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1 FEDERAL TRADE COMMISSION

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4SECTION 2 HEARINGS

5 UNDERSTANDING SINGLE-FIRM BEHAVIOR:

6REMEDIES

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10MARCH 28, 2007

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

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3MS. KURSH: Good morning, everyone. Thank you

4for joining us.

5I'm Gail Kursh. I'm with the Legal Policy

6Section of the Antitrust Division, and I would like to

7welcome everyone this morning to the first of three

8panels on remedies in Section 2 cases.

9These panels are part of an ongoing series of

10public hearings on single-firm conduct.

11My co-moderator today is Dan Ducore, the

12assistant director of the Compliance Division in the

13FTC's Bureau of Competition.

14The Department of Justice and the Federal Trade

15Commission are jointly sponsoring these hearings to help

16advance development of the law concerning Section 2 of

17the Sherman Act.

18We began these hearings last June and have

19covered a wide range of single-firm conduct that may

20raise antitrust issues, including predatory pricing and

21predatory bidding, tying, refusals to deal, exclusive

22dealing, bundled rebates and misleading and deceptive

23practices, among other topics.

24It seems fitting to us as we get toward the end

25of these hearings that we now address remedies.

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1However, it would have been just as fitting for

2us to have addressed remedies at the very outset of

3 these hearings.

4 While I expect our panelists today may disagree

5 on the effectiveness of past Section 2 remedies and

6 perhaps even have differing views on the appropriate

7 goals of Section 2 remedies, I hope that we can all

8 agree today that crafting appropriate remedies in

9 Section 2 cases is critically important and that

10 consideration of remedies should begin very early in an

11investigation or litigation.

12 So on behalf of the division, I want to thank

13 our panelists for participating today and agreeing to

14share their insights with us.

15 I will introduce each panelist in more detail

16before he speaks. But in brief, our speakers in order

17 are Dave Heiner, vice president and deputy general

18 counsel for Microsoft; Robert Crandall, a senior fellow

19at the Brookings Institute; Per Hellstrom, chief of Unit

20C-3 of the Directorate General for Competition, the

21 European Commission; and Tad Lipsky, a partner at Latham

22 & Watkins and former Deputy Assistant Attorney General

23 for the Antitrust Division.

24 I also want to thank my colleagues at the FTC

25and at the division for organizing these hearings. And

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1 our panel this morning will go as follows. We will ask

2 each of the four panelists to speak for approximately 15

3 minutes. We will then take a short break.

4 The panelists will each be given a couple

5 minutes to respond to each other and then we will have a

6 moderated discussion that Dan and I will lead.

7 We will not be taking any questions from the

8 floor, and we intend to end today at 12 noon, take a

9 lunch break and begin the afternoon session at around

10 1:30.

11 Before introducing our first speaker, I will

12 turn things over to Dan and let him make an

13 introduction.

14 MR. DUCORE: Thanks, Gail. On behalf of the

15 Federal Trade Commission, I also want to thank our

16 panelists for agreeing to share their time and

17 especially their views with us this morning.

18 Briefly, the remedies issue is obviously from

19 the agency's point of view about more than simply money

20 damages. That is somebody else's issue.

21 But certainly more so than in an area like

22 merger enforcement, Sherman 2 cases present much more of

23 a one of a kind kind of concern when you are trying to

24 develop the remedy in the sense that you have to be very

25 careful that the particular remedy matches the

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1 particular facts and the particular theory of harm in

2 your case.

3 I expect today we will hear a lot about the

4 critical thinking that must go into fashioning effective

5 remedies for particular problems. And Gail is certainly

6 correct -- and I have seen this in my own experience --

7 that you have to be thinking about remedies at the

8 earliest stages of your case and, for an enforcement

9 agency, at the earliest stages of your investigation.

10 As someone who thinks about remedies pretty much

11 full-time, I'm going to be particularly interested in

12 hearing about both the broad approaches but also about

13 some of the smaller issues, including things such as

14 let's say administrability and the pitfalls and dangers

15 that can face an agency as it maybe starts to go off the

16 cliff and become an industry regulator.

17 With those introductions, let me get started,

18 with the exception I have to make a couple of logistical

19 announcements.

20 First, if there is an alarm, please go down the

21 stairway and get out of the building and follow the

22 instructions of people. You will be actually going

23 across the street. Second, the closest restrooms, men's

24 out the door and to the left, women out the door and

25 past the elevators to the left.

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1 And finally, especially for the panelists,

2 please turn off cell phones, electronic devices,

3 especially things like Blackberries. They can create

4 static on the microphones.

5 With that more mundane information, let me turn

6 it back to Gail to introduce the first speaker.

7 MS. KURSH: Thanks, Dan. David Heiner is vice

8 president and deputy general counsel at Microsoft

9 Corporation, where he heads up the legal department's

10 antitrust group.

11 Since joining Microsoft in 1994, Dave has played

12 a leading role in Microsoft's response to government

13 antitrust proceedings in the United States, Europe and

14 Asia.

15 He is the author of "Assessing Tying Claims in

16 the Context of Software Integration: A Suggested

17 Framework for Applying the Rule of Reason Analysis."

18 Dave.

19 MR. HEINER: Thank you, Gail and Dan, for the

20 invitation to speak here today, which I very much

21 appreciate.

22 This is a subject upon which I think it is fair

23 to say Microsoft has quite a bit of experience, working

24 largely with many people I see in the room.

25 At the outset, I thought it might be useful to

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1 briefly recap the remedies to which Microsoft has been

2 subject over the past decade or so.

3 In 1994, a consent decree was put in place and a

4 nearly identical European Union undertaking were put in

5 place. These were mostly contractual in nature.

6 In 2002, a consent decree and associated

7 litigated final judgment were entered in the Section 2

8 case against Microsoft.

9 The Section 2 case was followed by a number of

10 competitor lawsuits. Hundreds of consumer class actions

11 were filed. Nearly all of these private cases have been

12 settled with payments and some conduct relief as well.

13 In March 2004, the European Commission issued

14 its decision against Microsoft. The Commission took a

15 different approach to the issues than did the U.S.

16 court.

17 In February 2006, the Korean Fair Trade

18 Commission issued its decision against Microsoft. The

19 KFTC took yet a third approach. The EC and KFTC

20 decisions are on appeal now.

21 As you might imagine, all of this generates

22 quite a bit of work within Microsoft and its law

23 department.

24 When I joined the company in 1994, I was the

25 first antitrust lawyer at the company. Today I lead a

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1 group of about 30 professionals dedicated full-time to

2 antitrust counseling and compliance.

3 This group includes software developers and

4 business personnel as well as lawyers and paralegals.

5 All told, a few hundred people at Microsoft are

6 engaged in compliance work over the past few years.

7 I would like to begin with a suggestion on the

8 overall approach to fashioning relief.

9 I would suggest that it's probably better to

10 focus on creating or preserving opportunities for

11 competitors rather than limiting the defendant's ability

12 to deliver consumer value. This is the approach very

13 much taken by the U.S. consent decree.

