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1

1UNITED STATES FEDERAL TRADE COMMISSION

2and

3UNITED STATES DEPARTMENT OF JUSTICE

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5

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7SHERMAN ACT SECTION 2 JOINT HEARING

8UNDERSTANDING SINGLE-FIRM BEHAVIOR:

9MISLEADING AND DECEPTIVE CONDUCT SESSION

10WEDNESDAY, DECEMBER 6, 2006

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15HELD AT:

16UNITED STATES FEDERAL TRADE COMMISSION

17601 NEW JERSEY AVENUE, N.W.

18WASHINGTON, D.C.

199:30 A.M. TO 1:00 P.M.

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23

24Reported and transcribed by:

25Susanne Bergling, RMR-CLR

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1MODERATORS:

2RICHARD B. DAGEN

3Special Counsel to the Director

4Bureau of Competition, Federal Trade Commission

5and

6HILL B. WELLFORD

7Counsel to the Assistant Attorney General

8Antitrust Division, U.S. Department of Justice

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10PANELISTS:

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12Michael F. Brockmeyer

13George S. Cary

14Susan A. Creighton

15R. Preston McAfee

16Gil Ohana

17Richard P. Rozek

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1C O N T E N T S

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4Introduction

5Presentations:

6   Michael F. Brockmeyer

7   George S. Cary

8   Susan A. Creighton

9   R. Preston McAfee

10   Gil Ohana

11   Richard P. Rozek

12Moderated Discussion

13Conclusion

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

2- - - - -

3MR. DAGEN: Okay, good morning, everybody. I am

4Richard Dagen, Special Counsel to the Director of the

5Bureau of Competition and one of the moderators for this

6session. My co-moderator is Hill Wellford, Counsel to

7the Assistant Attorney General for Antitrust at the

8Department of Justice. Before we start, I need to cover

9a few housekeeping matters.

10First, please turn off your cell phones,

11BlackBerries and any other devices. Second, the

12restrooms are outside the double doors and across the

13lobby. There are signs to guide you. Third, one safety

14tip, particularly for visitors, in the unlikely event

15the building alarms go off, please proceed calmly and

16quickly as instructed. If we must leave the building,

17exit the New Jersey Avenue exit by the guard's desk, and

18please follow the stream of FTC people to a gathering

19point and await further instruction. Finally, we

20request that you not make comments or ask questions

21during the session. Thank you.

22Now, today we are honored to have assembled a

23distinguished panel of practitioners, consultants and

24professors who are well versed in the issues we will

25tackle today involving misleading and deceptive conduct.

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1The hearing will be organized as follows: First, we

2will hear an approximately 15-minute presentation from

3each panelist. We will likely break after the fourth

4panelist speaks, and after the break, hear from our

5final two speakers. After the presentations, we will

6have a round table discussion moderated by Hill Wellford

7and me.

8Our panelists today are Susan Creighton, who is

9a partner at Wilson Sonsini Goodrich & Rosati and a

10former director of the FTC's Bureau of Competition;

11Preston McAfee, who is the J. Stanley Johnson Professor

12of Business Economics and Management at the California

13Institute of Technology; Gil Ohana, who is the Director,

14Antitrust and Competition, Cisco Systems; Richard Rozek,

15who is a senior vice president, NERA Economic

16Consulting; Michael Brockmeyer, who is a partner at

17Frommer Lawrence & Haug and an Adjunct Professor of Law

18at the University of Maryland School of Law; and George

19Cary, who is a partner at Cleary Gottlieb Steen &

20Hamilton and a former Deputy Bureau Director of the

21FTC's Bureau of Competition.

22I want to thank the FTC and DOJ Section 2 staff

23for organizing this session. This is the last Section 2

24hearing for 2006, but the hearings will continue during

25the first few months of 2007, so be sure to check the

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1agencies' web sites for updates.

2Second, I want to explain why a session entitled

3Misleading and Deceptive Conduct is, in fact, a session

4about Section 2 of the Sherman Act and not a hearing

5being held by the FTC's Bureau of Consumer Protection.

6Deceptive conduct is a type of exclusionary conduct that

7has been the basis for antitrust liability under Section

82. The Federal Trade Commission defined deception in

91983, noting that the FTC "will find deception if there

10is a representation, omission or practice that is likely

11to mislead the consumer acting reasonably in the

12circumstances to the consumer's detriment."

13In In re Rambus, a matter involving conduct

14before a standard-setting organization, the Commission

15explained that the policy statement could be applied to

16a Section 2 analysis, although it did not directly

17equate the policy statement's definition of deception

18with exclusionary conduct under Section 2. Consistent

19with our general policy to avoid discussing cases during

20the hearings that are currently in litigation, and

21because the Rambus matter is still in administrative

22litigation and there has not been a final appealable

23judgment, we will not be discussing this case today.

24There are a variety of scenarios under which

25deceptive and misleading conduct may form the basis of a

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1Section 2 antitrust violation, and this hearing is

2designed to address many of them. Deception also may

3encompass fraud, bad faith, falsehoods,

4misrepresentations and misleading conduct. These terms

5are related and sometimes used interchangeably. Such

6conduct can occur in both the private and public sector.

7Certain business torts and standard-setting activity may

8provide the basis of Section 2 liability.

9In one recent case, Conwood versus United States

10Tobacco, the Sixth Circuit upheld a $1 billion treble

11damages award. The allegations of exclusionary conduct

12in Conwood included misrepresentations of sales data to

13retailers as well as the destruction of competitors'

14products and displays.

15In United States versus Microsoft, the D.C.

16Court of Appeals found that Microsoft engaged in

17exclusionary conduct in violation of Section 2 when it

18deceived Sun Microsystems and independent software

19developers by offering them a set of Java implementation

20tools that ostensibly would enable them to develop

21cross-platform applications but could be executed only

22by Microsoft's version of the Java runtime environment

23for Windows.

24Misleading and deceptive conduct in the context

25of abuse of governmental processes can also be the basis

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1for Section 2 liability. Such cases have included FDA

2Orange Book listings and fraud on the Patent Office.

3Now I would like to turn it over to Hill for a

4few remarks.

5MR. WELLFORD: Good morning. My name is Hill

6Wellford. I am counsel to AAG Tom Barnett. The FTC and

7DOJ are jointly sponsoring these hearings today to help

8advance development of the law concerning the treatment

9of unilateral conduct under the antitrust laws. This is

10one of the most controversial areas even within Section

112, which is controversial enough on its own, and I think

12we should have a very good panel today. I have seen

13some of these presentations that have come in, and I am

14very much looking forward to the remarks that will be

15presented by the panel. Thanks to my colleagues at the

16FTC and the Division for organizing this. I will hand

17it back over to Rich.

18MR. DAGEN: So, I would like to introduce your

19first speaker. Susan Creighton, as I mentioned before,

20is a partner at Wilson Sonsini. Between 2001 and 2006,

21she served at the Federal Trade Commission first as

22Deputy Director and then as Director of the Bureau of

23Competition. While at the FTC, she played a key role in

24developing antitrust policy and made important

25contributions about, among other things, the

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1intersection of antitrust and intellectual property.

2She is a frequent author of antitrust articles,

3including a 2005 Antitrust Law Journal article entitled

4"Cheap Exclusion" dealing with many of the issues we

5will be discussing today.

6Susan?

7MS. CREIGHTON: Good morning. Let's see if I

8can figure out how to make this thing move. That

9worked, okay.

10So, courts and enforcers long have recognized

11that deception can constitute unlawful exclusionary

12conduct under Section 2 of the Sherman Act. With

13respect to deception in the context of private business

14arrangements, probably the two most recent prominent

15decisions are the D.C. Circuit decision in Microsoft and

16the FTC's decision in Rambus. The potential for

17deception in government proceedings to serve as the

18basis for Section 2 liability is reflected in cases

19stretching as far back as the Supreme Court's decision

20in Walker Process and more recently has been a major

21part of the FTC's enforcement agenda, as Rick mentioned,

22in cases such as UNOCAL and the Orange Book listing

23cases.

24In my view, these cases are correct in holding

25that deception can constitute a basis for finding

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1exclusionary conduct under Section 2. Indeed, as my

2co-authors and I argued in the article that Rick

3referred to in the Antitrust Law Journal entitled "Cheap

4Exclusion," deception and other forms of cheap exclusion

5are potentially a very effective form of anticompetitive

6conduct and properly should be a core focus of

7enforcement efforts by the FTC, the Antitrust Division

8and the state enforcement agencies.

9In particular, in our article, we highlighted

10three characteristics of such cheap exclusion, including

11deception. First, it is cheap in the sense that it

12costs little to the firm engaging in it. False

13statements made during a governmental standard-setting

14proceeding may be virtually costless, for example,

15particularly for a firm that would have participated in

16the regulatory proceeding in any event. These de

17minimus costs compare favorably to the high costs that a

18firm might incur, for example, through the low-cost

19pricing or potentially strategies such as exclusive

20dealing.

21Second, the conduct also is cheap in the sense

22of lacking any redeeming virtue. Deceptive conduct

23unambiguously fails to enhance any party's efficiency,

24provides no benefits short or long term to consumers,

25and its economic effect produces only costs for the

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1victims and wealth transfers to the firms engaging in

2the conduct fully apart from its potential contribution

3to market power.

4Finally, it is also cheap in the relative sense

5that it is a strategy where the costs are often likely

6to be far outstripped by the anticompetitive benefits.

7As the Antitrust Division explained in its business

8review letter, for example, "Early in the

9standard-setting process, standard-setting members often

10can choose among multiple substitute technological

11solutions, some of which may be patented. Once a

12particular technology is chosen and the standard is

13developed, however, it can be extremely expensive or

14even impossible to substitute one technology for

15another." Misrepresentations that enable a firm to

16charge higher discriminatory royalty rates after lock-in

17therefore may enable the firm to enjoy substantial and

18durable market power.

19Because deceptive conduct ordinarily has no

20efficiency or other procompetitive benefits, other forms

21of cheap exclusion do not provide the same type of

22trade-off that we see with respect to most other forms

23of exclusionary conduct that have been the subject of

24the previous hearings, predatory pricing, bundling,

25exclusive dealing and the like. With respect to these

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1forms of conduct, it is generally recognized that they

2will often, maybe even overwhelmingly often, be

3procompetitive rather than anticompetitive. The

4challenge, therefore, is to distinguish the times when

5the conduct might be anticompetitive without unduly

6chilling the procompetitive conduct.

7With respect to deceptive or other opportunistic

8conduct, however, there is no similar concern that we

9will be unduly chilling deception or opportunism. In

10fact, sort of phrased that way, I do not think we

11generally sort of think of being concerned about

12chilling deception. In this context, cheap exclusion

13may be viewed as something like the Section 2 analog to

14Section 1 price fixing; that is, we are not unduly

15concerned with overdeterrence of this behavior, and it

16is at the same time at the far end of the spectrum for

17Section 2 purposes from predatory pricing.

18If there is a category of conduct that we are

19particularly concerned not to chill under Section 2, it

20is price cutting. With respect to misrepresentations

21and deception, by contrast, we have and should have no

22such scruples.

23Screening tests designed to find the single

24exclusionary goat in the vast herd of procompetitive

25sheep, therefore, are not well suited and should not be

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1applied to exclusionary fraud or deception. The profit

2sacrifice test, for example, originally conceived as a

3means to screen out legitimate pricing behavior, does

4not work well when applied to conduct that is not

5legitimate, whether or not it is exclusionary.

6For example, fraudulent regulatory filings that

7can be made at de minimus costs may have powerful

8exclusionary effects due to the operation of extrinsic

9legal schemes. At the same time, such conduct also may

10be profitable even if it does not result in the creation

11of durable market power by harming competitors and

12generating profits for the filing firms, yet the mere

13fact of the profitability of this illegitimate behavior

14tells us nothing about whether the behavior or the

15fraudulent filing is legitimate efficiency-enhancing

16behavior.

17Now, if the balancing question typically raised

18regarding Section 2 conduct is not present here, what

19other concerns are raised regarding exclusionary fraud

20or deception? It seems to me that there are three

21concerns that are raised most frequently. The first is

22causation. This issue underlies a considerable portion

23of the Commission's legal analysis in Rambus, for

24example, and I'll return to that. The second is that

25antitrust should not be used as a kind of ex post

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1gap-filler for poorly written standard-setting rules or

2legal regulations. And the third is that we should not

3use antitrust where other laws, such as business torts

4and contract law, already can be used to reach and

5prohibit the conduct.

6Let me address each of these three objections

7briefly in turn. First, with respect to causation, it

8seems to me that contrary to the concern about causation

9often expressed in this area, exclusionary deception, in

10fact, often occurs in circumstances where the

11environment is, in fact, conducive to the acquisition or

12maintenance of durable market power. Indeed, for

13deceptive conduct in the government context, it seems to

14me that this is often likely to be the rule rather than

15the exception.

16The reason is simple. If the exclusion operates

17by force of law, the exercise of market power will not

18induce new entry, and the entry barriers created by the

19need to change laws or regulations may be formidable

20indeed. The UNOCAL case, for example, highlights these

21effects. Now, that's in the government context.

22In the private context, as the Commission

23discussed in Rambus, profitable private ventures may

24also often be conducive to the use of deception to

25acquire or maintain durable market power. In instances

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1where business relations are characterized by

2cooperation rather than competition, for instance, the

3Java development program in Microsoft or in instances of

4private standard-setting activity, deception may be

5difficult to deter or counter, and the resulting

6lock-in, especially in network industries, may be

7difficult or impossible to overcome once the deception

8has been detected.

9Now, in this regard, deceptive advertising,

10where the statements are both ascertainable and

11falsifiable, may actually be the exception rather than

12the rule. In Caribbean Broadcasting, for example, the

13alleged deceptive statement was one that was made

14publicly, and it would appear to be one that would be

15readily falsifiable. Did the company's broadcast, in

16fact, reach the entire Caribbean region or not? That

17seemed to be an answer that you probably could pretty

18much figure out with a couple of guys and radios.

19Now, by comparison, in Conwood, if I understand

20the allegations correctly, the alleged deceptive

21statements were made in private communications to

22retailers. It is unclear how or when the plaintiff

23would have been able to learn of them, and hence, to

24counteract them.

25One might also consider a statement that is less

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1readily falsifiable. For example, statements claiming

2patent infringement by a competitor's product without

3any identification of the particular patents in issue or

4anything sort of as formal as some kind of warning

5letter that would make it possible to respond to the

6allegation might be the kind of tipping event you could

7expect potentially to have a forceful impact in network

8industries.

9Now, the second concern raised regarding

10exclusionary deception is what I have called the

11gap-filling problem. The concern here, as I understand

12it, is that antitrust is effectively being used in these

13circumstances to take care of problems that could have

14been solved ex ante through more careful drafting,

15either the Orange Book regulations or the

16standard-setting rules.

17Now, here I raise with some trepidation as a

18lawyer on a panel with economists who may, in fact,

19provide a more subtle understanding of this point, it

20seems to me that the insight of transaction cost

21economics is applicable here, and I have up here a quote

22from Oliver Williamson. "The general rubric out of

23which transaction cost economics works is that of hazard

24mitigation through ex post governance. It being the

25case that all complex contracts are unavoidably

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1incomplete, the fiction of comprehensive contracting,

2which concentrates all of the contracting action on ex

3ante incentive alignment, is untenable."

4Now, I have also referred in my slides here and

5also in the "Cheap Exclusion" article by analogy to an

6article written some time ago by former FTC chairman Tim

7Muris regarding the judicial doctrine of the duty of

8good faith and fair dealing. His point, as I understand

9it, in the article was that parties to a contract cannot

10adequately defend themselves ex ante against

11opportunistic conduct that undermines the parties'

12legitimate expectations, perhaps even the purpose of the

13contract, at least not without incurring wasteful and

14inefficient transaction costs of the type that

15Williamson was describing.

16So, the judicial imposition of good faith and

17fair dealing is an efficient means of protecting parties

18against conduct that is contrary to their legitimate

19expectations but not necessarily contrary to the precise

20language of the contract.

21By analogy, the antitrust laws can and should

22serve to protect against deceptive or opportunistic

23misuse, for example, of collaborative ventures such as

24standard-setting organizations where such conduct

25defeats the very purpose of such arrangements and that

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1which makes them acceptable under the antitrust laws.

2That intuition, I think, for example, is what the

3Supreme Court was driving at when it said in Allied Tube

4that, "Private standard-setting by associations is

5permitted under the antitrust laws only on the

6understanding that it will be conducted in a nonpartisan

7manner offering procompetitive benefits."

8Now, although standard-setting organizations can

9and should exercise self-help to the extent possible,

10the insight of transaction cost economics is that no

11amount of ex ante bargaining can ever perfectly secure

12collaborative ventures or other government regulations,

13such as the Orange Book, against opportunism in

14circumstances where it turns the purpose of the

15collaboration or the regulation on its head and in a way

16that it threatens the creation of durable market power.

17Moreover, in other contexts, such as the Java

18development in Microsoft, the collaboration will not

19even be pursuant to elaborate written contracts. In

20such circumstances, antitrust law in my view properly

21provides part of the ex post governance structure that

22helps ensure ex ante that such collaborations and

23regulations achieve their intended procompetitive

24 purposes.

25Now, finally, sometimes the question whether

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1deceptive exclusion should be subject to Section 2 gets

2 posed wrongly in my view as whether the conduct at issue

3is a business tort, and if it is, why then do we need to

4subject it to the antitrust laws? I think that this

5asks the question through the wrong end of the

6telescope. The right question to ask is, is an

7inefficient exclusionary act that is likely to have

8caused market power nonetheless excused under Section 2

9because it also violates another law or statute?

10Now, the reason it is important to ask the right

11question is the old true saying, the wrong answer is

12what the wrong question begets. Here, asking first

13whether the conduct is tortious and then why do we need

14antitrust is likely to be misleading in at least three

15ways.

