitating price discrimination, and
11	those were the reasons that he advanced for the Court's
12	historical hostility towards tying.
13	So, let's fast forward to the case that the
14	Supreme Court decided earlier this term, the Independent
15	Ink case, and again, the basic pattern in the
16	proceedings below were quite similar to what had
17	happened in Jefferson Parish. The District Court had
18	the good sense to rule in favor of the defendant. The
19	Court of Appeals, thinking that it was bound by old
20	Supreme Court precedence, said no, you cannot rule in
21	favor of the defendant here. In Independent Ink, it was
22	because of the statement that Justice Stevens had made
23	in Jefferson Parish and that the Court had made in other
24	cases, if the Government has granted the seller a
25	patent, it is fair to presume that the inability to buy

41

1	the product elsewhere gives the seller market power.
2	So, when the Supreme Court got this case, which
3	had been decided below based on what Justice Stevens had
4	said in Jefferson Parish, the Supreme Court unanimously
5	reversed in an opinion written by Justice Stevens,
6	ironically enough. Why does it change here between what
7	Stevens said in Jefferson Parish and what Stevens said
8	in Independent Ink?
9	The one area where I think I may disagree with
10	David Evans is he looks at the Independent Ink decision
11	and says Justice Stevens was very careful not to say
12	anything that would undermine what he had said about per
13	se illegality in Jefferson Parish. I think that is
14	factually true. There is nothing that is flatly
15	inconsistent between the two decisions, but as I read
16	the Independent Ink decision, it is written the way that
17	it is precisely because Justice Stevens and the rest of
18	the unanimous Court are inviting a re-examination of
19	this per se rule and signaling very clearly that they no
20	longer believe that it makes any sense.
21	Let me go through specifically the reasons why I
22	believe that. First, if you look at the actual issue
23	that was presented in Independent Ink, it was a very
24	simple and very narrow issue. Should you presume market
25	power from the fact that there is a patent? The issue

42

1	that was presented in the case had absolutely nothing to
2	do with assuming that there is market power, what is the
3	appropriate mode of analysis of the antitrust issues?
4	But when you look at the Independent Ink decision, the
5	Court spends a great deal of time and devotes a great
6	deal of attention to precisely that second issue which
7	was not raised in this case, and I think it is
8	significant that they did so.
9	For those of you who are particularly fascinated
10	by these issues, I will recommend to you an article that
11	was written by Kevin MacDonald, "There's No Tying in
12	Baseball," in which I think Kevin does a very, very good
13	job of explaining why if you want to look at the narrow
14	issue that was presented in Independent Ink, there are
15	many, many, many ways the Court could have come out, as
16	it did, addressing only the fact that all of its old
17	precedence about patents and copyrights and presumptions
18	were really being misread. People were relying on
19	dicta, and the Court very easily could have
20	distinguished those cases and said, you know, that is
21	just wrong. When we look at this narrow issue, it has
22	to come out the other way. But they went well beyond
23	that.
24	The first reason they gave for the way they came
25	out was the presumption that a patent confers market

43

1	power is a vestige of the Court's historical distrust of
2	tying arrangements, which seems to me a very odd thing
3	to say. It was not saying, you know, the Court's
4	historical belief that patents confer market power. It
5	was an historical distrust of tying arrangements
6	generally, and they emphasized that is what we are
7	addressing today. There are some specific quotes here.
8	Over the years, this Court's strong disapproval
9	of tying arrangements has substantially diminished. The
10	dissenters' view in Fortner that tying arrangements may
11	well be procompetitive ultimately prevailed. The
12	assumption that tying arrangements serve hardly any
13	purpose beyond the suppression of competition has not
14	been endorsed in any opinion since. That seems to me to
15	be very strong language supporting the rule of reason
16	analysis.
17	When you look at the specific concern that
18	Justice Stevens had articulated as a rule in favor of a
19	per se prohibition of tying, price discrimination, what
20	the Court said in Independent Ink is, "While price
21	discrimination may provide evidence of market power...it
22	is generally recognized that it also occurs in fully
23	competitive markets."
24	The Court in Independent Ink gave a second
25	reason for why they were coming out differently today