14 The Court of Appeals had reversed and remanded

15 the Section 1 tying claim against Microsoft but affirmed

16 Section 2 liability relating to the manner in which

17 Internet Explorer had been integrated into Windows 98.

18 The decree that resulted did not require that

19 any functionality be removed from Windows. Rather,

20 every provision of the decree is directed at creating or

21 preserving opportunities for competitors, both as a

22 matter of product design and contractually.

23 The focus is upon ensuring that distribution

24 channels remain open. This is an approach that was

25 strongly approved by the Court of Appeals in 2004.

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1 Today, new Windows PCs come loaded up with

2 software from Microsoft's competitors, such as Google,

3 Yahoo, AOL, Semantec, McAfee and many others.

4 Under this approach, consumers benefit from the

5 ability to choose either integrated solutions or

6 separate stand-alone software or, as is so often the

7 case, to use both.

8 The European Commission has taken a different

9 approach. The Commission ordered Microsoft to create

10 new versions of Windows from which media playback

11 functionality had been removed. These are called

12 Windows XPN and Windows Vista N.

13 They were built following extensive compliance

14 discussions with the European Commission staff. They

15 are available in every European language.

16 However, not a single PC manufacturer has chosen

17 to license these operating systems. These operating

18 systems sit on the shelf. Costs have been imposed, but

19 there is little apparent benefit for anyone.

20 I will return to another aspect of this in a

21 moment. For now, I would note only that the U.S.

22 approach seems far more effective at advancing antitrust

23 values.

24 This focus on creating opportunity tells us

25 something about the proper objectives of antitrust

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1remedies.

2 I would suggest that remedies should be put in

3 place in order to safeguard competitive opportunities

4 but not necessarily to engineer any particular market

5 outcome, such as a reduction in market share. This is

6 for the market to determine once any competitive

7 restraints have been removed.

8 Indeed, even if engineering market outcomes were

9 thought to be desirable theory, it is hard to see how

10 this could be accomplished in practice in most cases.

11By its nature, a remedy will only govern the

12conduct of the defendant, not other market participants.

13 Everyone else, competitors, developers of

14 complementary products and, most notably, consumers will

15act according to their self interest.

16This is particularly noteworthy in high-tech

17 industries where products often interconnect with each

18other in different ways.

19 For example, both the U.S. and EU remedies

20 require Microsoft to make available certain technology

21 called communication protocols to its competitors for

22 use in their products.

23 About 30 firms have taken licenses to this

24technology under the U.S. program and one firm to date

25 under the similar European program.

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1 But whether firms choose to take a license and

2 what kinds of products they build with those licenses

3 is, of course, entirely up to them and outside the

4 control of either Microsoft or any antitrust agency.

5 This general point is relevant outside the

6 context of access remedies as well.

7 Internet Explorer continues to have very high

8 share, although declining. Should this be seen as a

9 shortcoming of the U.S. consent decree?

10 Well, the open source Firefox Web browser now

11 has about 14 percent share, up from zero just a few

12 years ago.

13 Given the safeguards set up by the consent

14 decree which apply on a worldwide basis, there is no

15 reason why Firefox couldn't have a much higher share if

16 that reflected consumer preferences.

17 In fact, Firefox's share is about 33 percent in

18 some major European countries, up from 20 percent just a

19 year ago.

20 This focus on competitive opportunity rather

21 than outcome of market shares is especially important, I

22 think, in government actions.

23 As the Court of Appeals explained in the

24 Microsoft case, liability can be established with little

25 or no proof of actual market impact from the conduct at

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1 issue.

2 This is what the court termed in the Microsoft

3 case a rather endogenous test for causation.

4 In fact, the District Court found that there was

5 no proof that the success of Internet Explorer had been

6 due to unlawful conduct.

7 Where there is no proof of market impact in the

8 first place, it would seem especially inappropriate to

9 expect a remedy to bring about a particular market

10 outcome.

11 This brings me to my third observation.

12 Whatever the proper role of antitrust remedies may be in

13 the abstract, I think, as Gail and Dan said at the

14 outset, it is really quite important that they be fully

15 thought through before liability proceedings are

16 commenced.

17 This is true for at least two reasons.

18 First and most importantly, if it is hard to

19 devise an appropriate remedy, that may suggest that

20 there is no liability in the first place. At the very

21 least, it may suggest that the liability rules were not

22 sufficiently clear to provide any real guidance or

23 notice to the defendant of what would be termed unlawful

24 later.

25 Second, absent a clear view on the question of

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1remedy, it may be difficult or impossible to obtain

2rapid relief through settlement.

3 These points are well illustrated I think by

4Microsoft's experience in dealing with the Windows tying

5issues through the years.

6The addition of new functionality to Windows can

7present competitive challenges for firms that wish to

8offer comparable functionality separately.

9Antitrust agencies around the world have focused

10on that over the past 10 years.

11 At the same time and as the Court of Appeals

12noted in the Microsoft case, such integration can lead

13to important benefits for software developers, PC

14manufacturers, in fact, to the entire PC ecosystem.

15 That's why functionality has been integrated

16into new operating system products steadily over the

17past 20 years or so and why in fact we see integration

18of functions as quite a common function across many

19 product categories.

20So one has the question how should these

21competing considerations be addressed in a remedy?

22In the U.S., the consent decree approach I

23outlined earlier is now in place. But there were quite

24a few bumps along the road to getting there, including

25three rounds of failed settlement talks, one before

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1 Judge Posner in Chicago.

2 I think it is fair to say at least part of the

3 reason why those settlement talks failed is that there

4 was disagreement among the DOJ and the various states as

5 to what would be a suitable form of relief.

6 Absent a clear view on this, no agreement could

7 be reached, and the eventual remedy was delayed.

8 The history in Brussels is instructive as well.

9 In early 2004, Microsoft proposed a variety of remedies

10 to address the Commission's concerns regarding the

11 inclusion of media functionality in Windows.

12 The Commission case team devoted a great deal of

13 effort to defining and exploring those proposals, and

14 Microsoft is grateful for that.

15 Ultimately, however, the Commission determined

16 that a general remedy should be devised that would

17 address all future tying cases.

18 Given the range of possible fact patterns and

19 the benefits of integration, however, neither the

20 Commission nor Microsoft was able to articulate any such

21 rule that would govern future product design decisions

22 despite prodigious efforts by both sides.

23 As a result, settlement talks failed. The

24 Commission proceeded to impose the logical remedy for a

25 tying case, which was an order to untie. As a result,

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1 PC manufacturers and consumers can now choose to get

2 Windows without media functionality.

3 As I have said, they have chosen the

4 full-feature version of Windows, as one might expect.

5 So the question becomes should it be unlawful

6 for a firm to fail to create a product for which there

7 is no appreciable consumer demand? Here consideration

8 of remedy may suggest that there was no unlawful tie in

9 the first place.

10 The same might be said about the package

11 discounting that was at issue in Lepages or the

12 selective discounting and output increases that were at

13 issue in the American Airlines case.

14 I would like to conclude with two final

15 observations of a practical nature.

16 First, in Microsoft's experience, it would seem

17 that the legal process is generally best suited to

18 contractual remedies.

19 Particular cases may call for other forms of

20 relief. But we should recognize that these come with

21 significant challenges for all concerned.