16First, these business torts and contract rights

17vindicate the rights of the wrong people. In a

18standard-setting organization, for example, we are not

19concerned ultimately with the rights of the

20standard-setting organization or its participants, but

21consumers. As Ted Gephart has written about,

22standard-setting organizations and their participants

23may or may not have interests that coincide with those

24of consumers, but simply because they might be

25indifferent to the anticompetitive consequences of the

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1deceptive conduct, for example, because they will be

2able to pass through price rises to consumers, does not

3address what antitrust is concerned with, namely,

4whether the conduct harms consumers.

5Now, similarly, business torts and contract law

6provide the wrong measures of causation and harm. A

7standard-setting participant who is able to pass along

8price increases may not have been harmed and should not

9be able to recover for the nonetheless real harm that

10consumers will have suffered.

11Finally, business torts may have elements that

12do not fit well with the proper issue from an antitrust

13perspective, or conversely, may be missing elements

14necessary to answer the antitrust claim. The intent

15element in fraud, for example, may or may not be apt to

16the proper antitrust question in a particular factual

17setting.

18Now, underlying this question, I think,

19ultimately really is a different issue, which is the

20hostility to private rights of action under Section 2,

21particularly their treble damage provisions, and a

22concern regarding unjustified suits. That issue,

23however, in my view properly should be dealt with

24directly and not by wrongly manipulating substantive

25standards under Section 2.

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1For the reasons that I have explained, I think

2that, in fact, this is an area that should be a

3priority, not a backwater for federal and state

4antitrust agencies. The importance of the substantive

5area should not be obscured or the barriers to effective

6enforcement heightened by an effort to cut off private

7litigation whose flaws lie elsewhere, not in their

8substantive antitrust claims, but rather, in procedural

9rules that govern private Section 2 actions.

10Thank you very much.

11(Applause.)

12 MR. DAGEN: Thank you, Susan.

13Our next speaker is Preston McAfee. He's the

14J. Stanley Johnson Professor of Business Economics and

15Management at the California Institute of Technology

16where he teaches business strategy, managerial

17economics, and principles of economics. Preston is the

18author of over 70 articles published in scholarly

19economics journals and co-author of the book Incentives

20in Government Procurement. He served as one of four

21economists who edit the American Economic Review for

22over nine years.

23Preston?

24DR. McAFEE: Thank you. Thank you, Susan, for

25actually providing the lead-in for what I would like to

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1talk about today, and let me also apologize for being

2still on California time and so only about 60 percent

3awake.

4 So, I would like to talk about the right of

5private action under the antitrust laws and connect that

6to deception and fraud as follows. Whatever is decided

7about deceptive practices and the right to sue under the

8antitrust laws will be abused in private suits if those

9are permitted, and let me warm up with VeriSign. So,

10VeriSign is the registrar of .com and .net, and in 2003,

11they began redirecting mistyped addresses to their own

12advertising site. The ISPs objected and asked the ruler

13of the internet to stop the practice, and VeriSign

14contended that that was an illegal conspiracy. The

15judge threw this out, which I think was the right

16answer.

17One thing that is a really interesting question

18about this particular antitrust suit is actually, what

19is somewhat of a principle, I guess, is it is often hard

20to fit modern industries into traditional economic

21analysis of antitrust, and this is a really nice poster

22child for that, because what is the quantity here? Is

23it the number of mistyped addresses? Well, that is

24something that is not affected by anyone's behavior,

25because that is just purely, you know, when consumers

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1make a mistake will determine that.

2On the other hand, you might think it is the

3number of advertisements, or in this case, is it the

4number of Viagra ads that are produced? Well, here is a

5situation where, in fact, we would like to reduce the

6quantity. That is, it would be welfare-enhancing to

7actually reduce the quantity that is produced by the

8industry. It does not quite stop there.

9So, another company that buys expired domains

10and then redirects them to its own advertising site sued

11VeriSign, that is, the plaintiff in the previous

12antitrust suit, saying that the existence of VeriSign's

13site finder itself violated the antitrust laws, and that

14suit, last time I looked, which was a week ago, seems to

15still be continuing. So, one thing is is that these

16suits concern the same behavior, that is,

17sitefinder.com, one saying that it was required and the

18other saying that it is prohibited by the antitrust

19laws, and so it makes for an interesting challenge.

20So, here are the things I would like to talk

21about. I have already talked about one example, and I

22am going to mention a couple more. I want to then talk

23about some research on for what purposes are private

24antitrust claims brought, who has an incentive to sue,

25and report on some research on that, and then conclude.

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1The Colorado Chiropractic Council sent hospitals

2requests for privileges and included in their request

3the threat of a lawsuit if denied. Nine of the

4hospitals did not admit the Colorado Chiropractic

5Council, and these hospitals were all, in fact, sued for

6restraint of trade. The suit was thrown out, but the

7message I want to bring to this is 21 hospitals admitted

8them, and while it is not demonstrated, it appears that

9the threat of an antitrust suit was, in fact, an

10effective threat.

11Antitrust actions outnumber or private suits

12outnumber government suits nine to one. Some of the

13reasons that they are given, I spoke with an attorney

14who says he tried to convert every contract suit into an

15antitrust suit as his first action, because it gives him

16access to treble damages, recovery of legal fees, and it

17is easier to survive summary judgment. So, private

18actions have grown. Canada, actually, did not permit

19private litigation until 1976, and they are still rare,

20probably because they do not have treble damages.

21So, the general idea which I think Susan

22reflected for me is that the incentives for private

23antitrust litigation are not guided by consumer welfare.

24The firms bringing the suit, consumer welfare generally

25is not their goal or motivation. So, what I want to

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1look at is, what are the actual motives of firms engaged

2in private antitrust action and assess to what extent

3the law can be used strategically, and then hopefully

4that will give us some insight into crafting the laws to

5minimizing the damage that is actually brought.

6Some of the uses to which the antitrust laws are

7brought -- private suits are put are harassment, harm

8and extortion, and harassment and harm can actually be

9used to induce cooperation, and this is especially

10effective because it is often cheaper to sue than it is

11to defend, and if you want to ensure cooperation, what

12you want is a punishment that is easy to mete out but

13expensive for the punished, and if it is symmetric, this

14is actually the economic theory of cooperation or

15collusion, actually, the same theory, suggests that that

16is the kind of punishment you would like to use. In

17addition, extortion reduces the returns to investment.

18That is clearly chilling -- chilling effect on

19 investment.

20Surveying a large number of private antitrust

21suits, we have come up with seven different reasons for

22private litigation, and I have color-coded them to what

23extent they are opposed to the interests of consumers.

24So, two quite common reasons are extorting funds from a

25successful rival, and I want to especially point to

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1follow-on suits. So, when the Government brings a suit,

2generally there is an entire group of people who follow

3on. Microsoft, of course, has been subject to many of

4those follow-on suits.

5In addition, changing the terms of a contract,

6antitrust suits can be effective means of doing that on

7occasion, and as I said, some contract attorneys prefer

8antitrust suits because they think that it makes the

9defendant more likely to settle. Something that is

10speculative on our part is that it can be used to punish

11noncooperative behavior. Of course, no one is going to

12admit to this, because by and large you have then

13admitted to violating the antitrust laws directly, but

14from a theoretical perspective, that would be a reason

15for private antitrust litigation.

16Responding to an existing lawsuit and preventing

17a hostile takeover are common reasons. These do not

18actually have any direct negative effect on competition.

19They depend on whether the existing lawsuit was itself

20pro or -- procompetitive or not or the existing hostile

21takeover, and I would point to those as being in some

22sense neutral. Where the antitrust -- where private

23suits turn the antitrust laws on their head is when they

24discourage the entry of a rival, such as in the Utah Pie

25case, or that they prevent a successful firm from

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1competing vigorously.

2Now, this, of course, is one of Microsoft's

3defenses. I am not going to comment on that directly,

4but independent service organizations often bring these

5suits to prevent manufacturers from offering service and

6competing successfully. So, in that sense, they can

7quite turn the antitrust laws on their head.

8Now, let me turn to some theoretical research.

9This is not based on the survey of antitrust suits. The

10question is, who has the incentive to actually bring a

11private antitrust suit that is, in fact,

12anticompetitive? And to assess that, we look at a

13procompetitive action. So, this is a cost-reducing

14action that will give a firm an advantage in the

15marketplace versus an anticompetitive action, so this is

16raising your rivals' costs without lowering anyone's

17costs, and ask, holding constant the likelihood of

18prevailing, who would benefit more from bringing the

19suits?

20And we actually, in the context of the sort of

21standard work horse model, the Cornell model, the

22standard economic model that is used most frequently in

23antitrust evaluation, we find something I think quite

24surprising, which is that it is the small firm in a

25dispersed market who actually relatively benefits from

28

1bringing an antitrust suit that is anticompetitive

2relative to a procompetitive suit, and the reason for

3this is the loss from a procompetitive rival's action

4actually gets larger as the number of firms grows,

5whereas the loss from an anticompetitive action

6decreases as the number of firms grows, so that in the

7limit, it is the small firm and not the large firm who

8tends to bring the action.

9So, to conclude, antitrust laws are often used

10not to encourage competition -- at least private

11antitrust suits -- but to reduce the level of

12competition. Clearly an outright ban on private

13antitrust litigation would solve that problem, but it

14may create other problems that are worse. Some

15alternatives may actually improve the situation as it

16stands today.

17One would be a gate-keeper, using government

18agencies as a gate-keeper for private litigation, but I

19am actually leery of that as a solution mainly because I

20judge the EEOC to be a failure as a gate-keeper in

21employment, and the gate-keeper model has not worked

22very well.

23One could also ask the agencies to weigh in on

24private litigation, and that may have more of an effect.

25Another proposal is to allow for additional support

29

1beyond what is already created, in particular financial

2support for agency litigation. That, of course, risks

3capture and so would be a risky strategy for different

4reasons. Something that -- modeling in Canada, you have

5a -- there is a -- is decoupling the damages from the

6awards. It may be that you want to have high damages as

7a way of deterring behavior but low awards to reduce the

8number of lawsuits, and there are plenty of worthy

9agencies who would love to have the difference between

10the damages and awards.

11And then finally, something that from my own

12experience in litigation I would find useful is to

13provide experts to the court to reduce the uncertainty

14associated with antitrust suits.

15Let me conclude with three remarks on deceptive

16practices. One is is that not every misleading

17statement is intentional. There are many

18well-intentioned corporations that make mistakes, and

19the law should not have zero tolerance. So, this is in

20some sense a counter to remarks of Susan's, that there

21is no downside. There are statements that are made.

22Generally, if you run a corporation, it is hard to

23ensure zero probability of a misleading statement ever

24being made. People have -- make errors on occasion.

25One of the things I would say about Oliver

30

1Williamson is that reading Oliver Williamson is very

2much like reading the Bible. When you read it

3selectively, he provides support for every point of

4view.

5The second point that I would like to make is

6that traditional economic analysis where a market -- and

7by that I mean the analysis of antitrust -- where

8 markets are either monopolies or competitive, is the

9sort of general situation, that kind of model is very

10poorly suited to evaluating deceptive practices, and

11there are lots of -- the problem is, often it is the

12case that you can have a large effect on a small number

13of people or a small effect on a large number of people,

14and then what seems like an inconsequential difference,

15so a small compatibility problem which is easily

16remedied may still be fatal if it is something that

17consumers will not remedy. These are situations where

18it is not either a monopoly or a competitive

19marketplace, and as a result, we in some sense need to

20bring new economic models to the evaluation of deceptive

21practices.

22And then finally, I also want to say, in my

23view, the patent system is broken. The system itself is

24anticompetitive. It creates entry barriers. Many firms

25cannot enter because -- so, firms with a good idea, who

31

1have invented a new technology and go and get it

2patented, find that because there are many patents that

3have some similarities, they are blocked from entry by

4existing patent pools. Patent pools, in addition, have

5the effect of encouraging collusive conduct.

6With a broken patent system -- and this, I

7think, echos a point that Susan made -- I do not think

8it is appropriate to try to fix the patent system using

9the antitrust laws. Instead, it would be desirable to

10fix the patent system directly. So, let's craft

11antitrust laws that promote competition and a patent

12policy that justly rewards the efforts to innovation.

13Thank you.

14(Applause.)

15MR. DAGEN: Our next speaker is Michael

16Brockmeyer. He's a partner at Frommer Lawrence & Haug,

17where his practice concentrates on antitrust and

18consumer protection law with particular emphasis on

19intellectual property financing agreements and the

20pharmaceutical industry. Before entering private

21practice, Michael served as chair of the Multistate

22Antitrust Task Force of the National Association of

23Attorneys General and was a chief of Maryland's

24Antitrust Division. He is a frequent author and

25lecturer on antitrust matters, and he is also an Adjunct

32

1Professor at the University of Maryland School of Law,

2teaching antitrust law.

3DR. BROCKMEYER: Thanks, Rick. Good morning,

4everyone.

5For my opening remarks this morning, I want to

6focus on abusive governmental processes, in particular

7with respect to deception in the intellectual property

8setting, and then I am going to briefly touch on

9tortious conduct.

10I find it helpful, however, that before going

11into those subjects, we should remind ourselves of

12certain basic principles that should apply when we look

13at any one of the subjects that we are talking about,

14and so, for example, and what we take for granted today

15I would assume, everyone, that aggressive competition on

16the merits serves consumer welfare. Even if done by a

17monopolist, competition on the merits is not

18exclusionary. If we do not permit that, then we deprive

19consumers the benefit of that competition.

20Now, that is a principle that has become well

21accepted in antitrust law, but we must remember that

22that principle is not one that necessarily underlies

23certain state laws that deal with deception or tortious

24conduct.

25 The antitrust laws should not provide a remedy

33

1for conduct that violates the common law or another

2statutory scheme and injures individual competitors

3unless the conduct substantially harms the competitive

4process. In my view, such conduct that violates the

5common law or another statutory scheme is not

6competition on the merits, but the question is, is

7whether often the conduct is sufficient enough to say

8that it harms the competitive process.

9In my view, the principle should be that that

10conduct substantially harms the competitive process when

11it allows, permits, durable pricing above competitive

12levels or there exists a dangerous probability that such

13supra-competitive pricing will occur. In my view, when

14you have this sort of conduct, the competitors, the

15injured competitor, cannot be passive. The competitor

16must have attempted to counteract, must have done so in

17a reasonable manner evaluated in the context of what

18would be a competitive market, and again, the harm

19should be measured in the context of ability to price

20above competitive levels.

21When deciding whether that conduct is

22exclusionary, that is, giving rise to a Section 2 claim,

23I believe that it is essential that deciding whether

24there is substantial harm to the competitive process

25must be undertaken first before any balancing against

34

1any procompetitive justification, much as what Susan

2said, it is very difficult for much of this conduct to

3have a "procompetitive justification."

4The concern from a principles standpoint is if

5you quickly, say under a Microsoft type analysis,

6shifted the burden for procompetitive justification and

7there was none, you may end up penalizing under the

8antitrust laws tortious conduct that does not

9substantially harm the competitive process.

10Finally, when a monopolist's exclusionary

11conduct is subject to another regulatory scheme designed

12to promote competition, the antitrust laws should

13 provide a remedy for such conduct only after taking into

14account the structure of the market and the significance

15of the regulatory scheme to the workings of the market.

16This is going to be particularly important when we are

17talking about Hatch-Waxman, as Preston was talking about

18in the patent arena, or even one explanation for

19Conwood, because we must remember that because there are

20virtual bans on advertising, the conduct there was such

21that it was difficult for Conwood to counteract the

22activity because it could not do so by traditional

23advertising in the regulatory scheme that we have with

24respect to tobacco advertising prohibited that.

25With that, let me now first go to abuse of the

35

1government processes through deception, and the first,

2of course, is Walker Process, and in the 41 or so years

3since Walker Process was decided, much has been said

4about Walker Process, and the issue with, of course,

5Walker Process is that we start with the principle that

6the patentee is immune from antitrust liability

7generally when the patentee seeks to enforce its patent,

8and so the question in Walker Process was, when would we

9remove that immunity, and the Court said, well, when

10there was fraud on the Patent Office, and if there was

11fraud on the Patent Office, there was not then a per se

12violation of the antitrust laws.

13Indeed, when I read the opinion again, I believe

14the Antitrust Division or -- I do not know whether the

15Federal Trade Commission joined -- actually had urged

16the per se rule, which the Court rejected there; that

17is, that once fraud on the Patent Office is shown, the

18plaintiff merely is now in the door and has to show

19other -- an otherwise violation of the antitrust laws.

20I believe the importance of Walker Process,

21however, is Justice Harlan's concurrence, and in

22particular, he wanted to make clear that this was not

23going to open the door or should not open the door for

24all sorts of plaintiffs' suits where a patent is found

25to be unenforceable or otherwise invalid, and thus, he

36

1concluded that the private antitrust remedy, which the

2Court was allowing as a result of the Walker Process

3case, should not be deemed available to reach Section 2

4monopolies carried on under a nonfraudulently procured

5patent.

6Well, when we think about that sentence, I want

7to remind you on a little bit of history. Noerr had

8been decided prior to Walker Process, but California

9Transport had not. California Transport comes six or

10seven years after Walker Process, and so we end up in a

11situation where -- and let me just sort of finish with

12Walker Process for a moment -- that with Walker Process,

13the standard is if you do have fraud on the Patent

14Office, it is exclusionary conduct actionable under

15Section 2 on the assumption that the patentee otherwise

16possesses monopoly power or there is a dangerous

17probability that the patentee will obtain monopoly

18power.