44

1	than they had in the past. They emphasized over and
2	over again that there was a very, very solid consensus
3	among economists and legal scholars that the old rule
4	made no sense, and I think what we have heard from this
5	morning and what we probably all knew before we came in
6	this morning is as to the per se rule against tying,
7	there is a very substantial, very solid, very
8	long-standing scholarly consensus that that rule makes
9	no sense. In Independent Ink, the Supreme Court is
10	saying that kind of a consensus is a very important
11	consideration when we are deciding these cases.
12	The third rule, which is particularly
13	interesting, I think, is the Supreme Court talked about
14	congressional action that kind of ratified this view
15	that maybe tying arrangements are not so bad after all.
16	Now, if you look at the legislation they were pointing
17	to, they were actually pointing to legislation about,
18	you know, this presumption of market power, but look
19	again at the way Justice Stevens described this concept.
20	"At the same time that our antitrust jurisprudence
21	continued to rely on the assumption" -- not about market
22	power -- "the assumption that tying arrangements
23	generally serve no legitimate purpose, Congress began
24	chipping away at the assumption."
25	So, again, I think this opinion in a way is

45

1	misleading and misstating what actually happened but in
2	a way that suggests to me that the Court is paving the
3	way to get rid of the last vestige of the per se rule.
4	And, of course, as to congressional action, they again
5	emphasized in Independent Ink, as they have said in
6	other recent cases, you know, even this assumption that
7	we normally would take congressional acquiescence as
8	some sign in favor of keeping our old precedents intact,
9	in the antitrust area, it is different, because Congress
10	has basically delegated to the courts this common law
11	authority to change doctrine over time, and they
12	repeated that observation in Independent Ink and
13	emphasized it again. So, even if congressional action
14	would be helpful to persuade them that they should
15	overrule prior cases, they do not regard it as necessary
16	in the antitrust arena.
17	Reason number four is I think the most important
18	reason for today's discussion. The Supreme Court said,
19	well, the other thing that has changed is the
20	Government's position, the position of the enforcement
21	agencies, and again, they walked through a history,
22	which some, including Kevin MacDonald, is kind of a
23	creative rereading or rewriting of history, to say what
24	we did in the past was because the Government was
25	telling us to do it in the past. The Government today

46

1	is telling us something very different, and we are going
2	to follow the Government's advice, suggesting, again, to
3	me that it would be very, very important for the
4	Division, for the FTC, to offer that advice to the Court
5	and that there is a very high likelihood that the Court
6	will accept that advice.
7	So, if you want to sum up what the Supreme Court
8	said in Independent Ink to explain their decision there,
9	almost the last sentence of the opinion says, "Congress,
10	the antitrust enforcement agencies, and most economists
11	have all reached this conclusion. Today, we reach the
12	same conclusion."
13	I think that is a very clear indication, you
14	know, here is the road map, here are the things we will
15	look at if this remaining per se rule comes before us,
16	and I think when you look at the record, it is pretty
17	clear how they would come out on that.
18	Now, I will admit that I may be reading too much
19	into this, and I will certainly agree with David,
20	virtually every quotation I have put on the screen
21	there, you can read it in a different context and you
22	can say, well, it is not really inconsistent with the
23	per se rule, it is not really inconsistent with
24	Jefferson Parish, and they were really just talking
25	about this narrow issue about patents and presumptions,

47

1	but I do not really think that that is right, and one of
2	the reasons that I do not think it is right, in addition
3	to the things that the opinion itself says, are the
4	questions and the comments that various Justices made
5	during the argument in Independent Ink.
6	Justice Stevens was the most active questioner
7	and the most active participant in this argument, and
8	time after time after time, the issue he focused on is,
9	does this per se rule make sense? And if you want to
10	get to what seems to be his tentative conclusion, the
11	last quote on this screen, "It doesn't seem to me it
12	makes any difference whether General Motors has a
13	monopoly or not," that is, whether they have market
14	power or not, "when it wants to sell two components as
15	part of the same package." What he seems to be saying
16	here, the question that he keeps asking is, you know,
17	why shouldn't that be okay?
18	Justice Roberts had an even stronger statement.
19	"Much of the economic literature sort of sweeps away
20	this question because it rejects the notion of tying as
21	a problem in the first place."
22	Justice Breyer, again, had many questions all
23	devoted to the same point, and, among other things,
24	focusing specifically on price discrimination, in which
25	he says, "I think most economists, in fact, everyone I

48

1	have read agrees with the notion that price
2	discrimination is sometimes good and sometimes bad. The
3	scholarly consensus that you see later on when the
4	opinion comes out.
5	And Justice Scalia, again, in a provocative way
6	says, is there anything to this notion of tying as an
7	anticompetitive practice at all?
8	So, to focus here, I think the Supreme Court in
9	the Independent Ink decision has laid out very clearly
10	what arguments it needs to hear with respect to the
11	remaining per se rule, and they have indicated, I think
12	pretty clearly, how they will come out on that question
13	if and when it is put in front of them. The first
14	point, they point to the Supreme Court's prior
15	recognition that tying is often a procompetitive
16	practice, which is the way they are now reading that
17	history.
18	Second, they point to a scholarly consensus,
19	which I think we will hear today and we have heard
20	elsewhere is clearly in place with regard to the per se
21	treatment of tying.
22	Third, congressional action, the Supreme Court
23	has already identified congressional action that they
24	think is an indication that maybe tying is not so bad
25	all the time anyway.