22 Contracts are good because they are within the

23 purview of lawyers. We understand contracts. We know

24 how to read them.

25 They are relatively easy to monitor, both for

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1 the defendant and for the enforcement agency, and I

2 would note that essentially no issue of significance has

3 arisen through the years in Microsoft's compliance with

4 the contractual provisions of the U.S. consent decree.

5 Product design remedies are more difficult.

6 Here considerable technical expertise may be required in

7 order to devise and monitor a remedy.

8 Ultimately lawyers will remain responsible for

9 making compliance judgments regarding highly technical

10 matters, and this may be hard, even with expert

11 technical help.

12 In addition, agency lawyers will inevitably find

13 themselves drawn into the details of product design and

14 even the details of making engineering trade-offs which

15 are essential to the product design process.

16 To deal with these kinds of complexities, the

17 technical committee set up under the U.S. consent decree

18 now has more than 40 full-time employees.

19 Remedies that require sharing of complex

20 technical information are also quite challenging.

21 Technological complexity can quickly lead, I think it is

22 safe to say, to enforcement complexity.

23 Protocol licensing, for example, is just one of

24 eight major provisions of the U.S. consent decree, but

25 it takes up the lion's share of the compliance work,

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1 both for Microsoft and for the agencies.

2 The EU protocol remedy introduces still greater

3 complexity. That is because it seeks to enable

4 fundamentally different computer operating systems with

5 different computer architectures to work together as if

6 they were one.

7 This is a computer science project, and even the

8 Commission itself has recently said that making this

9 work would require a massive development effort by third

10 parties, and that hasn't happened yet.

11 The result has been considerable frustration for

12 the Commission and for Microsoft.

13 This past summer, the Commission imposed fines

14 upon Microsoft of 280 million Euro for failing to

15 complete this project to the satisfaction of the

16 technical advisors set up under that decision.

17 Pricing is another challenge and likely will be

18 for any access case that involves information goods,

19 such as software.

20 The protocol technology that Microsoft has

21 developed was developed over the course of about 10

22 years. It is covered by 35 patents, and many more are

23 pending. It is covered by copyright and trade secret

24 law.

25 How is this to be valued? The answer is not

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1 entirely obvious given the many ways that software is

2 monetized today and the varying business models that

3 people have.

4 Microsoft has suggested pricing that is

5 comparable to that which is in place under the U.S.

6 program where many firms have taken licenses. That

7 pricing is backed up by more than a thousand pages of

8 analysis and justification that the Commission

9 requested.

10 The Commission has taken issue with this

11 pricing, however, and is threatening to impose new fines

12 that could run to additional hundreds of millions of

13 Euros.

14 My final observation relates to globalization.

15 From Microsoft's perspective and I think it is

16 fair to say from that of other high-tech companies, it

17 is increasingly important that antitrust agencies

18 cooperate closely on remedies and show due respect for

19 principles of international comity.

20 For sound economic reasons, the Windows

21 operating system is essentially identical all over the

22 world. That uniformity is critical to the role that

23 Windows provides in enabling compatibility between

24 literally thousands of complementary software products

25 and hardware products.

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1 And that is threatened today by the varying

2approaches taken to the Windows tying issues in the

3 United States, in Europe and Korea, which I haven't had

4 time to go through this morning.

5 In the compulsory licensing area, I think it is

6 safe to say that the U.S. and foreign countries are

7 taking a different approach to compulsory licensing.

8 In the age of the Internet, once trade secrets

9 are revealed, they can never be recovered. Absent

10 greater deference to comity principles, we may well find

11 that the legal regime that imposes the most onerous

12 legal requirements de facto prevails on a worldwide

13 basis.

14 Again, thanks very much, Gail and Dan. I

15 appreciate the opportunity to speak here today.

16 (Applause.)

17 MS. KURSH: Thanks, Dave. Robert Crandall will

18 be next.

19 Robert is a senior fellow in economic studies at

20 the Brookings Institution. He has previously served as

21 acting deputy and assistant director at the Council on

22 Wage and Price Stability.

23 He has written extensively on antitrust policy,

24 with a particular emphasis on the telecommunications

25 sector and emerging issues in wireless and broadband

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1 competition.

2 Among the antitrust topics on which he has

3 written is the effectiveness or lack thereof, I guess,

4 of relief in government Section 2 cases.

5 Bob.

6 MR. CRANDALL: Thank you, Gail. It is a

7 pleasure to be here.

8 I haven't written that extensively in antitrust.

9 In fact, I spent most of my career looking at regulatory

10 activities that range as far as environmental policy and

11 fuel economy standards and more recently

12 telecommunications regulation, which, of course, is

13 related to competition policy.

14 I have not spent as much time as my colleagues

15 on this panel have, I'm sure, on the details of

16 antitrust, nor the details of Section 2 remedies.

17 My purpose today is to provoke, frankly, and for

18 that reason I'm somewhat disappointed we will not have

19 questions in the audience, though I'm not sure how many

20 economists are in the audience anyway.

21 You see the title of my presentation. I will

22 focus on the AT&T divestiture, not simply because that's

23 the one I know a little bit about, but because some work

24 which I have done and which Clifford Winston and I have

25 done and Ken Elzinga and I have done on Section 2 relief

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1 using a case-by-case approach to this, which I think is

2 the only way to go about it.

3 Each one of these cases is sui generis. It is

4 hard to do a more general study. It suggests very

5 little effect it creates on the market, on competition

6 in the market, on output, on prices.

7 In fact, not because of shameless

8 self-promotion, but because I would like to provoke

9 people to read the articles and maybe prove me wrong, I

10 have listed the articles in this first slide.

11 But the one case that everybody comes to as the

12 example of success in Section 2 structural relief cases

13 particularly is the AT&T divestiture, which, of course,

14 was negotiated someplace on a ski slope in Utah in 1982

15 and was executed effective January 1, 1984 after about

16 10 years of litigation.

17 Indeed, at first I would have been a supporter

18 of that and perhaps anyone that was wishing to get into

19 a debate with me on this would find things I have said

20 in the past, 20 years ago, that I might have approved.

21 Maybe I was overly seduced by Bill Baxter, who was a

22 very persuasive guy and a very good fellow to boot.

23 But over time I have come to question whether in

24 fact even the AT&T case can be considered a success in

25 terms of relief from a Section 2 prosecution.

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1 Now, most people in the room would know about

2 this case. We don't have to spend much time on it.

3 The principal outcome was a divestiture of the

4 Bell operating companies from the rest of AT&T, AT&T

5 keeping the manufacturing and long distance arms and a

6 large share of the research operations.

7 The near-term result -- and I will show in a

8 second -- is long distance service increased. Long

9 distance service output increased and U.S. long distance

10 rates fell.

11 I do these slides myself. That's why they look

12 so bad.

13 But was the increased long distance competition

14 due to vertical divestiture? This is a very different

15 world in 1982.

16 AT&T accounted for 80, 85 percent of the access

17 lines and almost the same percentage of total telephone

18 subscribers, including wireless.

19 AT&T's wireless service was not launched until

20 1983 in Chicago, its cellular service. They had a more

21 mundane wireless service prior to that.

22 This is the period in which I think it was

23 McKinsey was predicting there would be a demand for no

24 more than one million cell phones in the United States.