19One area where I would disagree with the Federal

20Circuit, the Federal Circuit has said that in order to

21bring a Walker Process case, there must have been

22enforcement of the patent before the claim can be

23brought. In my view, Walker Process, if there has been

24fraud on the Patent Office, a Walker Process claim

25should be available even if the monopolist patentee has

37

1not attempted to enforce its patent. Now, I understand

2that in virtually all circumstances, knowledge of the

3claim and ability to bring the claim will be in the

4context of either a counterclaim or where there has been

5a cease and desist or some other letter, a declaratory

6judgment action being brought, such that there has been

7either actual or attempted enforcement. The difficulty

8is that there are circumstances -- and this goes a

9little bit to Preston's point, I believe -- where

10someone will come and ask for a review of the current

11patent law or current state of intellectual property, an

12opinion by a law firm may be given to say, well, your

13particular process will infringe. There is not

14knowledge of the fraud on the Patent Office, and someone

15who would otherwise come to market may not come to

16market simply because that firm does not want to risk

17the disruption of an enforcement action by the patentee

18who has procured the patent by fraud. So, in my view,

19the standard should not be one where Walker Process is

20available only when there is enforcement.

21Back to where I was going with Justice Harlan,

22and the question becomes this, and something that I am

23seeing in my practice, is where there is an allegation

24that a patent is unenforceable by reason of inequitable

25conduct before the Patent Office. Now, where there is

38

1inequitable conduct, there is intent, there is

2materiality, there is a weighing, but the basic issuance

3of the patent is not in issue; that is, in a Walker

4Process, where there is fraud, the patent is void ab

5initio, where that is not the case with respect to

6inequitable conduct. And here, in the Noble Pharma

7case, the Federal Circuit distinguished between in the

8case Walker Process fraud and inequitable conduct, and

9the key for that distinction is in a Walker Process

10fraud, there must be a fraud on the Patent Office, and

11but for the fraud, the patent would not issue.

12In my view -- and my time is getting short --

13the problem is that where there is inequitable conduct,

14there is often then a claim of sham litigation; that is,

15that the litigation is brought with the patentee knowing

16that its patent is unenforceable by reason of the

17inequitable conduct. In my view, the standard there

18should be one where the litigation must be sham, that

19is, meeting the PRE test, and the sham litigation itself

20must have substantially harmed the litigation; that is,

21the focus of the inquiry should be on the sham

22litigation and not the patentee's conduct before the

23Patent Office.

24Let me very quickly go to the issue of listings

25on the Orange Book. The Orange Book, as many of you may

39

1know, created under the Hatch-Waxman Act, a brand will

2list those patents that cover the branded drugs which it

3is marketing, and as we also know that the FDA plays

4only a ministerial act, meaning it lists what is

5presented to it.

6One point that I want to make is that listing in

7the Orange Book does have procompetitive attributes.

8While listing in the Orange Book means that when a

9generic sues, that there is a 30-month stay before the

10generic can -- its ANDA can be approved by the FDA, it

11also has a procompetitive attribute because it will

12encourage the generics to sue because of the 180

13exclusive for the first to file. So, we must be mindful

14that listings in the Orange Book do have procompetitive

15attributes, and where the FTC has sued in BristolMyers

16and Biovale, in both of those circumstances, the

17allegation was, in the case of BMS, it knew or could not

18have reasonably believed that the listing was

19appropriate or that Biovale was aware that the patent it

20listed did not cover the drug that it marketed.

21In Organon, I will pass through this, there is a

22suit that said the court had no antitrust liability,

23because Arganon had a reasonable basis for submission on

24its patent in the Orange Book.

25In my view, the standard should be that

40

1something may be actionable exclusionary conduct under

2Section 2 only when the decision to list the patent was

3objectively baseless; that is, the test on whether to

4list should be objective, and it should be looking to

5where the brand could have reasonably believed that the

6listed patent could be asserted against a generic that a

7manufacturer would want to bring to the market.

8Finally, on the tortious conduct, in my view, a

9monopolist's misleading and deceptive tortious conduct

10that's illegal in common law or another regulatory

11scheme could be treated, may be treated, as

12exclusionary, but only when the conduct is

13institutional, pervasive and substantially harms the

14competitive process.

15Institutional, to me, goes to the question that

16Preston raised of mistakes. This must be one where the

17company has purposefully looked to undertake a campaign

18that involves misleading and deceptive conduct. It must

19be pervasive, that is, you measure it in the context of

20the relevant geographic market. We have to, you know,

21deal with the rogue employee who may be engaged in some

22tortious conduct in some area, but we should not visit

23antitrust liability.

24It must impair the competitive process, and

25finally, as has been suggested, in my view, there should

41

1be no rebuttable de minimus presumption -- I know there

2has been the suggestion in several -- I believe the

3Sixth and the Ninth Circuits have adopted the notion of

4a de minimus rebuttable presumption. I believe there

5should not be one. The plaintiff in my view has the

6initial burden, the initial burden being to present a

7prima facie case of substantial harm to competition.

8 Thank you.

9(Applause.)

10MR. DAGEN: Our next speaker is Richard Rozek.

11He is a senior vice president at NERA Economic

12Consulting. After starting his career as an Assistant

13Professor at the University of Pittsburgh, Richard

14worked for over six years in the Bureau of Economics at

15the Federal Trade Commission in a series of senior staff

16positions, including Deputy Assistant Director for

17Antitrust. Since joining NERA in 1987, Dr. Rozek has

18worked on projects affecting many different industries,

19including the pharmaceutical industry. His work has

20appeared in a number of journals.

21 Richard?

22DR. ROZEK: Well, I want to thank Pat

23Schultheiss for inviting me to come here and talk today

24about the pharmaceutical industry. It is an industry

25that I spend a fair amount of my time studying, and the

42

1work I do at NERA is focused on the pharmaceutical

2industry as well as other industries, but I want to

3begin by summarizing some of the interesting

4characteristics or structural characteristics of the

5industry that make it so interesting to study. Not only

6that, we live in a world with laws regarding patents,

7copyrights, trademarks and trade secrets that along with

8the effective enforcement mechanisms have contributed

9substantially to economic growth and development in the

10United States. Nowhere is this effect of the

11intellectual property laws more pronounced than in the

12health care industry, specifically for pharmaceuticals.

13Innovators in the pharmaceutical industry invest

14 hundreds of millions of dollars in research and

15development or R&D for new medicines that address unmet

16medical needs. Conducting R&D and obtaining approval

17from the U.S. Food and Drug Administration or FDA to

18sell a new medicine as a safe, effective treatment for a

19particular disease usually requires 10 to 15 years of

20research. Many research projects actually fail and do

21not even result in the innovators submitting a new drug

22application to the FDA.

23For the few successful projects, the innovator

24has, at the end of that 15-year period, a patent that

25gives it exclusivity, not to be confused with monopoly

43

1power, for components of the product. The patent may be

2a composition of matter, may be a process, may be a

3method of use. Also, the innovator has a new drug

4application approved by the FDA as a result of that R&D

5investment, but there is no guarantee that the product

6will be commercially successful.

7The innovator must manufacture and distribute

8the product. The innovator must inform patients,

9physicians, pharmacists, and payers about the

10therapeutic benefits of the improved product. He must

11negotiate prices with specific payers, both public and

12private. And in the end, many pharmaceutical products

13 may not even generate sufficient revenues to justify

14their investment. Those products that are successful

15provide resources in terms of retained earnings for the

16innovator to fund its ongoing R&D efforts. So that if

17we want to have cures for such medical problems as AIDS,

18Alzheimer's disease, and cancer in our lifetime, we must

19have public policy that provides the incentives for

20innovators to invest resources in pharmaceutical R&D and

21continue the work to solve these unmet medical problems.

22Now, there have been some concerns raised about

23practices that innovators engage in near the end of the

24patent lives for their products, such issues as filing a

25Citizen's Petition with the FDA, introducing new,

44

1improved versions of their products based on the

2original chemicals, settling patent infringement cases,

3introducing generic versions of their original branded

4products, sometimes referred to as introducing an

5authorized generic. These practices and others that we

6have heard about today with regard to Orange Book

7listings and so on, have been the focus of antitrust

8scrutiny that the pharmaceutical industry has been

9receiving.

10 This policy debate on whether or not these

11practices are legitimate or the incentives to engage in

12these practices somehow be altered are guided more by

13emotion, rather than analyses that demonstrate that

14there is actual harm to consumer welfare from these

15practices. As a matter of fact, there are many

16beneficial effects from these practices that often are

17not the focus of the debate.

18For example, filing a Citizen's Petition with

19the FDA makes the FDA aware of scientific or public

20health questions regarding its efforts to approve

21additional products. Introducing a combination product

22that combines two active ingredients or an extended

23release product can actually provide benefits to

24patients, increase compliance one pill instead of two.

25Actually, for insured patients, it can result in lower

45

1co-payments. You have to buy a single pill, pay one

2co-payment, instead of take two pills and make two

3co-payments, so there can be a cost-reducing benefit.

4 Settling a patent case can reduce litigation

5costs and can actually, in some cases, provide

6additional entry into a marketplace. Introducing an

7authorized generic product into the marketplace can

8obviously increase competition. So, you see that there

9are benefits to the practices that have been the subject

10of these challenges, and there appears, on the other

11hand, to be a lack of evidence that these actions harm

12consumers.

13Instead of talking about these types of

14actions collectively, I'll talk about the authorized

15generic issue, which has been the subject of some

16debate. There has actually been legislation proposed

17addressing authorized generics. There have been some

18court decisions related to authorized generics and so

19on. Most recently, to spur the debate, the Supreme

20Court refused to hear the FTC appeal of the

21Schering-Plough case. The Court of Appeals for the

22Second Circuit denied a consumer group's request for a

23rehearing in the Tamoxifen matter that involved Astra

24Zeneca and Barr settling a patent case. Bruce Downey,

25the Chairman and CEO of Barr, said in response to the

46

1Court of Appeals' decision, "We are pleased that our

2patent challenge settlement related to Tamoxifen citrate

3has been upheld as being pro-consumer and

4pro-competition."

5 In spite of these court decisions and in spite

6of the benefits to competition from introduction of an

7authorized generic, the argument has been that

8introducing an authorized generic is inconsistent with

9the intent of the Drug Price Competition and Patent

10Restoration Act of 1984, sometimes referred to as the

11Hatch-Waxman Act. Specifically, the threat to launch an

12authorized generic reduces the incentives provided to

13generic companies to challenge patents listed in the

14Orange Book and, thus, will reduce the number of future

15generic alternatives.

16Now, the problem is that there is no evidence

17that the number of generic alternatives will be reduced

18or that there are a lack of profit opportunities or

19entry opportunities for generic firms. The Hatch-Waxman

20Act actually encourages both innovation to solve those

21unmet medical problems and competition or imitation by

22sellers after patent expiration. It has generally been

23a success because it has struck this balance between

24innovation and imitation, and restricting options

25available under the Hatch-Waxman Act to encourage

47

1innovation, to destroy the incentives to develop new and

2improved medicines, will actually harm patients,

3physicians, pharmacists, and payers.

4 Now, some of the entry opportunities that

5exist -- and this should be of interest to the antitrust

6community as well, because it is an issue that is a key

7part of any antitrust inquiry -- is what are the entry

8conditions into a marketplace? Is entry encouraged or

9discouraged by certain actions? Well, the presence of

10authorized generics, for example, actually creates new

11entrants into the pharmaceutical marketplace. Obviously

12innovator companies now have an opportunity to introduce

13an authorized generic and enter that component of the

14industry, as companies such as Pfizer, Novartis and

15Schering-Plough have done. Pfizer has its generic

16entity, Greenstone, Novartis has its generic affiliate,

17Sandoz, and Schering-Plough has Warrick. These are

18firms that now sell generic products. So, innovator

19companies are entering the generic marketplace.

20Companies that have traditionally been in the

21generic marketplace and have launched their own generic

22products or independent generics have also been involved

23in participating in the authorized generic portion of

24the industry. Mylan, Barr, Par, Watson, Ivax/Teva,

25which is now a single firm, have all sold authorized

48

1generic forms of drugs under licenses from the innovator

2varieties. Barr, a company that actually derives most

3of its revenues from sales of generic drugs, has a few

4branded products as well, and it recently launched an

5authorized generic version of its brand oral

6contraceptive product Seasonale after Watson, a generic

7company, launched a generic version of the product.

8 Bruce Downey, again, said, quote, "It is our obligation

9to preserve our rightful interest in this product." So,

10you see, even the generic companies see the benefit of

11launching authorized generics when they do expand into

12the brand or innovator segment of the industry.

13Some firms have arisen to sell authorized

14generics only. For example, Prasco is a firm that

15currently sells authorized generic versions of seven

16branded products. It is a privately held company. It

17was created because of the opportunities presented to

18the marketplace by this ability to sell authorized

19generic products.

20I have seen various estimates of the value of

21the patented products coming off patent in the next two

22or three years, and it could easily exceed $27 billion

23in 2007 and $29 billion in 2008. So, the point is that

24there are profit opportunities in the generic industry

25with authorized generics in the marketplace as well.

49

1 So, the new entrants have emerged, and future profit

2opportunities exist.

3 The issue remains, however, what is the role for

4antitrust policy versus competitive forces in this

5industry? Where in the industry should antitrust policy

6be focused? Should it be focused at the manufacturer

7level? Should it be focused at the retail level?

8Should it be focused at the distribution level? There

9are fundamental questions with regard to using antitrust

10policy to address issues in the pharmaceutical industry.

11I think there have been several mistakes in the current

12application of the antitrust laws to the pharmaceutical

13industry, broadly defined as this vertical chain from

14research through distribution of the products to

15patients.

16One is that market definitions are often too

17narrow in this industry from an antitrust perspective.

18Market definitions that use a single chemical as the

19appropriate defining characteristic of a market,

20overlook the therapeutic competition that exists in the

21pharmaceutical industry, competition between chemical

22entities, Avandia competes with Actos, Fosamax competes

23with Actonel, ear tubes compete with antibiotics for

24treating otitis media. There is a lot of competition

25that's overlooked by taking the static view that it's

50

1only a single chemical constitues a relevant market.

2Well, a fundamental flaw in current antitrust, taking a

3too narrow view of the market, not realizing the

4therapeutic competition, competition across therapies,

5be they pharmaceutical or surgical procedures.

6Taking that narrow view of market definition

7causes decisions to be made that monopolies exist when,

8 in fact, they do not, you see.

9Another flaw is taking a static, as opposed to a

10dynamic, view of the market when you have a market

11environment characterized by high expenditures in R&D

12and new products emerging from research being done

13within U.S. laboratories, UK laboratories, Japanese

14laboratories, and even in other countries, such as India

15and Argentina and Brazil, countries that are developing

16and have recently improved their protection for

17intellectual property.

18Competitive forces are working in health care

19markets, and I think a greater reliance on allowing

20these competitive forces to work as opposed to

21intervening too early with antitrust enforcement is a

22better solution for everyone concerned. What we need to

23do is to convince consumers that shopping for

24pharmaceutical products, such as they do for other

25consumer goods, is a good idea. We have to induce more

51

1of a shopping or a searching procedure for the lowest

2pharmaceutical prices.

3I recently conducted with one of my colleagues a

4survey of pharmacies in Crystal City, Virginia to

5purchase the product albuterol, which is an asthma

6treatment. We found that in a narrow geographic region

7within Crystal City, Virginia, the price of a canister

8of albuterol ranged from $8.19 to $26.49. We found out

9this information just by calling the pharmacy and asking

10them how much a canister of albuterol would cost. There

11is often a significant difference in price, which you

12can find out by just calling before you even go to the

13pharmacy with your prescription.

14WalMart recently announced a pilot program to

15sell generic pharmaceutical products for $4 a

16prescription. K-Mart is offering a 90-day supply of a

17prescription for $15. The market is responding to the

18need to control health care costs.

19So, in conclusion, I want to say that innovators

20in the pharmaceutical industry obtain patents and

21regulatory approval in the U.S. They are subject to the

22general U.S. antitrust laws, as are all companies, and

23additional specialized rules, such as the Hatch-Waxman

24Act, that strikes a balance between innovation and

25imitation. This structure creates the incentives for

52

1both innovators and imitators to develop, manufacture

2and sell their products. To preserve the gains from

3both types of activities, public policy, including

4antitrust, should focus on maintaining a business

5environment that allows innovators and imitators the

6most effective means to manage their product life cycles

7under the existing system.

8In the case of innovators introducing authorized

9generics and the other activities I described earlier,

10competition has increased and new entrants have emerged.

11Patients have had access to established therapies and to

12new therapies, and they have the mechanism in place to

13assure that research will be done on therapies to meet

14unmet medical needs in the future.

15With regard to the pharmaceutical industry, a

16reliance on competitive forces rather than a stepped-up

17antitrust policy that has focused on static analysis

18under narrow market definitions holds greater promise

19for controlling health care costs in the future.

20Thank you.

21(Applause.)

22MR. DAGEN: Before we proceed to our last two

23speakers, we will take about a ten-minute break. When

24we come back, we will hear from Gil Ohana and George

25Cary and then go directly from their presentations into

53

1our round table discussion. Thank you.

2(A brief recess was taken.)

3MR. DAGEN: Okay, welcome back, everybody. We

4have two speakers remaining, and after their

5presentations we will follow with the round table

6discussion.

7Gil Ohana is Director of Antitrust and

8Competition for Cisco Systems, a leading manufacturer of

9networking equipment for the internet. He writes and

10speaks regularly on licensing, standard-setting, patent

11pools and other subjects at the intersection of

12antitrust and intellectual property law. Before joining

13Cisco, Gil was a trial attorney at the Antitrust

14Division of the U.S. Department of Justice, specializing

15 in antitrust issues in high technology industries.

16Gil?

17MR. OHANA: Thank you, Richard, and thanks to

18the Justice Department and the FTC for the opportunity

19to speak today.

20Susan Creighton earlier used the term "network

21industries." I am in the networking industry, and in

22the networking industry, something the customers care

23about a lot is that networking products work together

24well and the way that we make sure they work together

25 well is largely by participation in standard-setting.