49

1	The thing that is missing at the moment and the
2	thing that I think is critical, which is why I focused
3	my remarks this morning on this, is support for a change
4	in the rule from the antitrust agencies. There was an
5	opportunity for the Government to do this in the
6	Independent Ink case. The question was asked very
7	clearly, what is your position on this? And the
8	Government's lawyer said, well, Justice O'Connor, who
9	argued for rule of reason treatment, made persuasive
10	points, but we have not taken a position on that
11	question.
12	I want to make it clear I am not criticizing
13	that answer. I think it was perfectly appropriate in
14	the context of that case, but I also think it is very
15	important, very critical, that the next time the
16	question comes up that the Government does take a
17	position, which is the per se rule makes no sense. This
18	should be a rule of reason analysis.
19	(Applause.)
20	MS. LEE: Thank you.
21	Our final speaker before we take a short break
22	is Mark Popofsky, who has been a partner at Kaye Scholer
23	since leaving the Antitrust Division of the Department
24	of Justice in 1999, where he was senior counsel to the
25	Assistant Attorney General. Mark works in the

50

1	antitrust, intellectual property and technology practice
2	groups at Kaye Scholer and chairs the firm's technology
3	and competition practices.
4	Mark is an Adjunct Professor at Georgetown
5	University Law Center where for several years he has
6	taught the Advanced Antitrust Law and Economics Seminar.
7	Mark?
8	MR. POPOFSKY: Thanks, June. It is a pleasure
9	to be here today. I would like to thank both
10	enforcement agencies for holding these hearings and for
11	inviting me to participate in them, and it is nice to
12	see so many familiar and well-respected faces here in
13	this room, both in the audience and on the panel today.
14	I approach this topic like Don Russell as a simple
15	country practitioner, a formal federal enforcer, and a
16	veteran of several rounds in the Microsoft jungle, a
17	veteran of those wars.
18	I think it is fair to say, to start with the
19	issue that Don talked about and David Evans touched on,
20	that if the Supreme Court today were hearing a case
21	about whether Jefferson Parish should be overruled,
22	there is no doubt in my mind there is a majority on the
23	Court right now to overrule Jefferson Parish. I think
24	it is notable in my view that Justice Stevens is not
25	among them, and my slight disagreement with Don will be

51

1	I see the opinion in Independent Ink as very craftily
2	written by Justice Stevens, who has had a 40-year agenda
3	in this area, to say, well, what we are talking about
4	today is not Jefferson Parish at all but a special per
5	se rule that was applicable to intellectual property and
6	perhaps even only to patent ties, and I am here today,
7	Justice Stevens, writing for the Court, to address only
8	the viability of that per se rule.
9	To be sure, much in the decision and especially
10	in his reasoning probably was prompted by many of his
11	colleagues to get them all on board, and this suggests
12	exactly what I said a few minutes ago, there is a
13	majority out there to overrule Jefferson Parish, but I
14	think it would indeed need a swift kick in the Supreme
15	Court's rear by the enforcement agencies, among others,
16	to get them to take that next step. I do not think it
17	is inevitable.
18	But why I think we are here today is to not talk
19	about that next step, which may not be inevitable but
20	perhaps is upon us soon, but to talk about what happens
21	after that. After all, we are here in the Section 2
22	single-firm conduct hearings. Whether or not Jefferson
23	Parish remains or falls, tying will remain unlawful
24	under Section 1 either under the strange presumptive per
25	se rule of illegality, which is rebuttable in some