25 At this time, though, we had so-called universal

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1 service pricing, which is really inverse Ramsey pricing,

2 for you economists in the room. I suppose antitrust

3 lawyers may understand the jargon.

4 This, in fact, invited entry into long distance

5 service. It invited the likes of Bill McGowan of

6 Microwave Communications Incorporated -- he said he

7 changed the name to MCI because he didn't want people to

8 think he was going to fry them -- to enter the long

9 distance service to figure a way to get access to AT&T's

10 service, particularly with very low prices.

11 Indeed, they battled that out for many years,

12 culminating in a private antitrust action and convincing

13 the Justice Department in '74 to file the Section 2

14 case.

15 Once again, the question was was the vertical

16 divestiture which resulted in this case necessary to

17 promote long distance competition? What are the

18 numbers?

19 Here are the numbers on real interstate long

20 distance rates and AT&T's average share of revenues

21 using the same access on the left-hand side.

22 And you see that starting in 1984, after the

23 divestiture, AT&T steadily lost market share and long

24 distance rates came down steadily.

25 This is taken to reflect success of the decree.

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1 Of course, we don't know what the but for would look

2 like. And it may well be that without some action that

3 we wouldn't have had this result.

4 In fact, most other countries had to take action

5 themselves, and they took action only along one

6 dimension of the decree. No other country that I'm

7 aware of has actually required a divestiture of their

8 operating companies from manufacturing or long distance

9 service companies in their country.

10 Virtually all of them, however, at some time

11 after 1984, as late as 1998 in the EU, required access,

12 equal access to the incumbent local exchange company

13 switches for terminating or originating calls.

14 This obviously is regulated access, and in any

15 regulated access there is going to be an argument about

16 the price. But nobody engaged in vertical divestiture.

17 One could argue that what Offcom is doing in the

18 U.K. today is a very mild version of structural

19 separation with British Telecom. We will see how that

20 works out.

21 But no other country actually engaged in

22 vertical divestiture.

23 Now, if you look at what happened to the price

24 of long distance services, comparing the U.S. interstate

25 rate -- the intrastate rates didn't go down as fast

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1 because the states controlled and used their regulatory

2 controls to keep those prices relatively high, the

3 inverse Ramsey pricing continues to stay low.

4 If you look at the U.S. interstate prices

5 against the average for Canada and wouldn't make much

6 difference which one you use for the EU. I use the

7 three-minute price here, and I think they also publish

8 10-minute prices in the annual monitoring reports that

9 the EU does on monitoring effects of their regulatory

10 program.

11 What you see here is prices came down even more

12 rapidly in Canada and the EU, much more quickly

13 subsequent to their liberalization than it did in the

14 United States subsequent to ours.

15 In fact, equal access to the switches was all

16 that was required. And the FCC in the United States had

17 not done this of its own volition prior to the bringing

18 of the AT&T case in 1974 or prior to the negotiation of

19 the consent decree, the divestiture with the equal

20 access provisions in it in 1982.

21 Now, in no small part long distance rates in the

22 United States fell because of declining access charges.

23 One of the things -- and you could take this as

24 a measure of the success of the decree. One of the

25 things that the decree did was to expose exactly how

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1 much if you want to call it broadly subsidy was going on

2 between long distance service and other service, local

3 access to the telephone network in the regulatory

4 process at the Federal Communications Commission.

5 With very high access charges now having to be

6 levied to keep the rates at about the same level, the

7 FCC started the process of rebalancing rates, lowering

8 access charges and putting all those complicated charges

9 that you and I don't understand on the back of our

10 telephone bills, which are in fact designed to try to

11 shield from the public information about what's really

12 going on here.

13 But it made good policy sense to put these

14 nontraffic-sensitive charges as a fixed charge on your

15 telephone bill and to lower the traffic-sensitive

16 charges of long distance by doing so.

17 In fact, a great deal, as you can see, of the

18 decline in long distance rates occurred because of the

19 decline in access charges.

20 My friends who worked on the AT&T case at DOJ

21 and others who have been involved in this process over

22 the years who don't like my presentation will argue with

23 me that this could not have happened but for the case.

24 In fact, that is one of the benefits of the

25 case, I suppose. We could not have persuaded the FCC to

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1 undertake both equal access and to rebalance rates but

2 for the divestiture.

3 I suppose that is a benefit. But again, the

4 problem here was not AT&T's monopolization activities,

5 unless you consider their lobbying activities of the FCC

6 as part of it, but, rather, the FCC's seeming

7 incompetence or reluctance to do the right thing to

8 maximize economic welfare for people using the telephone

9 network.

10 As a mea culpa, I was actually at the FCC

11 advising part-time one of the commissioners, Glen

12 Robinson, who is now professor of administrative law at

13 University of Virginia. So I guess I'm tied up in the

14 complicity in all that.

15 This is simply saying much the same thing, that

16 in fact what happened was as a result of the

17 divestiture, there was an exposure of the folly of the

18 universal service pricing policy, something which the

19 FCC addressed with great opposition from so-called

20 consumer groups, who claimed that millions of low-income

21 people would fall off the telephone network.

22 Of course, we know better than that because we

23 know the price elasticity in the demand for access to

24 telephone service is very, very low.

25 What about the costs of the decree? My own

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1 estimation -- and I haven't seen anyone else attempt to

2 address this -- was that we lost about $5 billion of

3 output just in the transition from the old AT&T to the

4 new AT&T over 1984-85, in that period.

5 There are some estimates -- now, these were

6 funded by the Bell companies as attempting to get out of

7 the decree. There is an estimate by Paul Ruben, a

8 colleague at Emory, that the process of administering

9 the line of business restrictions in the decree totaled

10 about $1.4 billion over time.

11 Though what happened -- and this goes to Dave's

12 presentation on trying to provide technological

13 prescriptions and deal with changes in technology in an

14 antitrust decree. What happened was that the market

15 changed rather dramatically.

16 Something called the Internet came up and the

17 separation of interstate from local and intrastate

18 services in the decree became extremely problematic.

19 Not only that, but the information restriction which

20 eventually was abolished by the Court of Appeals also

21 was a problem at a time when obviously information and

22 transmission switching of signals were melding together.

23 Now, here is one of the more interesting -- I

24 mentioned earlier that the estimates, at least one

25 commercial estimate of what cellular technology was

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1 going to do back in the 1980s was seriously wrong.

2 At the very time that the AT&T case was brought,

3 the FCC was deciding what to do about the so-called

4 cellular spectrum.

5 It took about another nine years for them

6 finally to have one of these licenses begin to --

7 through one of these licenses for service to become

8 available. There was a lengthy hassle over how not only

9 to allocate the spectrum but how to assign it and divvy

10 it up among players.

11 We know what they did. They decided to have

12 only two licenses -- why is not at all clear -- and to

13 give one of them to the incumbent wireline carrier on

14 the grounds that I suppose that wireless was

15 complementary and not likely to be competitive with

16 wireline service.

17 Obviously one's perspective on that would change

18 over time.

19 So it wasn't until 1983 that wireless service

20 began. This is the time when the consent decree was

21 just going into effect, after it had been negotiated.