54

1So, we're very proud of the leading role that we've

2played in developing standards that many of you use

3every day, whether or not you realize it. To give some

4examples, 802.3, which is the ethernet standard; 802.11,

5which is the WIFI standard; TCPIP, which is the basic

6transmission control protocol on which the internet

7runs.

8We also sell every year billions of dollars of

9products that implement a wide variety of industry

10standards, so both from the standpoint of participation

11in standards development, from the standpoint of

12implementation of standards in commercial products, we

13are passionately interested in a transparent standards

14development process. What do I mean by that? I mean a

15process that values intellectual property rights but

16that also recognizes, as the Justice Department did in

17the Vita letter, that the incorporation of a patent into

18a standard may confer on that patent significant market

19power and that, therefore, the decision to incorporate

20the patent into a standard should be made knowingly with

21access to the best information that is available at the

22 time.

23The deceptive practices in standards

24development, therefore, run contrary to our interests.

25They reduce our incentives to participate in standards

55

1development, and they reduce our confidence that the

2products we ship will not infringe or that if they do

3infringe that we will be able to address the

4infringement with a payment of reasonable licensing

5fees.

6I'd like to preface my remarks with a quote from

7Justice Brennan in the Allied Tube case that I am sure

8many of you have seen before. Historically, the

9antitrust scrutiny that Justice Brennan referred to was

10really around Section 1. More recently, the FTC in

11particular has brought a number of cases involving

12Section 2 issues in standards development, as we all

13know. What I'd like to talk about today is those cases

14without getting deeply into the facts of any of them and

15make a few points about them.

16First of all, to suggest that despite the title

17of today's discussion, when we talk about deception, we

18really ought to be talking about exploitation and not

19deception. Second, that if you situate deception in the

20broader panoply of Section 2, you come up with some

21interesting conclusions, and I think Susan touched on

22these earlier, regarding whether the risk of

23over-enforcement operates as strongly in the context of

24deception in standards development cases as it does in

25Section 2 cases more generally. And last, I'd like to

56

1comment on, since I am here in an event hosted by the

2Justice Department and the FTC, I'll abuse a privilege

3of being here by talking about how I feel the agencies

4can best address issues of deceptions in standards

5development, and I'll give you a hint, it's not just

6about bringing cases.

7I won't spend long on this slide. Here are some

8examples all drawn from recent FTC decisions or

9investigations involving deception in standards

10development, and as the cases suggest, there are a fair

11number of fact patterns -- I didn't, for example, deal

12with government standard-setting here, the Orange Book

13cases, et cetera, but there are a fair number of fact

14patterns just in classic tech industry standards

15development.

16So, to unite the theory, I thought about a kind

17of way of defining the issue, which is that it is a

18patentee's exploitation of monopoly power that results

19from the success of a standard for which their patent is

20essential, where that power is created by actions that

21run contrary to the rules or shared expectations of the

22participants in standards development.

23I'd like to focus on two parts of that

24definition. The first is exploitation of monopoly

25power, and the second is resulting from the success of

57

1the standard.

2First of all, on exploitation of monopoly power,

3it seems to me that the analytical weakness of just

4focusing on deception is that you are really missing

5what matters, which is not the deceptive act itself, but

6the exploitation of the market power that that creates.

7Let me offer an example, as they say, ripped from the

8headlines, though it is a situation that people in the

9networking industry are aware of, as I think are some

10people in this building.

11The hypothetical is, a patent holder discloses a

12patent in patent standards development, it offers to

13license the patent for fully paid up $1 royalty, give me

14a buck, use all you want. The patent holder then sells

15the patent to someone else. The buyer buys the patent

16without knowledge of the prior licensing commitment,

17let's assume. The buyer begins to assert the patent

18against companies implementing the standard, which by

19now has enjoyed a great deal of success, and you won't

20be surprised to learn that the successor is asking for

21more than a dollar. The rules of the standards

22development organization at the time did not

23specifically require that licensing commitments made in

24the context of the standards development effort, in

25fact, bound successors, but if you ask people who

58

1participate in the standards development effort, that

2would certainly be their expectation.

3What was the deception here? Well, there really

4wasn't any. The successor was quite up front about what

5they were doing. The initial patent holder did not

6deceive anyone, the successor did not deceive anyone, so

7where is the deception? It seems to me that what you

8are really focusing on here is the exploitation, and the

9exploitation begins at the moment that the successor

10 becomes aware of the past licensing commitment and the

11consensus within the standards development effort that,

12in fact, it would bind the successor as well. At that

13point, failure to withdraw the claim and seek only the

14one dollar royalty is I guess deceptive conduct, though

15it seems to me more to be exploitative conduct.

16Now, note in this case, the deception and the

17exploitation essentially merged into one in the matter

18of the standpoint of timing. In cases like Rambus and

19BroadCom, obviously there is a much longer time period

20between when deception occurs and when the exercise of

21monopoly power will occur, thereby exemplifying the

22point that the two may be different, they may be the

23same, but in any case, what you want to worry about is

24the second, not the first.

25Listening to some of the discussion this morning

59

1made me think of another reason why you want to focus on

2exploitation rather than deception. It is the question

3of inadvertent deception. Deception may very well be

4inadvertent, and it is particularly true in the

5standard-setting context. Where the rules of standards

6development organizations are not clear, people can make

7innocent mistakes. Exploitation is never inadvertent.

8Let's move on to the second phrase I'd like to

9talk about, the phrase resulting from the success of the

10standard. Here we come to a significant difference

11between the FTC's series of standards cases and what

12I'll call kind of classic Justice Department monopoly

13maintenance cases, AT&T, IBM, Microsoft, all of which

14involve durable monopoly power and raise the question

15and the understandable concern that what you should

16really be worried about is the risk of false positives,

17because in those cases, you are dealing with a

18successful company, and you have got to tease out, a

19pretty difficult analytical task, tease out specific

20exclusionary conduct from what made that company

21successful as a general matter. That's not easy to do,

22a risk that I am sure many of you have seen the Learned

23Hand quote that captured this.

24Now, the question I would like to pose is under

25what circumstances can you be sure that the deceiver in

60

1a standards deception case is or is not what Learned

2Hand would call the successful competitor? It seems to

3 me that in deception cases, the conduct and market power

4elements of monopolization may focus on different

5subjects. In other words, you may be worried about or

6you may be focusing on different actors. Certainly you

7would be focusing on whether the act of deception was

8anticompetitive and then whether it lacked business

9justification, but you would also be focusing not on

10whether the deceiver gained monopoly power through its

11actions, but whether the standard gained monopoly power,

12and the standard may have gained monopoly power for

13reasons that have very little to do with the underlying

14deception.

15In that sense, the risk of over-enforcement is

16lowest when, first of all, the undisclosed intellectual

17property right was not core to the success of the

18standard. It was, in other words, nice to have. Now,

19this isn't an argument for counting patents. The fact

20that the undisclosed patent was one patent out of fifty

21or a hundred or a thousand should not be dispositive,

22because all patents are not created equal, but the other

23thing you should think about is, what were the rejected

24substitutes? First of all, did they exist? Second,

25were they close? And third, can you say with some

61

1degree of assurance that they would have been selected

2absent the deception?

3Now, that may not be the easy inquiry, but it is

4a whole lot easier than figuring out whether per

5processor licensing was the source of Microsoft's

6vertical monopoly in operating systems in 1984. It is a

7whole lot easier than figuring out whether lease

8practices were the reason that IBM enjoyed a leading

9 position in mainframes for quite so long.

10First of all, the time period is very

11compressed. In the facts of the Rambus case, the period

12in which Rambus gained monopoly power through the

13insertion of its patents in JEDEC and competitive

14alternatives were distorted was a matter of months. You

15 knew what the alternatives were. You typically, because

16 standards development activities are ostensibly

17documented, have a good set of evidence to look to to

18figure out what the alternatives were, why they were

19rejected. It seems like an easier exercise, and because

20it is an easier exercise, the risk that you are going to

21get it wrong it seems to me goes down.

22Let's talk about moving on to the culture of

23standards development. First of all, standards

24development is not a lawyer-intensive process, which

25goes back to the point I made earlier about the risk of

62

1inadvertent nondisclosure or the risk of inadvertent

2deception. In thinking about that, I go back to the

3Rambus case and the FTC's description of standards

4development as a cooperative effort in which the risk of

5deception is therefore present. I would like to think

6that that is right, but it raises an interesting

7question and one that antitrust plays a role in.

8The question is, how do we get there? And it is

9not just an academic question for this audience. It is

10a question in which antitrust does not necessarily come

11with clean hands, not the Government, mind you, but the

12private enforcement. Specifically, because of the

13pervasive antitrust scrutiny of standards development

14that Justice Brennan spoke about in Allied Tube and

15particularly the imposition of vicarious liability on

16standards development organizations in Hydrolevel,

17standards organizations got very, very, very concerned

18about antitrust liability.

19They do not know much about it, but they know

20enough to be frightened, which is kind of like what we

21would feel if suddenly a brilliant men appeared at these

22doors and told us we would be locked in this room until

23we came up with the next standard for high speed

24wireless data communications, and the way they responded

25to that concern was by developing rules that

63

1systematically discouraged the discussion of what seemed

2like efficient things to talk about, cost, patent

3validity, pricing, particularly in the context of input

4 pricing.

5The standards development organizations, for

6whom the cost of defending that antitrust case to a

7motion of dismiss, let alone summary judgment, would

8consume multiples of their annual budget, decided we are

9not going there, and we are going to enforce these

10rules. That led to the development of what I will call

11a culture of standard-setting in which people can be

12forgiven for not having asked what seem in retrospect to

13be obvious questions, like, hey, I really like your

14technology contribution, how much is it going to cost me

15to practice that, and instead being satisfied with the

16answer, well, it will be reasonable, and also questions

17like, well, can you prove to me that that patent is

18valid? How much do -- do you have patents?

19These are questions that seem, again, pretty

20basic from the standpoint of lawyers with the benefit of

21reading cases in this area but that the rules of the

22standards development organizations often prohibited

23discussion of, which suggests a role for the agencies,

24 but not necessarily a litigation role. I don't want to

25dismiss the litigation role, having been at Cisco during

64

1the Rambus case and having talked to many engineers who

2were following the coverage of the case in EE Times,

3which is a leading semiconductor trade journal, which

4had a full-time reporter, believe it or not, covering

5the Rambus case.

6It did provoke a lot of interest, and cases are

7very useful from that standpoint, but beyond that, since

8antitrust in some sense played a role in creating this

9problem, it can also play a role, particularly the

10agencies, in helping address the culture of standards

11development by helping the agencies understand or the

12participants in standards development understand what

13they can and cannot do, and I would like to say that we

14are off to a good start in that, particularly with

15statements like Chairman Majoras' speech at Stanford

16last year, the recent Vita letter, and also some

17statements out of the European Union regarding this, but

18more dialogue is needed and more help from the

19enforcement organizations to figure out how far they can

20go to defend themselves from these risks, to in some

21sense change the culture, will nevertheless be

22necessary.

23Thank you.

24(Applause.)

25MR. DAGEN: Our final speaker during the

65

1prepared presentations is George Cary. George is a

2partner at the D.C. office of Cleary Gottlieb. Before

3joining Cleary, George served as Deputy Director of the

4FTC's Bureau of Competition. George also was a

5principal contributor to the 1997 modification of the

61992 Federal Horizontal Merger Guidelines, which

7incorporated consideration of efficiencies in merger

8assessment. He is a frequent speaker and writer on

9antitrust issues.

10George?

11MR. CARY: Thanks, Rick.

12We seem to have started with some very broad

13principles at the beginning, through Susan's comments,

14and have now narrowed down through Gil's comments to a

15specific analysis of the standard-setting process. I am

16going to take it one level more narrowly, and I am going

17to talk about implementation of specific rules within

18the standard-setting context and whether violations of

19those specific rules ought to be treated as an antitrust

20issue, an issue of antitrust concern.

21The particular provision that I am going to talk

22about is so-called FRAND licensing commitments,

23commitments by participants in the standard-setting

24process to license their technology on fair, reasonable

25and nondiscriminatory terms, and I am going to start by

66

1laying out several premises that you have already heard

2referenced this morning but which I believe apply in

3this case as well.

4First, standard-setting eliminates competition

5among alternative technologies. Companies that

6otherwise would be competing to promulgate proprietary

7standards have now gotten together and eliminated that

8competition by agreement. Antitrust, therefore, has a

9stake in policing that standard-setting activity.

10Second, when proprietary technology is made an

11essential element of an industry standard, the owner of

12that technology gains market power, exclusionary power,

13beyond what is inherent in the patent itself. Prior to

14the adoption of the standard, the company can exclude

15others from practicing the particular innovation

16incorporated in the patent. After inclusion in the

17standard, if it is an essential patent, the patent

18holder can exclude firms from practicing the standard

19generally. That is a much broader grant of monopoly

20power and one, again, where antitrust has a stake in how

21it is exercised.

22Third, the proposition that nondisclosure of

23patents after lock-in as part of a standard has occurred

24has been recognized as an antitrust concern. I think we

25have had a couple of references to that recognition this

67

1morning, the Rambus case, the UNOCAL case, the Dell

2case, and other cases where the Commission and the

3courts have recognized that if you fail to disclose a

4patent, if you have a duty to disclose because you are

5part of the standard-setting body, and if, as a result,

6you have gained market power because the standard has

7now incorporated that patent, that raises antitrust

8concerns.

9My premise here today is that if you accept

10those three propositions, then it naturally follows that

11you have to accept the proposition that violation of

12commitments to particular terms that the standard body

13sets in order to ensure that there is no hold-up after

14lock-in and that there is no extension of a patent

15monopoly to a monoply of the standard as a whole, also

16must raise antitrust concerns. So, violations of other

17rules designed to constrain exploitation of lock-in

18raise similar competitive problems to failure to

19disclose, and therefore, ought to be treated similarly

20under the antitrust laws.

21What is a FRAND commitment? A FRAND commitment

22is an agreement to license on fair, reasonable and

23nondiscriminatory terms as a condition for including the

24intellectual property within the standard. The purpose

25of this is to avoid hold-up, the same purpose as a

68

1requirement that patents be disclosed, and an obligation

2to disclose is ineffective if there is no recourse for

3violation of the FRAND commitment. If one can simply

4disclose, agree to license, and then fail to fulfill

5that agreement, it raises the same competitive concern

6as failure to disclose in the first instance.

7 What are the problems that FRAND is designed to

8address? Before the standard is adopted, companies have

9options. They can invent around patents. They can use

10alternative patented technology. After the standard is

11adopted, those wishing to practice the standard no

12longer have options. They are locked into the use of

13the standard, and having sunk significant investment in

14standard-specific resources, it creates the potential

15for monopoly rents, because their elasticity of demand

16is now much more inelastic. They need to recover the

17investments that they have made in that standard, and

18they are going to be willing to pay a higher price for

19the patented technology than they would have prior to

20the adoption of the standard.

21Second, FRAND is a commitment to a common

22enterprise. Participating in the standard-setting body

23is a commitment to the efficiency and the success of

24that standard. That promise is that all participants in

25the standard, many of whom contribute intellectual

69

1property of one form or another, have committed to each

2other as a matter of good faith and fair dealing to

3impose a mutual restraint on their exploitation of the

4market power created by that standard and a commitment

5that they will not price their intellectual property at

6such a level so as to make the standard itself

7uncompetitive or inefficient.

8FRAND is designed also to ensure competitive

9markets downstream for products that are compliant with

10the standard. To accomplish this, there is a

11nondiscriminatory element to a FRAND commitment where a

12holder of intellectual property promises not to use that

13control to disadvantage its competitors in producing

14parts, equipment, networks that are compliant with that

15standard. These are the goals of the standard-setting

16process in imposing FRAND, and these goals, I would

17submit, inform us as to how to properly interpret FRAND

18in the context of an antitrust enforcement.

19My next premise is that FRAND is enforceable

20under the antitrust laws under standard, conventional

21Section 2 theory. The holder of a patent included in a

22standard gains monopoly power. What is the definition

23of monopoly power under the cases? It is the power to

24exclude others from the marketplace and the power to

25control prices. If you hold a patent, if the patent is

70

1essential to practicing the standard, and if you refuse

2to license that patent, you have effectively excluded

3competition from within the standard. If you hold a

4patent that is essential to practicing a standard and

5you charge an exorbitant royalty to competitors who are

6producing products compliant with the standard, you have

7imposed costs on your rivals, and those costs have to be

8passed onto consumers, and you have gained the power to

9control prices in that downstream market. Both of those

10things are the hallmarks of monopoly.

11When does monopoly violate the antitrust laws?

12It violates the antitrust laws where it is willfully

13acquired; in other words, where it is not competition on

14the merits, when the monopoly is not based on superior

15products, business acumen or historical accident. A

16willful violation of a FRAND commitment to license on

17 fair, reasonable and nondiscriminatory terms is,

18therefore, monopolization. You have a monopoly by

19virtue of the power to exclude and control prices.

20Making a commitment to FRAND that you then renege upon

21or do not follow through on is willful acquisition of

22that market power, and therefore, the two would

23constitute a violation of the Sherman Act with a

24requisite showing of competitive effects.

25Antitrust courts are competent to enforce FRAND

71

1commitments. Now, there has been some discussion about

2this, but again, the idea that you can have an antitrust

3violation by virtue of violating the essential elements

4of Section 2 with no antitrust recourse is one I think

5we would generally reject, and I think Susan articulated

6the principles of that very well. Some have argued that

7FRAND should be enforceable only under contract law or

8under tort law, but if it is a violation of the

9antitrust laws by virtue of its effect on competition,

10by virtue of its effect on consumers, then the public

11should have standing under the antitrust law and

12recourse to vindicate a violation of the Sherman Act.