52

1	senses, as Jefferson Parish articulated, or under a full
2	or truncated rule of reason. Why are we here, in other
3	words, to talk about tying under Section 2 of the
4	Sherman Act? What does it accomplish?
5	In my view, that question depends on answering
6	two questions. The first is the conduct subject to
7	Section 2 from a legal perspective. I am not one of
8	these fancy guys with a Ph.D. or fancy gals with a Ph.D.
9	In a legal sense, does Section 2 reach a broader range
10	of conduct that can be labeled tying in Section 1? And
11	two, and perhaps most importantly, regardless of the
12	answer to that first question, should we have different
13	rules of liability for Section 2 for tying-like conduct
14	than Section 1? I will address each of these briefly in
15	turn.
16	I believe it is fairly clear that Section 2 does
17	reach a broader array of tying-like conduct than Section
18	1. Let me give you three examples. A conditioned
19	refusal to deal, which is set up like a good old
20	fashioned Colgate policy. The monopolist says to its
21	customers, I will not deal with you in the future unless
22	you take this tied good with the tying good. The
23	customer acquiesces.
24	Suppose, like in a Colgate situation, we do not
25	have enough of a basis to infer a Section 1 vertical

53

1	agreement and all we have is, technically, unilateral
2	conduct. That is something that Section 2 and, indeed,
3	perhaps even Clayton Act Section 3 would reach that
4	Sherman Act Section 1 does not, the conditional refusal
5	to deal, which could, of course, ripen into an agreement
6	but need not.
7	The second and more intriguing and important
8	example, which I gather we will discuss after the break,
9	is technological tying and product design. Now, it is
10	notable that the Microsoft case, which I lived, did
11	treat technological tying and product design as conduct
12	subject to both Section 1 and Section 2, but I think the
13	Court really glossed over the issue there. If all you
14	have is a monopolist or would-be monopolist designing a
15	product, it is not clear to me that every court is going
16	to reach the conclusion that that is the functional
17	equivalent of an agreement or a contractual tie. I
18	think it is an issue of great dispute in the case law,
19	and that might be yet a second area where a Section 2
20	liability rule used for tying makes a substantial
21	difference.
22	The third and presently very hot area brought to
23	us by one of Don Russell's partners in the LePage's
24	cases is bundled discounts, which, of course, is a
25	category of conduct that can achieve similar results to

54

1	tying and exclusive dealing. Indeed, tying and
2	exclusive dealing, of which there is, of course, going
3	to be another forum and of which tying is but a form,
4	are just extreme forms of bundled discount. There is a
5	discrete rule here. There is law dating back at least
6	to the Way and Means case in the Northern District of
7	California as to when a bundled discount should be
8	treated as an outright tie depending on what percentage
9	of the tied item is purchased outside of the bundle, but
10	that rule, as I just mentioned, is discreet. It would
11	only capture some forms of bundled discounting under
12	Section 1, and there will be a large number of bundled
13	discounts reached only under Section 2 and not Section
14	1.
15	Bottom line, in my view, there very much is a
16	difference between the coverage of the two provisions,
17	Section 1 and Section 2, with respect to tying and
18	tying-like conduct, and I think it is largely settled
19	that there is a difference and it will remain.
20	The second issue I wish to address today, the
21	appropriate legal standard, is, by contrast, extremely
22	unsettled. The issue, put brightly, is whether Section
23	2's legal test for liability for tying is different than
24	Section 1's, even assuming here we have the Don Russell,
25	David Evans, post-Jefferson Parish, halcion world of

55

1	being under the full rule of reason. So, what I am
2	about to say assumes that Don Russell and David Evans
3	have, perhaps rightly, won the battle and we are
4	confronted with a Section 1 rule of reason rule for
5	tying, and the question is, what should we do under
6	Section 2?
7	Now, stepping back for a minute, I think it is
8	critical that the answer to that question we observe to
9	turn on what sort of conduct we are talking about. So,
10	let me start with the brightest beacon in this area in
11	the last ten years, and that is the Microsoft case, for
12	that is an intriguing case I think for tying, despite
13	the fact that the Government, of course, brought a per
14	se claim, and I was in the room when that decision was
15	made.
16	There was, of course, a holding by the Court of
17	Appeals that the tie-in in this case involving not just
18	a technological tie-in but related conduct should be
19	evaluated under the rule of reason, not the per se rule,
20	number one, and two and more importantly, and I am sure
21	the economists will start jumping up and down, the
22	Microsoft Court held there is a difference in what you
23	do depending on what market you are looking at.
24	And what did the Microsoft Court hold? The
25	Microsoft Court held that Section 1 tying law, under the