22 And in the negotiation of the consent decree, the Bell

23 companies were allowed to keep one of the wireless

24 licenses.

25 In retrospect, wireless became the most serious

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1 competitor for a long period of time. Cable and VOiP

2 may now take its place in the future.

3 And it was certainly a mistake to do that. But

4 the bigger mistake was only to assign two bands to

5 cellular service.

6 It wasn't until we ran a huge federal budget

7 deficit and the Congress decided we needed to raise

8 money through spectrum auctions that we began to get

9 more spectrum allocated to, more and more licenses

10 awarded for cellular service.

11 And, of course, starting about 1995, 1996, the

12 new PCS cellular licenses were bid on and began to

13 operate, and we went from two carriers to six national

14 carriers over a period of time through a contorted

15 process I won't bore you with right now, because the

16 stuff was licensed on a local market by local market

17 basis rather than national basis.

18 But the important message here is what drove

19 competition starting in the late '90s was wireless, and

20 particularly long distance competition in the '90s, and

21 now I would even argue competition for the local access.

22 What I show you here is a chart in which the top

23 red line shows what we would have expected interstate

24 terminating switched access minutes to look like given

25 what was happening to prices and GDP, and the dotted

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1 line below, what actually happened to wireline

2 terminating and interstate access.

3 The gap that opens up there is primarily due to

4 wireless. That is, wireless began to take a very, very

5 large share.

6 Interestingly enough, this whole thing developed

7 because of the development of these national plans which

8 most of us have called from anywhere to anywhere. They

9 were introduced first by AT&T, still the largest long

10 distance player.

11 They cannibalized their own business with this,

12 because then ever other cellular company had to follow

13 in the next year. And today, of course, we have not

14 only a proliferation of these plans, but the plans also

15 allow zero per minute calling in nighttime and on

16 weekends.

17 This number, which goes through 2004, is

18 woefully out of date. I haven't tried to update it.

19 I would think that a very, very large share,

20 overwhelming majority of all interstate long distance

21 minutes now go over wireless. As I said, this may

22 change with VOiP.

23 The price of the decree -- and this is one of

24 the problems of any of these decrees -- is it is

25 difficult to get rid of it.

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1 The price for getting rid of it after 10 or 12

2 years was the 1996 Telecommunications Act which -- and I

3 won't go into in great detail; we don't have time -- is

4 subject to its own folly and led to enormous battles

5 between entrants and particularly MCI and AT&T and the

6 regional Bell companies, led to an unbundling regime

7 which got more and more liberal as more and more of the

8 new entrants failed and ended up with a thing called a

9 uni-platform which means the entrant could use all of

10 the facilities of the Bell companies at discounted

11 rates, 50 to 60 percent off retail, through the

12 so-called unbundling process, a provision which was

13 eventually overturned by the Court of Appeals which said

14 it went too far.

15 Also, there was a line-sharing provision which

16 is still in existence throughout Europe and most other

17 countries of the world, Japan, Australia, but which also

18 was ruled as an unjustified extension of the unbundling

19 regime by the D.C. Circuit.

20 In fact, the great savior of folly in U.S.

21 telecommunications was Steven Williams of the U.S. Court

22 of Appeals, now retired or senior status.

23 What happened in the '96 act, we wasted at least

24 $50 billion of investment. Where the stuff went nobody

25 knows. I can't find it on eBay today.

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1 MCI and AT&T were forced to enter the arms of

2 Verizon and SBC respectively, not because of the ending,

3 the D.C. Circuit opinions. They would have been forced

4 into it anyway because wireless was eating their lunch

5 so rapidly that their revenues were declining by 10 to

6 15 percent per year.

7 So, after 12 years of the AT&T decree and nine

8 years after the 1996 act, we reverted back to a

9 vertically integrated telecom sector.

10 It was not antitrust, although you could argue

11 that antitrust, certainly the equal access provision did

12 generate the nascent competition early on in long

13 distance services.

14 But we could have gotten there without antitrust

15 had the FCC been on the job or had they realized the

16 benefits of doing this. We led the way with the AT&T

17 decree, and then the rest of the world could follow with

18 their equal access provisions.

19 Today, the local bottleneck is largely

20 irrelevant. And, in fact, despite the rhetoric

21 surrounding it, the local telephone companies are in

22 deep trouble because they do not have a network which is

23 easily capable of delivering high-speed video on demand

24 and are, therefore, having to spend enormous amounts of

25 money to upgrade their networks to catch the cable

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1 companies who very easily can offer voice

2 telecommunications services.

3 As a result, what has happened is with the

4 change in the regulatory regime, the incumbent local

5 carriers are now investing enormous sums in their

6 networks, far more, by the way, than the more regulated

7 EU carriers are investing in Europe or, for that matter,

8 more regulated carriers in Australia. Japan still is

9 investing a lot despite a heavily regulated system.

10 I don't know that I can give you general lessons

11 from all this. I think this is sui generis.

12 The AT&T decree may have worked in a narrow

13 sense in that it did introduce equal access into long

14 distance.

15 The cost of the vertical divestiture was

16 extremely high. Was it necessary? I think in

17 retrospect I can say probably not.

18 But I didn't have the foresight at the time to

19 say that. And it is easy enough to go back and be a

20 Monday morning quarterback.

21 But I think it is at least too facile to say

22 this is a decree that clearly was a success and one

23 which we ought to follow in other cases, although one

24 wonders what other industry would offer the same

25 opportunities for this type of vertical divestiture and

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1 access.

2 But perhaps Dave has some ideas on that.

3 With that, let me just stop and say one of the

4 things that Cliff Winston and I really wanted to provoke

5 is economists looking at the impacts of antitrust

6 decrees, antitrust policy in general, more empirical

7 work.

8 Our conclusion in our paper wasn't that

9 antitrust is a failure. It was that we have no

10 empirical evidence that it is a success. And that is a

11 serious problem for a policy that's only been in place

12 for 117 years.

13 So we hope to provoke people into doing research

14 and either proving what we have done so far right or

15 wrong, as the case may be.

16 I thank you for your attention.

17 (Applause.)

18 MS. KURSH: Thank you, Bob.

19 I would like to now ask Per Hellstrom to come

20 up. Per is chief of the Unit C-3 at the Directorate

21 General for Competition, European Commission.

22 He is actively involved in the European

23 Commission's case against Microsoft, and we are very

24 grateful to him for traveling across the Atlantic to

25 share his perspectives based on his experiences with

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1 Article 82.

2 MR. HELLSTROM: I would like to provide a

3 European perspective to this issue of remedies.

4 I don't really intend to go into detail in any

5 particular case. I certainly don't want this to turn

6 into another hearing on the Microsoft case.

7 I already defended that case once before the

8 court, and we are still awaiting the judgment in that

9 case.

10 But I could mention that as some of you may be

11 aware, the Commission is currently undertaking a review

12 of its policy under Article 82, which is our provision

13 for single-firm behavior.

14 And in addition to that, we are also reviewing

15 our policy as regards remedies, both under Article 81,

16 cartels, et cetera, and Article 82. And we are

17 preparing some internal guidance in this regard.