13Participants in the standard-setting process may not

14have the requisite incentives, and in any event, there

15is a separate injury to consumers and to the public by

16virtue of the exploitation of market power that results

17from this kind of conduct.

18Finally, if a court is capable of determining

19whether conduct violates FRAND in a contract or tort

20case, there is no reason why, as a matter of judicial

21administerability, it cannot do the same in an antitrust

22case, and there is no reason under antitrust policy why

23it should not do so.

24I am now going to illustrate a couple of

25examples of FRAND violations and talk about how one

72

1might go about proving such a violation in an antitrust

2case. The first is the most obvious, the extreme case

3of a refusal to license. If you have agreed to license,

4the standard has now incorporated your patent and you

5refuse to license, you now have the capability of

6monopolizing the market for standard-compliant parts and

7equipment and networks. That, it seems to me, is a

8clear violation of the FRAND commitment. It is also a

9violation of antitrust law, because now you have created

10a downstream monopoly.

11Second, if you discriminate against competitors,

12the "ND" part of the FRAND commitment, in

13standard-compliant markets, again, you are taking your

14monopoly on essential technology and you are extending

15it to product markets for standards-compliant parts and

16equipment. The hold-up potential is very real, and

17antitrust law has recognized this kind of vertical

18integration and abuse of monopoly in one market to gain

19a monopoly in another in a variety of settings.

20One example might be the case of a

21rate-regulated utility vertically integrating into a

22market where there is no such rate regulation and then

23using its market power to expel other competitors from

24that market, and once achieving a monopoly, charging

25higher prices in the unregulated market to evade

73

1regulation in the regulated market. This is a similar

2kind of phenomenon where a company might agree to

3license on fair and reasonable terms but through

4discrimination that excludes competitors in compliant

5markets gains the ability then to charge the monopoly

6 price in the compliant parts and equipment market.

7Such discrimination also has an effect on future

8innovation and competition, because often in these kinds

9of markets, you find that the companies that are making

10the compliant parts are learning about how the standard

11works in ways that allow them to make improvements on

12the technology in the standard, and in the next

13generation of standardization, provide a competitive

14alternative to the firm that provided the essential

15technology in the first instance. Eliminating those

16kinds of innovators and competitors cements the position

17of the firm providing the technology in the first

18generation and potentially permits them to succeed to a

19monopoly in the second generation without making the

20kinds of commitments that a standard-setting body might

21otherwise require or by raising what they might be able

22to charge as a fair and reasonable royalty in the second

23round.

24Again, discrimination is well known to antitrust

25courts. Antitrust courts look at that in the context of

74

1the Robinson-Patman Act, of the Sherman Act, of

2discriminatory pricing, of predatory pricing. This is

3not a foreign concept, and antitrust courts have

4demonstrated an ability to administer these kinds of

5rules.

6What does fair and reasonable mean? Again, we

7have to look at the underlying purposes of the

8commitment that is being made in the light of the

9antitrust principles that are being addressed here.

10Fair and reasonable means a royalty that reflects the

11competitive environment before lock-in. I think Gil

12described it very well. It is the value of the

13innovation separate and apart from the additional value

14that that innovation takes on by virtue of its

15incorporation in the standard and by virtue of the

16lock-in created by the standard.

17Second, fair and reasonable means a royalty that

18is sufficient to allow the standard itself to be a

19commercial success, so that you do not have a situation

20where the royalties are so high that the standard is

21debilitated, weakened, and is not able to provide the

22efficiencies that the standard is designed to provide.

23So, how would one determine a fair and

24reasonable value? One would look at the alternatives

25that were available to the standard-setting body before

75

1the standard was adopted. One would compare how close

2those alternatives are, and one would ascribe a value

3based on the benefits that the chosen technology

4provides over and above the other alternatives. You

5then might adjust that royalty if you find yourself in a

6situation where the cumulative royalty stack is so high

7that it impedes the efficient adoption of the standard.

8Again, antitrust courts routinely compare the

9but-for competitive world with the observed market when

10assessing constraints, and this is no different. In a

11price-fixing case, you would look at the price set

12through the illegal restraint. You would then, through

13economic evidence, look at what the price would have

14been in the but-for competitive world. You would look

15at the comparison, and you would say the difference is

16damages. Again, here, one might look at what options

17were available to the standard-setting body, how close

18those options were, what did the standard-setting body

19at the time think about their alternatives, and how much

20incremental value, separate and apart from the lock-in

21value, did the accepted technology provide?

22Determining the fair and reasonable royalty is

23within the competence of courts and enforcement

24agencies. Courts routinely determine in the context of

25a patent infringement suit what would a reasonable

76

1royalty have been. The courts have developed a

2standard. The Georgia Pacific case lays out a whole

3series of standards that might be used to do that.

4There are industry benchmarks that could be looked at.

5There are examples of the licensing of the same

6technology in a context outside of the standard, what

7kind of royalty did that patent attract where it did not

8have the benefit of the standard?

9A comparison of royalties charged in other

10standards might also provide a benchmark, and a

11comparison of the royalty charged in a competitive

12market with no FRAND obligation might also be looked at.

13So, courts have experience in assessing those kinds of

14things. There is a body of case law that informs us,

15there is an antitrust principle that gives us a

16benchmark, and the courts are certainly capable of

17analyzing those factors.

18So, in conclusion, I would cite to you Justice

19Ginburg's decision in the Cable and Wireless case that

20was cited previously, and I would just quote from

21Justice Ginsburg when he says, "Anticompetitive conduct

22can come in too many different forms and is too

23dependent upon context for any court or commentator ever

24to have enumerated all of the varieties." It does no

25good to shut one barn door and leave others open. It

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1does no good to say failure to disclose is an antitrust

2violation, but disclosure with commitments that you then

3refuse to implement cannot violate the antitrust laws.

4The courts are capable of looking at the factual context

5and coming to reasoned decisions about whether the

6antitrust laws have been violated because of the

7creation of market power and whether a particular

8actor's conduct should be adjusted as a result of the

9commitments they made.

10Thank you.

11(Applause.)

12MR. DAGEN: And I think it is now time for a

13little inter-panel discussion. Each panelist -- I think

14we will probably go in the same order that we did the

15presentations, if you have any comments that you want to

16share addressing other panelists' presentations or

17questions that you want to pose to other panelists, we

18can try to keep track of them and either have them

19addressed as part of this discussion or further on down

20the line. We are thinking three to five minutes per

21person, if you have got that amount to go through, and

22we will see how it proceeds from there.

23MS. CREIGHTON: I am not sure I have three to

24five minutes of things, but I had just a few points, I

25think one comment on what Preston had to say a couple on

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1what Gil had to say.

2First, on Preston's observations, I found

3intriguing his remark by the one lawyer who quoted that

4he does his level best whenever he can to turn a

5contract dispute into an antitrust claim. I would think

6that typically, if people are in a contractual

7relationship, that means that they are probably

8somewhere in the vertical chain of supply, and so my

9guess is that those antitrust claims that he is turning

10his contract disputes into are a whole variety of what

11we would view as sort of typical arguments about

12vertical restrictions, and yet somehow we do not think

13that that problem with turning contracts into antitrust

14disputes means that we should invalidate all those types

15of Section 2 claims sort of ex ante as somehow

16invalidating them.

17So, sort of returning to the point I had made

18about we need to separate the question about problems we

19have with private actions from the substantive antitrust

20analysis, I guess I would pose as a broad experiment,

21suppose we did away with private antitrust enforcement

22just for the time being. In that circumstance, I would

23be curious for those who have voiced concerns about

24bringing -- for the Government to bring an antitrust

25enforcement action in the context of -- I guess what I

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1would call opportunism. If the Government is satisfied

2that that conduct has, in fact, caused durable market

3power, why would we nonetheless still eschew government

4enforcement to remedy it?

5With respect to Gil's point about intent, I

6had -- that was actually -- I think I share the concern

7that he does and had mentioned that one of the things

8that can be misleading, so to speak, about using

9business torts as our sort of initial predicate act for

10an antitrust claim is that we really are not about

11intent and that what you are trying to get at with a

12business tort is different from what we are driving at

13with antitrust, and so some folks had mentioned about

14inadvertent deception.

15I guess what I have tended to think of as

16deception, I have been tending to think of -- I will

17misuse Mr. Williamson again -- I think he defined

18opportunism as self-interest with guile, and so I think

19understanding it in that context, if we have -- what we

20are really concerned about in antitrust is self-interest

21with guile that causes durable market power, and that is

22really what we are talking about here, not some narrow

23business tort that may or may not fit the particular

24facts of what we are concerned with, which is consumer

25harm created by such market power.

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1And then my final point, I wanted to amplify and

2underscore a point that I thought Gil made quite well,

3which was sort of going back to the causation question

4that people have raised with Section 2 claims in this

5area. I would agree with his point that it would seem

6that many of our more traditional antitrust cases

7actually do pose that causation problem more forcefully

8than the kind of opportunism cases that we have been

9focused on here. So, for example, in the cases that Gil

10had identified, the Microsoft case, the AT&T case, the

11IBM case, obviously untangling the effect of the

12particular exclusionary acts is a challenge, but that

13does not mean it is a challenge that we should forgo.

14I would say, by contrast, in an Orange Book

15case, if you conclude that there actually was a listing

16that was made self-interestedly with guile and there was

17a patent on it that automatically excluded competitors

18from the market for 30 months where competition should

19not have been excluded, the causation issue is pretty

20straightforward. So, I would agree with Gil on that,

21that sometimes the standard-setting cases, misuse of

22government processes, the causation issue actually can

23be quite straightforward.

24That was it for my comments.

25MR. DAGEN: Thank you.

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1DR. McAFEE: Thank you.

2Let me actually echo something that Gil said,

3which is that it would be useful for the agencies to

4provide guidance to the standard-setting organizations.

5In particular, the prohibition of talking about costs or

6for that matter the prohibition of negotiating prices

7for the use of patented technology in advance are

8actually quite harmful in making good decisions. It is

9as if you had to buy a car without knowing what the

10prices are, and so the inability or the fear of

11discussing what technologies will cost when implemented

12in the standard is itself something that is designed to

13procure standards inefficiently.

14The second thing I want to say is that -- and

15also in response to Gil -- is when you buy a bath robe,

16it comes with a somewhat optimistic statement that one

17size fits all. One of the things that you learn in

18studying standard-setting organizations is that they

19solve very different problems from each other, and they

20make their decisions in a very different environment,

21and I think one of the things that will be a challenge

22for providing guidance to standard-setting organizations

23is that they actually -- one size will not fit all very

24well.

25In particular, the amount of information that

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1they have available to them at the time that they make

2decisions is often very different. I know JEDEC, in

3particular, would discuss proposed standards, and then

4the individuals would go back and work in their labs and

5see whether or not the proposed standard was something

6they could actually build themselves and what problems

7needed to be solved in order to practice the tentative

8standard. They very much were not necessarily on the

9same page, nor did they want to get on the same page in

10the sense that they did not want to reveal things that

11they knew about the technology, because that would give

12them a competitive edge. Giving advice about just what

13they are allowed to do in such a circumstance where

14standards are chosen, where how the standard is going to

15be implemented is not yet even known, is going to be a

16challenge.

17And then finally, I have to agree with George

18that it certainly is not a solution to say we can

19practice a RAND -- if I make a promise that I will

20satisfy a RAND, which there is another definition of

21RAND, which is research and no development, which seems

22appropriate in standard-setting organizations, but --

23and then charge an exorbitant fee after the fact, after

24the standard has been adopted, that is no solution at

25all, and certainly the antitrust laws -- that is, I am

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1going to completely agree -- that certainly the

2antitrust laws, if they cover the deceptive conduct,

3must also cover the failure to provide a RAND or failure

4to live up to the RAND assurance. I am less confident,

5however, that the courts can actually effectively

6interpret what is reasonable.

7Thank you.

8DR. BROCKMEYER: I would like to comment a

9little bit on some of the remarks of Preston and

10Richard.

11First of all, with respect to the issue of

12private enforcement, I do not believe that we should

13eliminate private enforcement, and indeed, I think the

14decisions of the court over the last 20 years or so have

15made it much more difficult for the plaintiff to

16proceed, and indeed, the argument of I guess last Monday

17or so in the Twombley case could also have an effect on

18private enforcement, albeit that case is a Section 1

19case.

20But I do want to touch on private enforcement in

21that I believe private enforcement is one way to explain

22the result in Conwood. While not knowing what U.S.

23Tobacco's presentation was before the jury with respect

24to the existence of monopoly power and accepting the

25concession that it did have monopoly power that was in

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1the Sixth Circuit, when we think about the evidence that

2was put forth and the reasonable juror sitting there,

3hearing about a monopolist whose salespeople are running

4around ripping out racks and throwing them in dumpsters

5and various other types of conduct with respect to I

6guess misleading information being provided or whatever,

7in my view, the result in Conwood is not particularly

8surprising given that it was in a private enforcement

9setting.

10Now the question becomes, well, do we want to

11deter that? Well, I think one way to look at it, and

12maybe this is Susan's point, is does the result in

13Conwood somehow deter efficient conduct? Are we going

14to deter throwing out racks or whatever or are we going

15to -- whatever, and I think the end result is I do not

16find Conwood to be a particularly surprising case, and I

17think it can be explained in the context of private

18antitrust enforcement and a reaction of juries to

19evidence.

20With respect to the pharmaceutical arena and

21Hatch-Waxman and the regulatory scheme, Richard is

22absolutely right. As I've mentioned in one of my

23principles, I think we need to take into account the

24structure of the industry and the regulation involved.

25On the other hand, when there is deception, when there

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1is anticompetitive conduct that disrupts the balance

2that is struck in Hatch-Waxman, then I think antitrust

3has an appropriate role to play. Indeed, I would say

4that the Commission's case against Bristol-Myers and the

5deception that was involved with Bristol-Myers is a very

6good example of where antitrust properly intervened in

7this particular setting.

8MR. DAGEN: Richard?

9DR. ROZEK: Well, as an economist, I was struck

10by the discussion this morning that raised questions of

11measurement. Economists like to practice their craft

12and measure things. It comes up a lot in the areas of

13misleading and deceptive conduct. One area where it

14comes up frequently is in the issue of false

15advertising. How do you measure whether an ad is really

16false? It could have on its face a false statement or

17it could be perceived as conveying a certain message

18that is inaccurate, and so economists can do surveys and

19interpret that survey result.

20But in some cases, it is much harder to measure

21whether something is misleading or deceptive, and I

22think back to some of the cases I have worked on where

23in one situation, for example, an organization had

24funded some scientific research; it was concerned about

25the scientific and statistical merit of the research;

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1that is, the scientific protocol followed and the

2statistical tools that were used to analyze the results

3of that data.

4So, the company raised legitimate questions, I

5thought, as a reviewer of an academic article would

6raise in commenting on the methodologies used to conduct

7the research, but it was criticized for doing that and

8for suggesting that the article not be published. To

9avoid bad publicity, the company just paid a large

10settlement. How to measure whether that was -- whether

11their withholding publication -- or their request to

12withhold publication of the article was really

13misleading or whether there were legitimate scientific

14questions that needed to be resolved before publication,

15was a much more difficult issue.

16That brings me to the question that was raised

17earlier about private actions following on government

18settlements. When someone settles a particular case

19with the FTC or the Department of Justice, and they may

20have done a calculation at that point that settling the

21case was -- even if they could win, settling the case

22was within that company's interest, was in their

23interests to settle the case, but then they do not

24always adequately factor in the private antitrust

25actions that are going to follow and the damages that

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1are at issue in those private cases. So, they do not

2take a complete picture of the damage calculation and

3factor it in when they settle.

4So, sometimes -- I have had cases like this,

5too, where people come to us after two or three of the

6private cases have gone forward and say, "we are just

7tired of paying all this money. We are going to fight

8this now." And I say, well, you know, you should have

9fought it at the FTC or the Department of Justice,

10because you could have a better case there on market

11definition and on entry conditions and so on. In some

12settlement discussions, the full impact of the private

13cases are not factored into those calculations.

14And then I was struck by George's comments on

15the FRAND standards and what evidence is actually used

16to determine whether a royalty rate is fair and

17reasonable. I think the discussion of Georgia Pacific

18factors borrowing from the patent literature, and the

19wealth of information in the tax literature on applying

20the arm's length standard to valuing intangible property

21on transfers between affiliated companies such as a UK

22research lab and an Irish manufacturing plant, that

23would be very helpful to apply in the FRAND context.

24Now, I was also struck by the discussions of

25private cases and whether or not there should be a ban

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1on private antitrust actions. It seems to me that not

2an outright ban, but maybe some reform in the process.

3Again, speaking to some of the cases I have been

4involved in from my own experience, there was no reason

5that the brand name antitrust litigation should have

6gone on as long as it did until Judge Kocoras made the

7decision that it was meritless. All but four

8pharmaceutical firms who were initially sued in that

9case settled. That case went on too long, and there

10should have been a process in place to make a decision

11much faster. So, there are areas where there could be

12reform in the private antitrust cases to at least render

13decisions on frivolous cases much faster.

14I was struck also by Preston's comments on

15Canada because of the absence of private actions. I did

16a study of health care reform in Canada and compared it

17to health care reform initiatives in the United States.

18One of the key differences between Canadians and

19Americans -- residents of the United States that you see

20is that in Canada, they have a much greater confidence

21in the Government as a solver of problems, and so they

22trust the Government to provide their health care and to

23provide high-quality health care. Whereas in the United

24States, I think we saw it with the Clinton Health Care

25Reform Initiatives, there was a great deal of distrust

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1in the Government as a solver of problems and more the

2Government as a creator of problems. So, there is a

3fundamental difference in Canada and the U.S. just in

4terms of how the residents in those countries interpret

5the Government and government action.

6I think part of the reason you do not see

7private antitrust cases in Canada is that, "Well, the

8Government will take care of it" is the solution. Those

9are my comments.