56

1	rule of reason -- so this is presumably the
2	post-Jefferson Parish world come a little sooner because
3	the Microsoft Court created an exception to Jefferson
4	Parish -- the Court said Section 1 is concerned
5	exclusively with harms to competition in the tied
6	product market. Look only to harms in the browser
7	market, the Court said, ignore this monopoly of
8	maintenance in the tying product market, operating
9	systems. The Court said, we are, in other words,
10	concerned only with how the tied market can be affected.
11	Strikingly, the Court also said the standard of
12	liability here is higher in some sense under Section 1
13	when you are looking at a tied product market than
14	Section 2, which, of course, the Court said had to do
15	with in that case the tying product market. The Court
16	said for a Section 1 rule of reason tying claim, we need
17	actual harm to competition in the tied product market.
18	The Government must define that market with precision,
19	they must show a substantial likelihood of
20	anticompetitive effects. Government, you have not even
21	gotten past go on that issue, you are likely to lose.
22	We are not willing to do what we did in the Section 2
23	side of the case -- where the Court said the concern
24	about tying under Section 2 requires looking at the
25	upstream tying product market -- where the Court was

57

1	willing to infer causation of anticompetitive harm
2	merely from the fact that Microsoft engaged in a
3	category of conduct which the Court said was likely to
4	cause anticompetitive effects.
5	So, just to step back and summarize, we have a
6	clear difference, the Court of Appeals says, for Section
7	2 tying and Section 1 tying. Section 1, give me actual
8	effects in the tied product market. Section 2 tying,
9	give me a reasonable likelihood that we have conduct
10	likely to cause upstream monopolization for Section 2
11	tying. The liability standard in a very discrete way is
12	lower, ironically, under Section 2 after the Microsoft
13	decision than Section 1, at least in terms of what is
14	the nuance and the measure and the strength of the story
15	you have to have as a plaintiff to infer competitive or
16	show competitive harm.
17	I think this was no accident in this unanimous
18	per curiam en banc opinion. Tying, as we have heard, is
19	ubiquitous in competitive markets. If you have a legal
20	rule that it is very easy to show anticompetitive
21	effects that satisfy the rule of reason under Section 1,
22	you are potentially going to be condemning under Section
23	1 a broad swath of otherwise benign conduct. It is very
24	easy to get to those jurors David Evans mentioned if you
25	can have a Section 1 tying rule that says, basically,

58

1	have any story of plausible anticompetitive effects and
2	have a story of some market power. Differentiated
3	products, we all know, is very easy to show some market
4	power over.
5	So, the Court is saying, higher standard for
6	liability, at least under some categories of cases under
7	Section 1, there -- technological tying. Perhaps a
8	break to the plaintiff under Section 2, provided the
9	plaintiff has a clear story of how the tie-in can
10	actually lead to monopolization of the tying market, and
11	it was a story of how NetScape's distribution of
12	browsers would enable Microsoft to prevent NetScape from
13	reaching certain economies of scale to grow into a
14	threat for Microsoft.
15	So, whether or not one agrees with what the
16	Microsoft Court said about the concern of each provision
17	of the Sherman Act, exclusively downstream for Section
18	1, exclusively upstream for Section 2, you have a court
19	saying the rules are different depending on what you are
20	looking at for tying, and this leads to my final major
21	point.
22	This says something more general, I think, about
23	Section 2 tying, where we are going in this area, and
24	importantly, what the enforcement agencies can
25	contribute. As I have written recently in an Antitrust

59

1	Law Journal article, there is a holy war raging over the
2	appropriate liability standard under Section 2
3	generally. Everything, at least almost everything, save
4	perhaps very discrete areas like charging a monopoly
5	price and after-Trinko refusals to deal, are up for
6	grabs.
7	In fact, I think this revolution in Section 2 is
8	inherent in Trinko, where Trinko itself, often read as a
9	very pro-defendant decision, says in designing Section 2
10	legal standards, we should be Bayesians, as David Evans
11	said. We should look at the risk of type one errors,
12	the risk of false positives, type two errors, the risk
13	of false negatives, the relative likelihood and the
14	magnitude of the likely effects of each, and enforcement
15	costs, and under that process, in a very common law
16	fashion, courts will arrive at the appropriate Section 2
17	doctrine or legal rule for the conduct at issue.
18	I think that is where we really are with Section
19	2 law and tying. Much is up for grabs despite what
20	Microsoft said about the difference and focus between
21	Section 1 and Section 2, and I think what is yet to be
22	written in the next ten years I think will show us is
23	where the courts go applying many of the principles that
24	Dr. Waldman, Dr. Evans, and I am sure Ms. Feldman will
25	enlighten us of about the economic learning and