18 Just a brief overview of the legal framework in

19 Europe, which may be different than the U.S. framework.

20 We have Article 82 of the treaty, which states

21 that abuse of a dominant position shall be prohibited.

22 Now, this provision has direct effect and it can

23 be relied upon by private parties before national

24 courts, and it is the implementing regulation,

25 Regulation 1/2003, which provides the enforcement powers

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1 to the European Commission to enforce Article 82 and

2 impose remedies.

3 Remedies are not mentioned in Article 82 itself.

4 In addition to that, we have the case law of the

5 Community Courts which, of course, has dealt with the

6 issue of remedies in some cases, and there is certain

7 decisional practice of the European Commission, the

8 Microsoft decision being one of those.

9 I believe, therefore, that one must separate the

10 issues of the finding of an abuse and the imposition of

11 a remedy, at least in our legal system.

12 Having said that, from the point of view of an

13 enforcement authority, I do share the view that it is

14 important to think about remedies early on in an

15 investigation.

16 But for the purposes of the discussion on

17 remedies, I think also we must assume that we have

18 already a valid finding of an abuse, for example, a

19 refusal to deal, tying, excessive pricing. And certain

20 aspects that could in theory be relevant for the

21 imposition of a remedy, such as the specific character

22 of the market, efficiencies, incentives to innovate,

23 et cetera, may in fact already have been taken into

24 account in the finding of the abuse.

25 Now, regulation 1/2003, that is the implementing

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1 regulation that gives powers to the Commission.

2 The context with regard to remedies are Article

3 7, which gives the power for us to take prohibition

4 decisions and impose mandatory remedies; Article 9,

5 which provides for commitment decisions. That is

6 voluntary remedies where it is up to the parties to

7 propose adequate remedies. There is no finding of an

8 abuse.

9 And these decisions are only possible where the

10 Commission does not intend to impose a fine.

11 And then there is also provision for interim

12 measures in cases of urgency in Article 8.

13 I will focus today only on the first one,

14 Article 7, prohibition decisions, whereby the Commission

15 is entitled, where it finds an infringement of either

16 Article 81 or 82, to require the undertaking concerned

17 to bring such an infringement to end. For this purpose,

18 it may impose on them any behavioral or structural

19 remedies which are proportionate to the infringement

20 committed and necessary to bring the infringement

21 effectively to an end.

22 Structural remedies can only be imposed either

23 where there is no equally effective behavioral remedy or

24 where any equally effective behavioral remedy would be

25 more burdensome for the undertaking concerned than the

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1 structural remedy.

2 In other words, two types of remedies are

3 possible, behavioral, structural.

4 As the wording indicates, the principles of

5 necessity and proportionality applies. And the aim, as

6 stated, is to bring the infringement effectively to an

7 end.

8 In other words, the Commission has the power to

9 require a company to restore the market conditions

10 absent the infringement and to impose remedies that are

11 necessary to that effect.

12 But, of course, details of any such measures can

13 only be decided on a case-by-case basis.

14 In addition to this, Recital 12 of the

15 regulation provides that with regard to structural

16 remedies, "changes in the structure of an undertaking as

17 it existed before the infringement was committed would

18 only be proportionate where there is a substantial risk

19 of a lasting or repeated infringement that derives from

20 the very structure of the undertaking."

21 Now, if we look at how this framework is applied

22 in practice, I believe that the standard scenario is to

23 have a cease and desist order plus fines.

24 In our terminology, fines are not really

25 remedies, but cease and desist orders are.

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1 And by cease and desist orders, I mean an order

2 for the company to bring the abusive behavior to an end

3 and refrain from repeating such act and conduct as well

4 as any act or conduct having the same or equivalent

5 object or effect.

6 This is usually the standard phrase in an

7 Article 82 decision.

8 But a remedy, as we speak about it here today,

9 is an elaboration, then, sometimes an expansion of a

10 cease and desist order, either prescribing a certain

11 action or prohibiting a certain action, leaving the firm

12 discretion on what precisely to implement.

13 Now, how to design a remedy. In theory,

14 remedies or commitments should be effective,

15 proportionate/necessary, clear and precise, cost

16 efficient, transparent and consistent.

17 Of course, in practice, this is quite a

18 challenge.

19 And as mentioned, evidently there is an inherent

20 link between the nature of the infringement and the

21 remedies available to the Commission, and any assessment

22 of the effectiveness and necessity of the remedy must be

23 based on the facts and circumstances of each individual

24 case.

25 But here are some possible criterias, a

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1 nonexhaustive list on how to assess the effectiveness of

2 a remedy, questions such as does the remedy lower

3 barriers to entry, is it likely to increase consumer

4 welfare, can it be practically implemented, monitored

5 and enforced and how quickly can the remedy restore

6 competition.

7 One question that has been raised is whether one

8 could foresee a two-step approach with regard to

9 remedies. That is, if the initial remedies imposed are

10 ineffective for one reason or another, could stricter

11 remedies be imposed.

12 Here there may be a difference in our respective

13 legal frameworks. In Europe, in order for us to impose

14 a new remedy if the initial remedy does not work, we

15 would have to respect the procedural rights of the

16 parties, and we would normally have to issue a so-called

17 statement of objections outlining the reasons why a new

18 remedy is required. And that, of course, is a procedure

19 that we know takes time.

20 Of course, this is true for the initial remedy.

21 We must provide sufficient notice in a statement of

22 objection of the remedies foreseen. It would be

23 possible to have some options, some alternatives and

24 allow the company concerned to comment on these.

25 With regard to behavioral remedies, a possible

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1 definition of behavioral remedy, "a behavioral remedy is

2 a measure that obliges the concerned undertaking to act

3 in a certain way or to omit certain anticompetitive

4 conduct."

5 Compliance with behavioral remedies usually has

6 to be monitored and enforced. One can classify these

7 types of remedies according to the type of infringement,

8 antiforeclosure remedies, anticollusion remedies or

9 antiexploitation remedies.

10 I will not go into further detail on these now.

11 Common to most behavioral remedies is that they

12 do not change the incentive of the firms to engage in

13 anticompetitive behavior. As a consequence, compliance

14 has to be monitored to avoid circumvention.

15 Monitoring raises various questions as to who

16 should monitor and how. Should it be the European

17 Commission, some sector-specific regulator, competitors,

18 customers, trustees, national courts, or could one

19 resort to some arbitration mechanism, and how should all

20 this be organized.

21 I believe as regards monitoring, the U.S. is

22 probably more advanced in this regard than we are in

23 Europe. And we are currently looking into ways to

24 improve our effectiveness in this regard.

25 A structural remedy is a measure that

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1 effectively changes the structure of the market by a

2 transfer of property rights regarding tangible or

3 intangible assets, including the transfer of an entire

4 business unit that does not lead to any ongoing

5 relationships between the former and future owner.

6 After its completion, "a structural remedy

7 should not require any further monitoring."

8 So structural remedies would normally involve

9 the transfer of property rights, some form of

10 divestiture. There should not be any ongoing links.

11 There should be a one-off measure, a clean

12 break, and this remedy should remove incentives and/or

13 the means of a firm to infringe competition law.

14 It may be necessary to have some sort of

15 behavioral flanking measures. Monitoring and

16 enforcement should only be necessary until divestiture

17 is completed.