10MR. OHANA: I'll segue on the point that the

11Government will take care of it. I wanted to pick up on

12Preston's comment regarding one size fits all and the

13role that I posited for antitrust agencies relative to

14helping standards development organizations and their

15participants understand what I will call the limits to

16self-help to avoid deception.

17I agree with Preston that one size does not fit

18all. The point I was making maybe was a little bit

19different. I am not positing a role for the agencies in

20creating the uniform code of standards disclosure rules

21or standards patent licensing rules. Far from it.

22Standards organizations need, because of the variety

23that Preston mentioned, a lot of freedom in that area.

24I think, nevertheless, it is useful for the

25agencies to do as the Antitrust Division did in the Vita

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1letter and as the European Commission did in the letter

2they wrote ETSI in June of this year, to set out what

3are the points that you cannot go past? For example, in

4ETSI, the European Telecom Standards Institute, one of

5the proposals was to essentially create a cap that at

6the start of a standards development exercise, all

7participants would agree that any IP disclosed would

8essentially be under a cap of X percent, and even if you

9had a very fundamental, very broad, very valuable

10patent, you were in there with the rest of the patents

11fighting for your share of X percent, and the European

12Commission quite rightly said that that was problematic,

13and it is that role that I see the agencies playing in

14terms of limiting what is now the considerable desire of

15standards development organizations to enact rules that

16address this problem proactively ex ante rather than ex

17post.

18MR. CARY: Just a couple of observations.

19First, I think that Preston's observations about the

20costs of antitrust enforcement, the difficulties of

21administerability and perverse incentives are all points

22that we constantly have to keep in mind and keep guard

23of in terms of how one interprets and applies the

24antitrust laws. But having said that, I think those

25comments also paint with too broad a brush, and maybe

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1one size fits all does not apply in that context either.

2I would say that for those of you who have not

3read it, and I am assuming that is not very many, the

4"Cheap Exclusion" article that Susan authored with her

5co-authors is a brilliant piece. The idea that one can

6rationally set about determining where to apply

7prosecutorial discretion in a systematic way in coming

8up with arrays of combinations of anticompetitive

9conduct where antitrust enforcement is likely to do as

10little harm as possible, is a prototype for how to make

11prosecutorial decisions going forward.

12And using that framework and integrating the

13points that Michael made, I would set up an array, and I

14would say, for example, at one end of the deceptive

15conduct that we have been talking about might be false

16advertising or sham litigation. In sham litigation, you

17have a built-in control: You have a judge. And if the

18case is frivolous and has no reasonable basis,

19presumably a judge would be easily in a position to get

20rid of the case quickly and efficiently; and if the case

21is more complicated so that he cannot get rid of it

22quickly and efficiently; then perhaps that is correlated

23with the idea that there is a reasonable basis to

24litigate the claim, and it ought to go forward.

25So, sham litigation as anticompetitive conduct

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1would seem to be one which has a built-in mechanism to

2police it, and in addition, one where the

3anticompetitive injury is likely to be small. Attorneys

4are expensive, but relative to the sizes of most

5business, paying an attorney is not likely to debilitate

6you from competing.

7At the other extreme would be the

8standard-setting discussion that we have had where SSO's

9create networks, durable market power is created through

10lock-in, it is very, very difficult to change those

11networks once they are established, and the

12opportunities for exploitation of market power are

13therefore significant.

14In addition, you have got antitrust concerns in

15participants establishing royalty rates pre-adoption of

16the standard which, again, puts a premium on antitrust

17enforcement after the fact if there is a pattern of

18exploitation that a participant then engages in. Maybe

19somewhere in between might be the Orange Book context

20where there is an immediate anticompetitive effect from

21bringing the litigation, separate and apart from the

22standard sham litigation (where the anticompetitive

23effect might flaw only as a result of paying attorneys'

24fees). So that is a middle ground, in light of the fact

25that you still have a judge who could dispense with the

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1case very quickly if it is truly a sham.

2So, I do not think it is necessarily appropriate

3to say that antitrust has no role in any of these areas

4because of the possibility of an unintended consequence.

5Instead, I think you can array these things and you can

6apply antitrust where it is going to have the highest

7likelihood of procompetitive impact and the lowest

8possibility of making a mistake.

9MR. DAGEN: Thank you.

10Does anybody else have any comments they want to

11share before we move into our rapid-fire questioning

12period?

13(No response.)

14MR. DAGEN: Okay, we have some slides that I

15think we will get to in a second with some propositions

16and questions, but I think just since George went last,

17I just had a question about one of the propositions he

18just made.

19So, in terms of your sham litigation, which you

20put at one end, it sounds like it would be a very strong

21presumption that there would be no sham litigation

22monopolization claims, because it either gets disposed

23of quickly, in which case there is no harm, or it lasts,

24in which case it is not sham. So, is that --

25MR. CARY: Oh, I do not know that I would use

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1the term "presumption," because that implies a legal

2rule. I would say that as a matter of logic and maybe

3some casual empiricism, that will tend to be the case,

4and therefore, as a matter of prosecutorial discretion

5or as a matter of the kind of scrutiny that a judge

6might impose on such a case, it should be at the end

7where the plaintiff might have to demonstrate a little

8bit more in terms of context and effect than they might

9in other contexts.

10MR. DAGEN: Any views from the rest of the

11panel?

12DR. BROCKMEYER: I would like to make a quick

13comment about Richard and what George just said about

14mechanisms for quick disposal of cases. I am going to

15point two cases out to you and Judge Schwarzer. Judge

16Schwarzer attempted in the Northern District of

17California to impose a screen -- and I will use the word

18screening mechanism to shed cases quickly, limited

19discovery, and in an effort to determine whether there

20was merit to the claim. If there was not, dismissal,

21and you move on, okay?

22There are two cases of Judge Schwarzer's in that

23period that went to the Supreme Court, and both were

24reversed, Kodak and Hartford. Those both came from

25Judge Schwarzer. So, while I recognize that, I do not

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1know how receptive the courts will be to that type of

2procedure.

3And so as a result, you are right, George, yes,

4one way to say you can get rid of the sham litigation

5quickly. Possibly not. It may depend on the judge.

6MS. CREIGHTON: Maybe if I could just pick up on

7George's idea, sort of to continue -- and I also thank

8you for the kind remarks, George -- because I agree, I

9think, that it is definitely not one size fits all when

10we are looking at this kind of conduct. Some is much

11more likely to arise in circumstances where there is a

12likelihood of causing durable market power, and I

13think -- and I would agree with George that at the other

14end, deceptive marketing claims where you are talking

15about -- particularly when it is sort of dueling claims

16about products, I think Judge Easterbrook in Sanderson

17versus Culligan cases correctly points out on the do no

18harm end of things or sort of not trying to chill

19procompetitive conduct.

20I think the FTC for the last 20 or 30 years has

21been a pretty aggressive proponent of the notion that

22advertising is a good, and so this is one area where if

23you allowed claims of any -- sort of I disagree with

24that advertising, he said bad things about my product,

25that is an antitrust claim, that kind of claim can chill

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1procompetitive conduct and that advertising is as much a

2good for consumers as price competition. So, I

3appreciate George's refinement of my analysis, and I

4would agree with it.

5MR. DAGEN: So, Hill, did you have anything you

6wanted to talk about before we move on?

7MR. WELLFORD: I have one question that several

8people glanced over, and I think George maybe most

9directly, so I will start there.

10What does your point about incentives say about

11the kind of remedies that we should look for to be

12procompetitive or perhaps even prohibit as the FTC tried

13to do in the Schering case, if you want to characterize

14it that way? You said, you know, certain participants

15in standard-setting organizations, for example, may not

16have the incentive to correct the -- to challenge or

17challenge the correct way. Perhaps some people who

18claim to represent the public, which was your point,

19some would have better incentives than others. Is there

20anything to that that you would like to share?

21MR. CARY: Well, yeah, let me back up a bit and

22start from the beginning on it. You start with the

23question, why shouldn't a violation of these kinds of

24commitments be enforceable only in contract or tort? I

25guess a wrinkle on that would be if it is remediable in

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1contract or tort, why bother with antitrust,

2particularly when, overlaying Preston's presentation,

3antitrust litigation can do harm?

4I was attempting to answer that question by

5saying that there is a harm that might extend beyond

6those individuals that might have standing to bring a

7contract claim or a fraud claim, that that harm is also

8a harm to consumers, and that that harm ought to be

9vindicated. So, for example, let's say you have someone

10who is not part of the original standard-setting

11proceeding; let's say that a particular state law of

12contract limits the rights of third-party beneficiaries

13to only those who are directly anticipated to be

14beneficiaries; and therefore, a nonparticipant in

15standard-setting would not qualify, they would not have

16a contract claim directly. Nonetheless, there might be

17a situation where a violation of the standard-setting

18rules would cause competitive harm, and that individual,

19without standing under contract, might be an appropriate

20party to vindicate it.

21A second example might be a state fraud statute

22or a state common law rule of fraud which says if the

23representation was not made to you, you have no standing

24to vindicate the fraud. Again, if a misrepresentation

25is made about patents, for example; if the

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1standard-setting body for one reason or another decides

2not to pursue that, say, for example, the perpetrator of

3that misrepresentation has now stacked the

4standard-setting body with its own agents,

5representatives, network of suppliers, allies; but there

6is a hold-up in the sense that the failure to disclose

7the patent was real, and now the patent is being

8asserted, why wouldn't a member of the public who is

9paying the bill for that violation of the

10standard-setting body's rules have an opportunity to

11bring an antitrust case, claiming the antitrust damage?

12It is that kind of thing that I was referring

13to, in saying that people with standing may not have the

14incentives, and people without standing may have

15suffered the consumer injury or the anticompetitive

16harm.

17MR. WELLFORD: Does it follow from your analysis

18there that a member of the public should be limited to

19remedies that benefit the public or the competitive

20process as a whole as opposed to that particular person

21who has brought the lawsuit, and is that done today or

22can it be effectively done?

23MR. CARY: I do not think that there is a

24necessity, just because of the standard-setting context,

25to revisit all of the rules of antitrust injury and

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1antitrust damages. So, for example, the courts have

2established rules as to what consumers can recover. The

3courts have established rules as to what competitors who

4are the target of the anticompetitive activity might

5recover.

6Those rules do not need be any different in the

7context of standard-setting than they would be in any

8other monopolization case or price-fixing case or other

9antitrust violation. I do believe that an antitrust

10injury requirement is appropriate.

11MR. OHANA: Just to comment, to pick up on

12something George said, it is by no means universal in

13standards development organizations' IPR policies that

14any implementer of the standard is given explicitly the

15right to sue to vindicate a disclosure or a

16nondisclosure made to the standards development

17organizations. In fact, it is extremely rare in my

18experience that they actually explicitly say that. So,

19you are going to be proceeding at that point under a

20third-party beneficiary theory, and a third-party

21beneficiary theory will vary a lot with state law. So,

22in that sense I agree with George that it is entirely

23possible that the contractual remedy will not exist.

24 MR. DAGEN: A couple of panelists I think

25mentioned the notion that the regular false advertising

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1sort of claim would be on the lesser end of the

2perspective. I wanted to try to juxtapose that with the

3standard-setting discussion that you were having, which

4was let's say you have a misrepresentation not about IP

5but something else within the standard-setting

6organization. There was a case involving Heary brothers

7a long time ago where there was an allegation, I

8believe, similar to an Allied Tube sort of thing with

9packing except involving misrepresentations about an

10alternative technology that was to be accepted or

11proposed for an alternative within the SSO.

12Where do you think that sort of

13misrepresentation more or less similar to the false

14advertising I think that you were talking about, where

15would that fall, if you have any thoughts on that?

16 Anybody?

17DR. McAFEE: Theoretically, it should not

18actually make any difference. If I establish my

19technology as the standard by claiming that the

20alternative technology sets the atmosphere on fire and

21burns up the earth, it is not -- and that is fraud --

22that is not true, then it has had exactly the same

23effect. On the other hand, it seems much less likely

24that in reality you are going to be able to pull that

25off, because by and large, the standard-setting

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1organizations are composed of people who know technology

2pretty well, and so your ability to impugn alternative

3technologies seems much more limited than your ability

4to keep secret, for example, that you have patents.

5MR. OHANA: There are cases, and I am thinking

6of the Schachar case in the Seventh Circuit, where, if I

7remember the case right, there was an allegation that

8there was a misrepresentation made to a standards body,

9and I think the response of the Seventh Circuit was that

10the answer to bad speech is more correct speech, and I

11would tend to agree with that. Those cases are not

12going to impose a high risk of durable competitive harm

13and therefore are unlikely to require the intervention

14of antitrust agencies or courts.

15MS. CREIGHTON: I thought the Commission was

16right in Rambus in focusing on the ability of the

17representation to be adequately -- both that its -- both

18public and rebuttable, I guess, in the sense of I think

19they were focused in particular on collaborative

20ventures where there's less ability to ferret out people

21where it might be making misrepresentations, but they

22were trying, I think, to be getting at this point about

23is it something that can be responded to with the

24contrasting speech.

25So, if I could change your hypothetical, for

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1example, suppose the misrepresentation was that each and

2every member of the standard-setting organization was

3voting based on sort of independent assessment of the

4technology, but, in fact, I have gone around and paid

5off everybody to vote my way, so there is a

6representation that everyone is voting unilaterally,

7and, in fact, that is not true. It has been stacked.

8It seems to me like that misrepresentation poses

9the same kind of difficult-to-get-at or ferret-out

10problem that misrepresentations about IP do, but they

11would be quite different from saying you should not use

12that guy's technology because it is bad and that guy is

13right there and he can counter.

14MR. CARY: Having set up the continuum and

15putting that kind of conduct at one end, now let me

16retract just a little bit, because I do think that there

17are environments where sowing confusion through false

18representations can, in fact, be an antitrust violation.

19I would not say that it does not exist, and I am

20reminded of the good old days of pop-up windows where

21people who were trying to create applications software

22that ran on particular operating system platforms would

23find that when somebody went to activate that

24application program, a little screen would pop up

25saying, "you are about to go into unchartered territory,

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1and we cannot guarantee that your computer will not blow

2up if you press the button."

3There are examples where that kind of activity

4causes consumers, who are not expert technicians, to

5worry about using alternative software which might, if

6it were allowed to grow and expand, reduce an

7application barrier to entry and result in more

8competition to the operating system. I would not say

9that as a matter of law one should not be allowed to

10pursue those claims in a well-pled complaint and beyond

11summary judgment if there are facts to be litigated

12about whether that kind of activity does, in fact,

13retard the growth of competing technologies.

14DR. BROCKMEYER: Well, yeah, I want to agree

15with what George just said, and we need to be a little

16careful, because while I agree also with what Gil said,

17that often false advertising or false statements may

18well be -- again, continuing to use the scale here -- at

19very much the low end of the scale, I do not believe we

20should fall victim to even possibly absolutist language,

21which one of the cases that we looked at was a Judge

22Easterbrook decision involving Culligan, where he has a

23fairly direct sentence that says commercial speech can

24never be the basis of a Section 2 claim.

25I believe that is wrong, and indeed, to go back

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1to the quotation from Judge Ginsburg that George read at

2the end of his presentation I think has it right, which

3is, yeah, we need to look at the context of the

4circumstances where the commercial speech or the

5misleading statements are made and then measure the

6effect of that in the context of the market in which it

7is made.

8MR. OHANA: I would agree with that. I would

9just point out that in the context of ETSI section

10consensus-based broad participation standard-setting, it

11seems to me that the likelihood that a disparaging

12statement by the proponent of one technology about

13another technology is very unlikely to have competitive

14harm, because there are going to be a lot of other

15participants who are going to be eagerly awaiting the

16response from the proponent of the criticized

17technology, and there is going to be a discussion of it,

18and in that sense, I think the likelihood of competitive

19harm is very low.

20What I would point to in the example that George

21gave, which actually I had to look at when I was at the

22Antitrust Division, because I think it involved a

23company in the Pacific Northwest and the Windows

24operating system, is that what was very interesting

25about that is that it was actually used only in the beta

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1of I think it was Windows 3 or Windows 3.1, and what was

2sort of interesting is that Microsoft then pulled it

3 when they actually released the operating system.

4The argument from the complainants was that the

5damage had been done, because obviously the beta test

6was distributed to a lot of kind of key influencers of

7the technology industry who were then going to write

8articles, create demand for the product, knowing that

9DRDOS, at least according to Microsoft, cannot work.

10That might be a context in which responsive speech may

11not be effective, because it has to happen in a very

12short time period in which a lot of demand is going to

13be set in a product market that is very subject to

14tipping, which I guess goes to Michael's point that the

15underlying facts matter a lot.

16MS. CREIGHTON: Another fact pattern that might

17be worth throwing out there at some point would be in

18the context of something that cannot be responded to

19effectively potentially with responsive speech or at

20least some party is vaporware, saying you have got your

21product coming when, in fact, it is not. So, that is a

22deceptive statement not readily correctable.

23I think Preston and Richard probably know the

24literature better than I do, but I think Farrell,

25Sloaner and others have written some articles about at

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1least in tipping industries the potential for such

2statements to have anticompetitive long-term effects.

3DR. ROZEK: I think part of the discussion has

4to involve the sophistication of the buyer. If you are

5making statements to a buyer about a competing

6technology, the buyer has to be able to assess those

7statements. It may not be in every case that they can

8do that instantaneously. It may be a statement about

9reliability of the product after it is being used for

10two years. You would not know if that statement is true

11or false up front. You may have to spend a lot of money

12to buy the machine, let's say a medical device, a

13lithotripter, for example, something you have to spend a

14lot of money, you would not know about the reliability

15until after you spent the money, put it in place,

16trained your workers and used it for a period of time.

17Not all people can make those kinds of assessments.