60

1	translating that into concrete legal tests for discrete
2	situations.
3	Now, there is no time today for me to lay out
4	plausible stories of where this will take us and
5	specific examples of what legal rules might emerge for
6	Section 2 law in tying, but let me give you sort of
7	three rules of thumb as I see it.
8	First, I think as Dr. Waldman said, condemning
9	tying through contracts likely poses fewer risks of
10	false positives than condemning unilateral tying, true
11	unilateral tying, like product design. This suggests
12	that some forms of "unilateral tying" reached only under
13	Section 2 might have applied to them a more lenient
14	legal test for the defendant than Section 1. We might
15	indeed have the courts leading to a higher standard of
16	what the plaintiff has to show.
17	Now, there have been some cases which have gone
18	the other way recently. The Teva-Abbott decision, which
19	some of you may be aware of, held that a monopolist
20	product design decision should be analyzed under the
21	rule of reason, did not really get into what that means.
22	The next step will be deciding what that rule of reason
23	entails under Section 2, whether it is a different
24	standard than under Section 1 or the same, and there is
25	a good argument it should be different.

61

1	That said, how tying should be treated under
2	Section 2 really should not depend on a game of
3	formalisms, is it unilateral, is it contractual,
4	although that can inform, as I just said, the analysis.
5	What is important in this area is that related forms of
6	conduct, related from an economic perspective, be
7	treated similarly under the antitrust laws. The last
8	thing we want is courts all over the country coming up
9	with different legal rules that create incentives for
10	firms to inefficiently substitute to different conduct
11	to avoid the most plaintiff friendly doctrine, and let
12	me give you an example of that.
13	Suppose courts come out with a rule that
14	exclusive dealing, if you have a contract, is under the
15	full rule of reason, but exclusive dealing done in the
16	form of a conditional refusal to deal, I will only deal
17	with you if you deal with me exclusively or I will deal
18	with you with bundled discounts and induce you to
19	exclusivity, is determined under some different test.
20	Courts should think very carefully before taking that
21	step. The last thing we want is to induce firms to
22	inefficiently substitute to perhaps less efficient
23	conduct to avoid what they perceive as the most
24	restrictive doctrine.
25	The third factor I will mention is that some

62

1	forms of tying present strong or unusual cases for
2	efficiencies. Certain bundles of IP rights, for
3	example, may provide an insurance function that other
4	tying arrangements lack. There may be special
5	efficiencies for certain forms of bundled discounting or
6	volume discounts, and those situations might argue for
7	differently restructured analyses than the traditional
8	general rule of reason, taking into account, as I said,
9	you want to treat what the economists demonstrate to be
10	economically similar arrangements similarly.
11	Backing up in my final point, what does this
12	suggest about the role of the enforcement agencies in
13	this area? Putting aside the issue of whether the
14	agencies should jump on the next opportunity to overrule
15	Jefferson Parish v. Hyde, I think through their closing
16	statements at the end of investigations, the Section 2
17	cases they elect to bring, importantly, the amicus
18	briefs they elect to file (a lot of the actions are
19	private), the business review letters they issue, and
20	the competition advocacy in which the agencies engage,
21	particularly as regimes overseas decide what their
22	Section 2-like rules of the road are going to be, the
23	agencies can play an important role in shaping what
24	Section 2's rule of reason looks like as applied to
25	tying arrangements in the years to come.

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1	As I said, much is up for grabs, and this is the
2	moment when the agencies should seize the initiative and
3	set forth what their views should be of where these
4	arrangements should and should not cross the line.
5	Thank you very much.
6	(Applause.)
7	MS. LEE: We will now take a short break and
8	reconvene at five after 11:00.
9	(A brief recess was taken.)
10	MR. SALINGER: Welcome back. Our next speaker
11	is Robin Cooper Feldman. Professor Feldman is an
12	Associate Professor of Law at the University of
13	California, Hastings College of the Law. She
14	specializes in law and bioscience and is Director of
15	Hastings' Law and Bioscience Project. Professor Feldman
16	also serves on the Executive Committee of the Antitrust
17	Section of the American Association of Law Schools.
18	Professor Feldman has produced many publications
19	in the intellectual property, antitrust, biotechnology
20	areas. She received her JD from Stanford, where she
21	served in the Articles Department of the Stanford Law
22	Review. After graduating from law school, Professor
23	Feldman clerked for The Honorable Joseph Sneed at the
24	U.S. Court of Appeals for the Ninth Circuit.
25	Also, I understand that Professor Feldman is