18 That would be an advantage compared to

19 behavioral remedies. However, structural remedies have

20 rarely been used in Europe under Article 82.

21 However, for the future, the Commission would

22 not hesitate to impose structural remedies when

23 necessary and appropriate. In fact, we could even be

24 obliged to do so, although, of course, again it would

25 depend on the circumstances of each case.

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1 I would just like to conclude with a quote from

2 Mr. Charles A. James, the former Assistant Attorney

3 General at DOJ.

4 He has stated in an article that "an antitrust

5 remedy must stop the offending conduct, prevent its

6 recurrence and restore competition. Preventing

7 recurrence must involve proactive steps to address

8 conduct of similar nature. Restoration requires

9 prospective relief to create lost competition and may

10 involve actions to disadvantage the antitrust offender

11 and/or favor its rivals."

12 I believe the Commission would fully subscribe

13 to this statement, although I should add that the

14 Assistant Attorney General also emphasized that the

15 relief, however, must have its foundation in the

16 offending conduct.

17 So in the end, it all comes back to the inherent

18 link between the remedy and the infringement identified.

19 Thank you for your attention.

20 (Applause.)

21 MS. KURSH: Thank you, Per.

22 Tad Lipsky is a partner at Latham & Watkins and

23 a former Deputy Assistant Attorney General at the

24 Antitrust Division.

25 While at the division, he organized and

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1 supervised preparation of the merger guidelines and the

2 Antitrust Division's view of the United States versus

3 IBM, among many important antitrust cases.

4 His career has spanned virtually every facet of

5 antitrust law, and he has served in both public and

6 private practice, both here and abroad.

7 Welcome, Tad.

8 MR. LIPSKY: Thanks, Gail and Dan. Your careers

9 have spanned almost every aspect of antitrust law too.

10 I must say you have the organization of these

11 hearings down to an art and science.

12 It is really a great pleasure to be able to

13 focus just on the substance and you are taking care of

14 all the rest.

15 So congratulations. This has been a fascinating

16 set of presentations this morning, and, indeed, the

17 whole record of the hearings has been very interesting.

18 I enjoyed it very much. I am sure it will end

19 up being a very signal contribution to a lot of

20 subjects.

21 The remedies in some respects is really the

22 whole debate.

23 Ultimately every antitrust case comes down to

24 what is the problem and what do you want to do about it.

25 If you don't have the answer to the remedy, you really

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1 aren't out of the starting gate.

2 It is interesting when Bill Baxter came to

3 Washington, he had a specific plan for some things he

4 wanted to address. Actually, the AT&T case was not high

5 on his list.

6 His list was to begin an amicus program to

7 articulate to the courts in antitrust cases some

8 economic errors and omissions that he thought were

9 endemic in the precedent.

10 It is interesting we are seeing sort of the

11 final element of that play out just this week with the

12 Legion case.

13 Just about every landmark of judicial ignorance

14that Bill had identified has now fallen, when you look

15 at the Monsanto and Associated General Contractors and

16 NCAA versus Board of Regents and Copperweld.

17 This is really getting down to the last part of

18 that program.

19 And then he wanted to rewrite what were then the

20 effective merger guidelines, the 1968 sort of Warren

21 court, Lyndon B. Johnson version of merger guidelines.

22 Finally, the third element on his list was what

23 he had seen -- he wanted to do something about judgments

24 and decrees and the way relief was handled in the

25 division, and that meant not only cleaning out a lot of

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1 old decrees but, believe it or not, when Baxter came to

2 town in 1981, it was not yet the consistent practice,

3 although it was beginning to be more consistent to have

4 sunset provisions in judgment decrees and in consent

5 decrees entered by the Antitrust Division.

6 I think both at the Commission and the division

7 that is now pretty much uniformly the practice.

8 He abolished the judgment enforcement section

9 because he thought it was very pernicious to have a

10 separate judgment enforcement section which discouraged

11 connecting the theory of remedy to the theory of relief

12 sought in a case.

13 Bill had many memorable phrases, but his way of

14 summing up this problem was to say of the division

15 litigators, he said "Everybody likes to catch them, but

16 nobody wants to clean them," by which he meant if you

17 weren't willing to clean the fish, then you probably

18 shouldn't be fishing to catch it either.

19 My presentation is really in two parts. One is

20 talking about essential facilities and mandatory access,

21 because that is such a hot part of the remedies debate

22 in the context certainly of Section 2 cases,

23 monopolization cases.

24 But it is really the way of illustrating what I

25 think is a fundamental point that is sometimes lost in

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1 debating the specifics of particular cases and I think

2 needs to be emphasized.

3 Perhaps not a Baxterian phrase, but my phrase to

4 capture the issue is no sense pretending.

5 If your image of the way an industry should work

6 in a modern capitalist competitive economy is that there

7 should be a number of competitors vying for advantage to

8 supply products and services that meet demand, there are

9 some industries where you are not going to have

10 multiple -- by virtue of the cost structure or some

11 other almost element of the technology or the market,

12 you are not going to have multiple competitors.

13 This is where the essential facility doctrine

14 really starts, from an implicit recognition that if you

15 have something that meets the essential facility

16 definition and it also is something that other

17 competitors cannot practically duplicate -- is I think

18 the phrase from the seminar cases -- what you have is a

19 classic declining cost industry where you simply are not

20 going to be able to structure it and expect optimal

21 results on a competitive basis.

22 You will have to consider the viability of

23 regulatory alternatives, price limits in the framework

24 of utility regulation or some other kind of public

25 intervention, and that puts you kind of in the space

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1 where you have essentially got a fundamental departure I

2 think from the antitrust vision of the way an industry

3 is supposed to operate and you need to consider whether

4 you can even attack the problem with an antitrust-like

5 remedy, be it vertical divestiture or whatever, or

6 whether you need a regulatory scheme.

7 And it also means that the costs and benefits of

8 these ways of addressing this problem need to be

9 confronted in an intellectually honest way and that you

10 might conclude that the best thing to do is to do

11 nothing because there are some problems whose remedies

12 are more costly than just suffering the problem.

13 I also wanted to point out, as long as we are on

14 the subject, there is a flaw in the essential facilities

15 doctrine, and that is that there is an element that says

16 you are not required to provide access if you don't have

17 room in your facility to provide the access.

18 That is just inconsistent with the fundamental

19 premise of an essential facility. If you are a

20 monopolist, you obviously have the incentive to

21 undersize and not build enough capacity.

22 So the fact you are actually operating at

23 capacity and don't have room to fit in access by anybody

24 else may actually be a signal that you are engaged in

25 exploiting your monopoly position.

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1 So it shouldn't be a reason -- you can say the

2 essential facilities doctrine is silly because all it

3 does is identify circumstances where you have to replace

4 antitrust with regulation.

5 But at least if that's your theory, you don't

6 want to say that you are going to ignore the problem if

7 it turns out that the monopolist is in fact a monopolist

8 and doing what he is not supposed to do.

9 Finally, a point that has been touched on

10 before, the idea of intellectual property and mandatory

11 licensing of intellectual property as a remedy.