18So, I think underlying all of this in the

19standard-setting process, in the false advertising

20cases, you really have to conduct a rule of reason

21analysis. You have to think about the sophistication of

22the buyers and their ability to interpret the

23information in a cost-effective way, without having to

24make a purchase and wait two years or so to determine if

25the machine is going to break down or be reliable, for

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1 example.

2DR. McAFEE: I agree with that completely. In

3fact, standard-setting organizations are unlikely to be

4a place where misleading statements of that kind are

5going to last. They tend to have a smaller number of

6very well-educated individuals, and it is more -- the

7vaporware, in particular, which is usually a gimmick to

8buy time while you try to develop a product so that

9another product does not become a standard.

10Microsoft made various promises about Windows CE

11as a way of trying to prevent Palm from becoming a

12standard, although in the end, Palm did become a

13standard. It did not -- the vaporware promises were not

14actually effective in that case. But there, that is a

15much more likely thing. We will eventually support

16this, just wait another few months, and that may be

17enough to buy time to prevent a competitor from entering

18the market.

19MR. DAGEN: If we could maybe put up a few of

20our propositions for discussion, first, slide number 2

21states, "Merely because a particular practice might be

22actionable under tort law does not preclude an action

23under the antitrust laws as well."

24I think this has been discussed a fair amount

25today. Is there -- I heard a lot of consensus on this,

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1but I wanted to know if anybody had any views contrary

2to that view or proposition.

3MR. OHANA: I do not know if it is contrary, but

4let me just offer what I hope is an exacerbation. If

5you look at Trinko, one of the facts in Trinko is that

6the conduct that Bell Atlantic was accused of was in

7parallel the subject of an FCC regulatory proceeding

8that resulted in the payment by Bell Atlantic of fines

9to the FCC, and there is language in the opinion, if I

10recall, that says that essentially where you have got a

11regulatory system and the regulatory system is intended

12to vindicate competition, the existence of the

13regulatory system matters relative to the antitrust

14analysis.

15Then you get this quote from Conwood, and I will

16not try to reconcile the two except to note that I think

17there is a tension there.

18MR. DAGEN: Well, given -- go ahead, Susan.

19MS. CREIGHTON: Though I think maybe the way to

20reconcile the tension was -- as I recall, Trinko said

21where there is another comprehensive regulatory scheme

22whose purpose is to promote competition --

23MR. OHANA: Exactly.

24MS. CREIGHTON: -- and that is a pretty

25important difference.

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1MR. DAGEN: Go ahead.

2 MR. WELLFORD: We have already covered the law

3of contract a little bit, but let me talk about the law

4of fraud and maybe some other areas. These areas of --

5is developed in the common law over a very long period

6of time as the collective judgments of the courts, the

7common law courts anyway, has been that there is some

8necessity to apply heightened pleading standards or

9specialized pleading standards to them.

10For example, in the law of fraud, you have

11Federal Rule 9 and 9(B), which is the rule of

12specificity, the rule to require justifying reliance,

13and the law of defamation or misleading statements about

14individuals in that area. You have the Supreme Court's

15 New York Times recklessness standard for defamation.

16Are we at all concerned that imposing Section 2

17liability, which very clearly has regular pleading

18standards, regular Rule 8, is at all going to be an

19end-run around any of those established doctrines, and

20does that indicate that either we may be off balance

21with Section 2 liability or we should have Section 2

22liability but apply some different pleading standards to

23try to vindicate those same concerns?

24DR. BROCKMEYER: Well, let me respond first, and

25somebody can probably tell me I am dead wrong, but I

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1believe, for example, in Walker Process, if you plead a

2Section 2 claim based on Walker Process, you are subject

3to Rule 9, and so you are going to have to plead with

4specificity, I think in the case of Walker Process and

5maybe in the case also of inequitable conduct, such that

6I really wonder whether Rule 9 is already coming into

7play when you need the heightened pleading standard when

8fraud is the predicate act for the Section 2 claim.

9MR. CARY: I guess I would respond that the

10typical kinds of requirements under Rule 9 are not

11ordinarily the kind that will not be able to be met in

12an antitrust case of this kind. I mean, it simply asks

13you to identify the kinds of statements that were made

14and to whom they were made, and so in the

15standard-setting context, it would be a statement that

16you would agree to license on FRAND terms, for example,

17that you did not intend to comply with or that you

18represented that there were not patents when, in fact,

19after the fact, you revealed the patents. The so-called

20heightened pleading requirement I do not think is all

21that heightened in this context.

22I think in terms of the recklessness element,

23there might be some room for divergence for the reasons

24that Gil described, that the thrust of the matter, the

25crux of the matter in the antitrust case is the

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1exploitation of market power, not the niceties of the

2precise statements that were made, and I think in the

3standard-setting context, especially one where you are a

4member of the body that is establishing the standard, I

5do not think there is scope for recklessness and then

6exploitation of the benefits of that recklessness after

7the fact.

8So, maybe there is a divergence there, and maybe

9there is also a divergence with respect to those states

10that have imposed a clear and convincing standard on

11fraud allegations, which is by no means the majority of

12states, but there are some.

13Again, I would say that since the crux of the

14 matter is the exploitation rather than the deception

15that a clear and convincing standard would not have a

16place in an antitrust case, whereas it might if what you

17are talking about is fraud.

18MR. DAGEN: Slide 4.

19Given what we have just talked about in terms of

20the use or the nonpreclusive effect of the actions under

21contract or tort compared to an antitrust case, I was

22wondering if anybody had any thoughts about the issue

23raised in Trinko about the cost of false positives. I

24know Susan talked about it a little, I guess several

25panelists talked about it a little, about it not being

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1as significant a concern with respect to

2misrepresentations, but I was wondering if the panel had

3any additional thoughts on that question.

4DR. McAFEE: I think one issue that has been

5brought up is that while it is true that we do not have

6to worry about chilling misleading statements, that is,

7we are pretty happy to chill as many misleading

8statements as we can, it was also brought up that there

9is a fair bit of confusion among engineers, in

10particular, about just what the antitrust laws entail

11and that the threat of antitrust actions actually scare

12the engineers a lot, and I think maybe the middle ground

13here is to provide fairly concrete guidance as to what

14is allowed and what is not so that we reduce that,

15because it would actually be somewhat of a disaster if

16companies instead of joining standard-setting

17organizations said, well, we are just going to have our

18own standard, let them fight it out in the marketplace,

19which guarantees that the standard that comes out is

20proprietary.

21 We are actually quite happy, it is quite

22procompetitive, to have standards that are practiced by

23many companies; that is, common standards that are

24practiced by many companies. If you thought about all

25batteries -- think about your digital camera, which

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1probably has a proprietary battery. That is a much more

2expensive proposition than if you have double A

3batteries because of the standard associated and

4multiple firms practicing it. So, we do not want to

5actually have that harm the open standards, and, in

6fact, we want to make sure that what we do with Section

7 2 is encouraging open standards, not discouraging it.

8MS. CREIGHTON: I am probably just repeating

9what I have said before. I think maybe the one area

10where you would be concerned about false positives here

11particularly would be chilling advertising unduly,

12because that obviously is a positive. I agree with --

13who was it -- Michael who made the comment that we are

14probably not concerned with chilling having racks pulled

15out of the shelves, you know, and we would not be unduly

16concerned about chilling blowing up a competitor's

17factory, and there is all kinds of conduct we probably

18would not be too concerned about chilling.

19I guess more generally, on the question of this

20specter that is haunting Europe of sort of -- specter

21haunting the United States of unduly broadening Section

222 liability, you know, it is not like we have got a huge

23number of cases here we are talking about where people

24have taken a fraud claim and then tried to turn it into

25an antitrust claim. We have got a handful, and I am not

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1even sure that it is very likely that we would see very

2many, because usually they have to have some kind of

3fraudulent relationship, you have to have a relationship

4of trust and confidence, and the circumstances in which

5companies are going to be engaging in that kind of

6relationship would seem to be relatively discrete.

7So, I guess while I agree with the Trinko

8statement in general, other than advertising, I am not

9sure that I see a big issue with chilling.

10MR. CARY: I guess that brings to mind one of

11the points that Preston made previously about lawyers

12wanting to convert contract cases into antitrust cases.

13It seems to me that in this regard, when you are talking

14about allegations that essentially sound in fraud,

15taking that and converting it to an antitrust case is

16not something you would do as a matter of course in any

17event.

18First, you would still have to prove the fraud,

19maybe not to a clear and convincing element, but then

20you would also have to prove the other elements of an

21antitrust case, which just expands your burden, and a

22fraud claim is suitable for punitive damages. So,

23limiting yourself to treble damages when you could get

24punitives in a fraud case, I am not so sure that that is

25necessarily the inclination most plaintiffs' lawyers

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1would take.

2I think what that points out, again, is that

3there is a different role for the antitrust law than

4there is for the private law of tort or the private law

5of contract in this setting.

6DR. BROCKMEYER: Yeah, I want to make a quick

7comment about what Preston said about engineers not

8understanding the antitrust laws, and over time it was

9not engineers, it was someone else, some other

10occupation who does not understand the antitrust laws,

11and I am not particularly sympathetic with the engineers

12in that setting in the sense that the antitrust laws are

13obviously an important segment of our body of law, and

14in the engineer's development of a product or technology

15or whatever, the engineer has to come to an

16understanding with the assistance of counsel or

17otherwise, and we proceed. Antitrust obviously at times

18maybe we think has gone off course, but hopefully we

19bring it back on course. So, I must say, I am not

20particularly sympathetic to engineers that are sitting

21out there and worrying about the antitrust laws.

22DR. McAFEE: All right, I am going to make the

23counter case, because what we are asking engineers to do

24in the standard-setting situation actually flirts with

25directly violating the antitrust laws. So, that is to

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1say, we are asking competitors to get together and set a

2standard that they are all going to practice. So, there

3is a sense in which they are already exposed to risk,

4and as a society, we do not like the alternative,

5because the alternative is the companies never get

6together, they each promote different standards that are

7not compatible, and the market chooses one, much like is

8happening with DVDs right now.

9We have multiple standards. The market chooses

10one of them -- actually, does not matter whether you

11think about old DVDs where you had plus or minus R or

12new DVDs where you have HD and Blu-ray. The market will

13choose one that will be proprietary. That is bad for

14society. We would be better off as a society if we have

15a single standard that everyone agreed on, a useful

16standard that all of the companies get to practice.

17And so unlike other cases of antitrust law where

18we said these are the laws, you have to obey them, here

19we are asking firms to get together and do something,

20which certainly there is a phrase, "tickles the dragon's

21tail," and it certainly tickles the dragon's tail of

22antitrust law automatically just because the competitors

23are standing in the same room.

24So, I would argue, then, that it is incumbent on

25us as a society to actually give them instruction so

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1that they do not just say, well, we are just not going

2to go down that road. We are going to stay in our own

3labs and never meet, because those meetings do actually

4result in standards that are good for society.

5MR. OHANA: I agree with Preston. I would just

6make the point that over-emphasis on antitrust risk and

7the idea that in some sense standards development is so

8fraught that engineers cannot ask probing questions

9about whether technology is patented, how much it will

10cost to practice, et cetera, creates the risk of

11significant inefficiencies as well, and you have to find

12a balance here between recognizing the potential for

13Section 1 problems in standard-setting and facilitating

14the risk of Section 2 problems.

15DR. McAFEE: I want to make an unrelated remark

16on something that Susan has said several times. She has

17referred to advertising as a good. This is -- I would

18say that it is actually an emerging consensus among

19economists, but it is hardly something -- if you went

20back 15 years and polled economists, you probably would

21not find 50 percent agreeing with that, although that

22number has grown dramatically, so it is actually -- and

23sometimes it is very cutting edge for the FTC to be

24promoting that as its view, is that advertising is

25itself a good. Everyone understood that informative

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1advertising is a good, but advertising which is not

2directly informative, some sort of brand positioning

3advertising and that kind of thing, to view that as a

4good is actually very -- looks to the future.

5An example of this, I think perhaps the most

6extreme example, is playground equipment. There are

7playground equipment companies that actually advertise

8that their rivals' products -- and they name them --

9kill children. Now, this is advertising we would not

10want to chill, whether it is -- well, if it is false

11obviously we would like to chill it, but on the other

12hand, you have got to have -- you have to view that as

13sort of a risky ad, especially because there is a sense

14in which all playground equipment kills children in the

15sense that there is stuff that you can do that will kill

16you if you fall off it, for example, not used as

17directed. This is -- the advertising here -- so,

18advertising in the playground equipment area is

19particularly extreme, and it is actually worth going and

20getting the brochures. It is a pretty entertaining

21example.

22MR. DAGEN: That actually reminds me of an FTC

23consent that we had a few years ago which involved

24bullet-proof vest manufacturers having an agreement not

25to engage in any sort of comparative advertising, so

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1they -- don't tell them -- we won't tell them yours

2fails if you don't tell them ours fails. Similar to the

3playground equipment in terms of mortality rates, I

4think.

5MR. WELLFORD: Let me ask one question, which is

6taking it outside the standard-setting context, which is

7probably special, if misleading conduct is such an

8anticompetitive problem, why is it so absolutely common

9between rivals in industries? And two examples I'll

10make, and then you can react -- anyone, I will throw

11this to Susan first perhaps -- as to whether there would

12be necessarily an anticompetitive problem raised.

13One is competitors are attempting to discover

14your trade secrets by aggressive but legal means, and

15your response is to start putting out misinformation so

16that they will not. That is an extremely common fact

17pattern. Does that raise concerns if they are a

18dominant competitor? Is that part of the rough and

19tumble of competition?

20The other is if you are a dominant maker of a

21particular product, are you permitted to do what lots of

22product makers do, Sony with the PS3 or any variety of

23car makers have done this, put out fake test products in

24the market and do fake tests with consumer groups in the

25hopes that your rivals will find out about the fake

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1tests and then try to design towards that fake thing

2when you have got something real?

3If you are a dominant competitor, do either of

4those raise concerns in the fact that they are common

5does not necessarily make them okay, as we have seen in

6the cartel area?

7MS. CREIGHTON: I guess I am having a hard time

8seeing how either would be likely to create and maintain

9durable market power, which I hope I was clear about,

10but I think that that really is the crux of -- the

11question is, if we have inefficient conduct that we

12believe causes durable market power, that is what we are

13trying to get at, and so we are not -- and, in fact,

14part of my point had been we are not trying to make

15torts a predicate act for antitrust. In fact, that is

16exactly the wrong way to think about it.

17So, the fact that this is conduct that you may

18or may not like or might or might not be good, unless I

19could see some way in which it was likely to be creating

20durable market power, I would not care from an antitrust

21 perspective.

22MR. DAGEN: Just following up on Hill's question

23then, the mere fact that it raises your rivals' costs in

24this context would not be sufficient in your mind? They

25are either going down the wrong path I think was -- Hill

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1was suggesting or they have to counter, take some

2counter -- so it raises their costs in the short run

3potentially.

4DR. McAFEE: I would actually object to that as

5being characterized as raising rivals' costs.

6MR. DAGEN: Okay.

7DR. McAFEE: The rivals who have actually chosen

8to investigate whatever they investigate, putting out,

9you know, memos that say we are investigating this, the

10rivals are free not to follow that, and, in fact, that

11is -- I would say generally, the rivals are the best

12informed. The general public is much more likely to be

13misled, which is usually damaging to the originator.

14So, if Sony says, well, we are going to deliver this,

15and then they do not, that is harmful to Sony, not so

16much to Microsoft.

17MR. DAGEN: Why don't we head to slide 3. I

18think we have had a lot of discussion about a lot of

19these topics, and that was the purpose of this panel.

20So, slide 3, "The jury could have found that --" this is

21from Conwood -- "that USTC maintained its monopoly power

22by engaging in the challenged conduct," and I would like

23to focus this on causation issues.

24So, what kind of causal connection must be shown

25between misleading conduct and the creation of or

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1preservation of monopoly power? I think it was -- well,

2Michael or Gil, one of them talked about what you would

3have to show, and we would like to consider that issue a

4little more.

5DR. BROCKMEYER: Well, let me go first. Yeah,

6basically what I had said was that you would need to

7show -- I used the word institutional, that is, getting

8away from the mistakes or the rogue district manager or

9whatever, that is, that it was a conscious decision that

10was corporate policy.

11Secondly, that it was pervasive, and I thought a

12little bit about how I would measure pervasive, and I

13think I would -- what I suggested on the slide is

14relative to the relevant geographic market. So, the

15question is how much was there.

16And then finally, ultimately, that it harmed the

17competitive process, that somehow, in the case of

18Conwood, that the throwing away of the racks and so on

19and so forth harmed the competitive process among

20Conwood and U.S. Tobacco.

21As I mentioned earlier, I think it is a classic

22case of what happens when you have private litigation in

23front of a jury in that I just think about it as myself,

24as I am sitting here, I am a juror and not an antitrust

25lawyer, and I sit there, and here I have got a

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1monopolist who is undertaking these acts.

2Now, one key, of course, is I think you have to

3distinguish -- and the judge has to instruct the jury in

4a way to distinguish between what was deceptive or

5misleading and what was procompetitive. For example,

6responding to WalMart or whoever it was, the

7competition, to have a rack, or even being the category

8captain or whatever, you know, in and of itself, those

9are not necessarily deceptive at all, and it is

10important that the court, in instructing the jury,

11allowed the jury to sort that out, and, in fact, would

12have to.

13So, to me, again, as I said earlier, I think

14Conwood is just a classic case of a jury's reaction to

15the evidence presented.

16DR. McAFEE: This is also probably a good time

17to remember that the antitrust laws are designed to

18protect competition and not competitors and that that is

19an easy mistake for a jury to make, because it is a

20somewhat subtle distinction, but that deceptive act

21should be viewed in that light, is does this actually

22affect competition in the industry or does this affect

23just one competitor in the industry.

24 MR. DAGEN: I think one of the allegations in

25Conwood was that as category manager, they were

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1supplying false information about their sales and their

2competitors' sales, and there was some talk about

3whether the information maybe was in public information,

4easily rebuttable.

5Does anybody have any sense of where that sort

6of conversation would occur, where on the line that

7would be?

8DR. BROCKMEYER: Well, one -- I hate to use this

9word, but when I thought about that -- and I teach

10Conwood in my antitrust class, okay, I like Conwood for

11teaching students, and the word that comes to my mind --

12I hate to use it -- is whether, in fact, U.S. Tobacco

13took on I am going to say fiduciary responsibility when

14it became the category captain to provide that

15information. Yeah, the person from Kroeger or whatever

16said, I made my own decision, and U.S. Tobacco was not

17going to sway me, but the point being is that once U.S.

18Tobacco took on those responsibilities, I think it had a

19bit of a higher standard of conduct than it would

20otherwise have as a competitor going in and pitching

21information, because it had committed to Kroeger or

22WalMart or whomever to provide information not only

23about itself, but about the competition as well, in a

24role different than being just a competitor in the

25market.

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1MR. OHANA: Let me maybe disagree with that a

2little bit having advised on category management issues

3over time. You always tell your clients when they have

4been appointed, annointed, category captain that they

5should provide truthful information to the retailer, but

6it seems to me that the retailer knows the biases of the

7category captain, that it is going to design a planogram

8that promotes its products, and if you think that the

9incentives of the retailer in any way parallel the

10consumer welfare, then the idea that the dominant

11company that is appointed category captain has some kind

12of special obligation to be truthful seems odd to me.

13This is not the context like the ones the FTC

14identified in the Rambus case where you are talking

15about a cooperative enterprise. There is a fierce

16competition for shelf space. Everybody knows what the

17biases of category captain are, and if the competitors

18ever feel that they are being discriminated against by

19the behavior of the category captain filtered through

20the retailer, they know Kroeger's phone number.

21MR. DAGEN: In terms of causation, Judge

22Easterbrook in Sanderson distinguishes cases from

23Hydrolevel and says Hydrolevel had an enforcement

24mechanism by virtue of codes being adopted based on the

25conduct in the standard-setting organization, and he

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1says in Sanderson there is just basically speech. Does

2there have to be an enforcement mechanism of some sort

3in either government or standards or some other means

4before the requisite causation can be shown in one of

5these misrepresentation cases?

6MS. CREIGHTON: I guess I'd say no and cite U.S.

7v. Microsoft. In the diluted Java, for example, there

8was no enforcement mechanism. It was cooperative in the

9sense that the standard-setting process is cooperative,

10but the representation was come build to Microsoft Java

11 because all the applications that you build will be

12interoperable with Sun's Java, and people had no reason

13to suspect that those representations were not true, so

14they went ahead and built applications using Microsoft's

15version of Java and then discovered that, lo and behold,

16they had just collectively created a library of programs

17that would only run on Microsoft. So, there was no

18enforcement mechanism there that I can identify other

19than the fact that it was a network market, but

20nonetheless, I think that that decision -- that the

21Justice Department was correct in pursuing that claim

22and the D.C. Circuit in upholding it.

23 MR. CARY: It seems to me that the issue is

24durability, not enforcement, and the question is from

25what does that durability derive? Does it derive from

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1network effects, from existing monopoly and interfaces,

2does it derive from enforceability, does it derive from

3the incorporation of a standard? It could be any of

4those.

5MR. DAGEN: If we could go to slide 7, this

6states, "The Federal Trade Commission may consider

7public values beyond simply those enshrined in the

8letter or encompassed in the spirit of the antitrust

9laws." That is from Sperry and Hutchinson, 1972.

10So, one of the questions that arises in

11connection with this agency, the FTC, is whether Section

125 gives the Commission a different role to play in

13policing deceptive conduct than Section 2 of the Sherman

14 Act.

15DR. ROZEK: One of the most difficult things to

16deal with is arbitrariness on the part of the antitrust

17agencies or any regulatory agency. If it is going to be

18difficult for both buyers and sellers to understand what

19the policies are going to be or the enforcement

20policies, just introducing some arbitrariness into the

21process, then I think there is a social cost to that.

22For example, one of the things that is very

23helpful in terms of enforcement of the antitrust laws

24are the Merger Guidelines. You have Guidelines that

25tell you how the antitrust agencies are going to look at

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1these things, and they follow those Guidelines. They

2have essentially become de facto the standard for doing

3competition analyses even in private cases.

4To the extent that there is a hidden agenda or

5there is a hidden policy trying to be achieved, laws are

6going to be applied in an arbitrary manner. I do not

7think that does a service to buyers or sellers or to

8firms or consumers.

9MR. DAGEN: We talked a little bit about treble

10damage actions. The other remedy often available is

11injunctive relief. Would that influence the standard

12that anyone would recommend as to what sort of conduct

13might be actionable, whether there is simply injunctive

14relief or whether there is treble damages also

15available?

16DR. BROCKMEYER: Is your question in the context

17of Section 5 or generally?

18MR. DAGEN: More generally.

19DR. BROCKMEYER: Okay.

20MR. OHANA: Bringing it back to the context of

21Section 5, I have the blessing and curse, as does Susan,

22of being a California admitted lawyer where we have the

23experience of private actions for injunctive relief

24under 17-200 recently, and I note this is a cautionary

25tale, narrowed significantly by state ballot referendum,

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1and the pattern in those cases is that the fact that you

2can only get an injunction and not money damages did not

3inhibit the creativity of people in using that law for

4some truly bizarre ends.

5MR. DAGEN: Anybody else?

6DR. McAFEE: There has been a little boom in

7sending out cease and desist letters for spurious

8copyright violations, for example. So, if I mention a

9company's name and mention their product, they may send

10me a cease and desist letter saying you are not allowed

11to mention our name because it is a copyright or it is

12trademarked, and that seems to be a case where something

13beyond -- and these are not necessarily antitrust

14issues, but agency action beyond the promote the First

15Amendment, for example, might be called for, and so

16insofar as other laws have a bearing on this, you might

17want to be selective about enforcement or go beyond.

18That is, I am going to agree, at least in principle,

19that going beyond the letter of the antitrust laws might

20be actually desirable in some circumstances, especially

21as technologies move very rapidly.

22MS. CREIGHTON: And just going back to your

23Section 5 point, I guess I would say that I think

24inefficient conduct that causes durable market power is

25actionable under Section 2, is actionable under Section

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15, and I do not think we need to extend or should extend

2Section 5 to go beyond that to reach other kinds of

3conduct.

4MR. CARY: I guess I would slightly disagree

5with Gil also as a California admitted lawyer.

6MR. OHANA: Oh, sorry.

7MR. CARY: I think it does make a difference

8that 17-200 is limited to injunctive relief in terms of

9what kind of damage it can cause to pursue the more

10frivolous claims. I think the ability to get a motion

11to dismiss on the damage claims granted, leaving only a

1217-200 claim, is significant and to some degree I think

13addresses some of the anticompetitive motives of

14bringing antitrust litigation that Preston has

15mentioned, and it leaves you in a position of simply

16litigating before a judge and not a jury a novel theory,

17which I do not think is quite so bad as facing the

18barrel of treble damages.

19MR. OHANA: This may be an area where the

20perspective of inside and outside counsel may differ to

21some degree. We do not enjoy 17-200 cases even though

22there is no ultimate risk of damages because litigating

23them is expensive, time-consuming and difficult, and

24yes, it is somewhat better that there is no risk of

25damages, let alone treble damages, at the end, but that

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1does not make the conversation with your general counsel

2over how much you have spent on what is a completely

3baseless action any easier.

4MR. CARY: One man's cost is another man's

5revenue.

6MR. OHANA: I guess that's right.

7MR. DAGEN: Turning to a variation on the

8subject, are there any safe harbors in the area of

9misleading or deceptive conduct that the panel would

10suggest or panelists?

11While you are pondering that, I will pose the

12follow-up, which is what about in specific conduct

13areas, the context of SSOs or false advertising or

14patent abuse?

15MR. CARY: I have got one example. I would go

16back to the sham litigation example. It would seem to

17me that if you are within Federal Rule of Civil

18Procedure 11, which requires a reasonable basis for the

19pleading, that being sued as an antitrust defendant for

20sham litigation ought to be dismissed as a matter of

21law. There ought to be a safe harbor if you have met

22appropriate pleading standards. There should not be a

23heightened standard for what might constitute sham

24litigation.

25DR. McAFEE: What if it is 200 sham litigations?

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1That is, it is not one, but we have sued 200

2different -- so, I am thinking about the Recording

3Industry Association of America. We have sued hundreds

4of different defendants. So, we are doing it over and

5over and over again. It is not clear to me that,

6especially when it is against small defendants, that

7there should be a safe harbor. I agree about one, but I

8am not so sure I agree with many.

9MR. CARY: Well, I think you are back to the

10question of whether the lawsuit is reasonably calculated

11to yield the result that you are seeking in the case or

12whether it is calculated to reach some other result, and

13I am not sure the number should make a difference if

14each one of them independently would be deemed a

15reasonable assertion of a copyright or a patent.

16MR. OHANA: This is the first time anyone from

17Silicon Valley defends the RIAA, but it seems to me if

18they bring 200 cases against 200 accused copyright

19infringers, those are all fair cases.

20MS. CREIGHTON: I think what Preston is talking

21about is the kind of case that would meet what is

22referred to as the pattern exception to Noerr, where it

23is filed without regard to whether it is true or not,

24and so, you know, you are going to have a coin toss

25chance of it being true or not, but -- actually I am

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1blanking on the name of the Second Circuit case where

2they challenged each and every satellite certificate.

3MR. CARY: Right.

4MS. CREIGHTON: Primetime. So, it seems to me

5that if you could satisfy the pattern exception in

6Noerr, that would also stand up in antitrust law.

7MR. CARY: Potentially it does under current law

8in the Second Circuit and perhaps in the Ninth Circuit,

9but I am questioning whether it should, especially in

10the case of intellectual property where one of the

11requirements for protecting the intellectual property is

12that you have zealously protected that intellectual

13property. The idea that then you could be charged with

14an antitrust violation for having done what the patent

15law requires you to do or the copyright law requires you

16to do is problematic, and I think the key goes back to

17your predicate, which is "without regard to the merits."

18There is a distinction between bringing a case

19which satisfies Rule 11, because you have a case that is

20reasonably litigable on the one hand; and one that you

21bring with no basis, which would violate Rule 11, in

22which case if it has the requisite competitive effect,

23there should be an antitrust remedy.

24DR. BROCKMEYER: George, I need to give a small

25refinement to your point, and I am not disagreeing with

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1you, but I am aware of circumstances where the initial

2bringing of the suit met Rule 11, but during discovery,

3it then, at that point during discovery, the plaintiff

4learned that there was no basis for the suit such that

5at that point then obviously if it pursues the case

6after that, then I think there is an issue for sham

7litigation. Now, whether that piece of litigation is

8exclusionary, that I do not know, but I would not agree

9that the safe harbor is, well, if you are okay at the

10initial filing of the suit, you are okay, because,

11again, of the circumstances I have discussed with you.

12MR. CARY: Yeah, I think I recognize that

13distinction, and I do not totally disagree with that. I

14think it gets very complicated, though, because in that

15context, now you are talking about work product and

16attorney-client privileged communications, and it gets

17very complicated to assess at what point you are

18obligated to drop that kind of lawsuit.

19DR. BROCKMEYER: Well, but the problem is in the

20patent arena you may learn during discovery of the

21fraud.

22MR. CARY: Fair enough.

23DR. BROCKMEYER: Okay?

24MR. CARY: Yeah.

25MS. CREIGHTON: I think I would probably

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1disagree with you, George, about the adequacy of Rule 11

2sufficiently to guard against that anticompetitive

3effect, because I think what you are proposing -- well,

4usually my understanding of Rule 11 is an objective

5standard, and so if you file every lawsuit and then it

6turns out half of them are meritless, you get half of

7them dismissed, but you have still raised rivals' costs,

8and that is just sort of the willy-nilly filing, and to

9your earlier point about a judge being able to serve as

10an adequate gate-keeper, I do not think a judge

11typically can serve as an adequate gate-keeper to that

12kind of pattern of filing.

13DR. McAFEE: Gemstar is alleged to be an example

14of that.

15MR. DAGEN: In terms of a kind of the safe

16harbor, there is a Sixth Circuit case involving

17podiatrists which looked at a multipart test and said to

18survive summary judgment on a Section 2 case, you have

19to show at least that there is a factual dispute, that

20the statements were clearly false, and two, that they

21were difficult or costly for plaintiff to counter. Is

22that something that panelists would agree with?

23DR. BROCKMEYER: Well, the problem with that

24decision was that the Sixth Circuit adopted what I

25indicated in my slides we should not have, which is

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1there was a rebuttable presumption, and George or

2someone said this earlier, we are now getting somewhat

3into procedural law. I do not think it is appropriate

4to have the rebuttable presumption. So, in the first

5instance, I would disagree with that case, and I think

6they filed a Ninth Circuit case as well.

7MR. DAGEN: Another statement in that case was

8that there is no liability if the statements are simply

9misleading as opposed -- and that court talks about

10Matsushita and what we have talked about earlier with

11Verizon and the danger of chilling procompetitive

12 conduct, and the Sixth Circuit is saying if it is simply

13misleading, and I think they mean by that not

14intentionally, if you cannot show from the beginning

15that it was an intentional misrepresentation, but if it

16is just a statement that turns out to mislead people,

17then they would dismiss the case on those grounds.

18MR. CARY: In the Walker Process context, that

19kind of distinction is an important one. In patent

20litigation, there is always something in the file,

21especially if it is a complicated product deserving of a

22patent, something in the file that one can point to as

23being slightly irregular or perhaps not as articulate as

24it might have been or using a term of art in a

25particular way that is distinct from how some future

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1juror might interpret that.

2Those kinds of technical issues that may or may

3not give rise to inequitable conduct, it seems to me

4that the judge does have an obligation to keep those

5kind of, quote unquote, "simply misleading statements"

6away from a jury and that some greater showing should be

7required before a Walker Process fraud allegation could

8be sustained.

9MS. CREIGHTON: I guess I would repeat what I

10have said before, which is I think the -- sort of the

11intent element that seems implicit there maybe is a bit

12misleading. I keep -- this analogy may be more

13confusing than helpful, but I have tended to think of

14like opportunism in contract. If a taxi driver picks me

15up at the airport and says, you know, ten bucks, and

16then pulls away and, you know, two miles later pulls

17over to the side of the road and says, you know, I will

18either let you out here or it will be a hundred bucks,

19is probably not that relevant to me whether he thought

20about that at the time he picked me up or only after we

21left the airport, you know, it is still robbery.

22And so in the same way, I do not know that it

23would have mattered to my analysis if a Microsoft said,

24go ahead and create, you know, applications using

25Microsoft Java, it will interoperate, and at the time

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1the person said that, he meant it and was sincere, went

2back home, and somebody said, well, actually, that is

3not true, all these people are only going to be able to

4write applications that work on our product, and he

5said, oh, yeah, that is a pretty nice fact, why don't we

6just keep that ourselves?

7I am not sure that the intent at the time of the

8statement is really -- for antitrust purposes, that may

9sometimes be more confusing.

10MR. CARY: Yes, I completely agree with that,

11and I think this goes back to Gil's distinction between

12exploitation and deception in the first instance. One

13can imagine, for example, a scenario where someone in

14good faith enters into a FRAND obligation, and then a

15year later, the CEO changes, and there is pressure on

16the stock, and he comes up with a brilliant idea, why

17don't we just increase the royalties on these patents?

18It would seem to me that that kind of exploitation is

19 just as much an antitrust violation as one with the

20deceptive intent in the first instance.

21MR. OHANA: And since we are in the world of

22patent trolls and nonproducing entities, the fact

23pattern that George just described is not one that is

24unfamiliar to many of us where incentives change after a

25patent is disclosed subject to a RAND obligation, and

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1what you thought was RAND based on what you perceived to

2be the incentives of the party making the declaration

3turns out to be quite wrong, often with significant

4economic consequences.

5At that point, I don't really care a whole lot

6about whether the initial statement was made with guile

7or opportunism. What I care about is the economic

8consequence at the end.

9DR. ROZEK: I think when you are talking about

10safe harbor as being a more objective standard to apply,

11like again, using the Merger Guidelines as an example,

12with the Herfindahl Index standards in the Merger

13Guideline. It is a more direct standard, easy to apply.

14By contrast, whether something is misleading or not

15misleading is difficult to determine with a bright line

16rule. It would be harder in this context to have a safe

17harbor as compared to the merger standard.

18MR. DAGEN: Well, it is now approximately 1:00.

19There are many other issues that we could have covered

20today, but I think we have covered a lot of ground, and

21I wanted to thank both the panelists and again the FTC

22staff and DOJ staff who put pretty much all of this

23together, and thank Hill. I would like to thank

24everybody for being here, the panelists especially for

25taking time out to educate us today, and I would like to

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1ask the audience to give one final round of applause.

2(Applause.)

3(Whereupon, at 1:02 p.m., the hearing was

4concluded.)

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1C E R T I F I C A T I O N O F R E P O R T E R.

2DOCKET/FILE NUMBER: P062106

3CASE TITLE: SECTION 2 HEARING

4DATE: DECEMBER 6, 2006

5

6I HEREBY CERTIFY that the transcript contained

7herein is a full and accurate transcript of the notes

8taken by me at the hearing on the above cause before the

9FEDERAL TRADE COMMISSION to the best of my knowledge and

10belief.

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 DATED: 12/20/2006


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 SUSANNE BERGLING, RMR-CLR


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18C 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

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20I HEREBY CERTIFY that I proofread the transcript

21for accuracy in spelling, hyphenation, punctuation and

22format.

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 DIANE QUADE