12 If your inability to duplicate is because of a

13 law that says that nobody else has the legal right to

14 make, use or sell some product or do something else,

15 then you have an inherent tension between the reward

16 structure set up by the intellectual property law and

17 the idea of antitrust intervention.

18 That is another real complicated problem. So if

19 you want to try and access remedy, here are some of the

20 costs and complications.

21 First of all, we already heard how complicated

22 it is to engage in access pricing. These are all the

23 familiar problems of traditional public utility-style

24 regulation, local distribution monopolies, gas,

25 electricity, what have you.

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1 Another issue that I think tends to be ignored

2 is evasion possibilities. It is very easy to discuss

3 monopoly pricing in your premise for intervention and to

4 slip into an assumption that if you can do something

5 about monopoly pricing, that will enhance the

6 performance of the essential facility that you have.

7 But, in fact, anybody who has dealt with an

8 insurance company or bought a car or actually bought

9 anything more complicated than a toothpick realizes that

10 there are zillions of dimensions to any commercial

11 transaction. There is credit terms, there is delivery,

12 there is service, repair, do you get a case with that

13 instrument.

14 If you have monopoly problem, you have to have

15 some way of forcing, compelling the monopolist to go out

16 beyond the area of profit maximization in every

17 dimension, not just price and output but quality and

18 service and innovation and all that other stuff.

19 So these regulatory problems tend to be severely

20 underestimated.

21 I have listed some other disadvantages here of

22 access remedies. You sacrifice economies of

23 integration, as is made obvious by some of our decrees

24 over the years, the Paramount decree separating

25 exhibition from production of motion pictures.

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1 You had it in the AT&T case. It comes up from

2 time to time. The institutional problems of enforcement

3 through the consent decree process I think are fairly

4 well recognized.

5 The Paramount decree, as a matter of fact, being

6 perhaps a good example, because after a course of

7 enforcement over many years, you had a situation where

8 ultimately the Assistant Attorney General had to walk

9 away from a remedy that had been adopted by the decree

10 enforcement staff, which looked to the new folks like

11 authorizing the so-called splits, the exhibition side,

12 buyers cartel.

13 So arguably you had a decree enforcement staff

14 being co-opted by the industry that they were regulating

15 and coming up with a solution that was seriously

16 anticompetitive.

17 Finally, here is a huge problem that is very

18 difficult to get a grip on but nevertheless we are

19 confident that it exists, that if you encourage

20 disadvantaged firms, usually a disadvantaged competitor,

21 to believe there is an antitrust remedy in an essential

22 facility-type context, you are encouraging them to come

23 to the agency, to invest their resources in legal

24 maneuvering rather than investing those resources in

25 innovation that would destroy the monopoly. And that's

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1a bad thing.

2 Nevertheless, as this slide is headed, once you

3 are in this space where you can't assume that there is a

4 competitive structure that will automatically achieve

5 optimal performance, you have to assess the possibility

6 that some kind of intervention and some kind of access

7 remedy, despite all the costs and burdens that I just

8 enumerated, might actually be better than doing nothing

9 or might be better than applying some other regulatory

10 remedy.

11 And some of the items that are sometimes

12 relevant to deciding whether you want to dive off that

13 cliff or not, if you are going to establish conditions,

14 prices and conditions of access, is there a regulatory

15 mechanism that is already extant that could take care of

16 that issue.

17 What most people regard as the seminal essential

18 facilities case -- it is arguable, but let's accept that

19 for right now -- U.S. versus Terminal Railroad, that's

20 where the J. Gould Railroads owned all the bridges and

21 terminals in St. Louis, and they wouldn't let the

22 western railroads use those facilities on equivalent

23 terms.

24 When the Supreme Court basically found liability

25 or instructed the lower court to find liability for the

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1 Gould coalition's behavior, they sent the matter back to

2 the District Court and said fashion a decree that lets

3 the western railroads use these facilities more or less

4 on the same terms and conditions as the railroads that

5 are part of the Gould group, "but, by the way, don't

6 mess around with the ICC's ratemaking authority, you

7 can't make rates."

8 So they had the ICC there they thought they

9 could rely on to solve any specific ratemaking issues.

10 We have already heard reference to the FCC's

11 ability to adjust the access charges and in effect work

12 in cooperation with the federal District Court in the

13 Bell system decree.

14 Then you have this fascinating case of Otter

15 Tail Power, where the Supreme Court in a 4-3 decision,

16 where the dissent was actually right, but nevertheless,

17 it was a 4-3 decision where the Supreme Court

18 essentially said that on remand, the parties would have

19 to work out an access arrangement.

20 And in this particular instance, the Federal

21 Power Commission would have been the logical regulator.

22 But at that time it did not have the power to regulate

23 the access terms and conditions that the Supreme Court

24 was looking to have enforced.

25 I don't know where that left people practically.

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1 I doubt that that decree did much good. But in any

2 event, since we have gone from the Federal Power

3 Commission to the Federal Energy Regulatory Commission,

4 they do now have the power to order and regulate access.

5 But, of course, things have been scrambled in

6 that industry by some fairly aggressive deregulation.

7 There are some cases which are decided more on

8 Section 1 grounds, Gamco and the Associated Press case.

9 I will not spend any time on them. Basically,

10 it is an organization where they are granting access to

11 a bunch of different competitors.

12 So if one of them is wrongfully excluded, you

13 can just order access on the same terms and conditions

14 that are available to everybody else. That makes your

15 information and regulation costs a lot lower.

16 And, finally, the question of dynamic

17 efficiencies, I think that Bob has really touched on

18 this very profound question about whether the AT&T

19 decree really has anything to do with the fact that long

20 distance rates have come down and now we have all of

21 these different forms of communication.

22 I think it is arguable -- I don't have the time

23 or energy to argue it right now. But I think it is

24 arguable that a lot of these innovations might not ever

25 have occurred without the divestiture decree.

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1 AT&T had essentially invented mobile telephony

2 or at least developed it to the point where the FCC was

3 beginning to grant licenses.

4 A tremendous fraction of the immense

5 communications and data processing research in the

6 United States took place in an AT&T subsidiary known as

7 Bell Labs.

8 That was brought to an end by the decree.

9 Really I think it may turn out that the strongest case

10 for connecting the AT&T decree to the subsequent

11 explosion in competition in the communication sector is

12 more an institutional question of unbinding parts of the

13 system that were capable of innovating, although I'm not

14 sure even Bill Baxter would have identified that as a

15 specific objective of his.

16 It is difficult to draw general conclusions from

17 this history of Section 2 remedies, but let me try a

18 few.

19 The need for speed. It is often remarked how

20 long structural cases take and how the industry and the

21 technology tend to change in a manner that by the time

22 you are done, everything you thought when you started

23 the case is irrelevant.

24 Well, Exhibit A in that would be United States

25 versus IBM, where it started as a relatively restricted

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1 predatory pricing case, actually, but it soon expanded.

2 It absorbed all these issues about foreign peripherals

3 being attached to the IBM system.

4 The theory shifted. And, of course, if you look

5 at the specific procedural approach that was taken in

6 the Federal District Court up in New York, where the

7 case was pending, sort of put like an eight- to 10-year

8 bump in the schedule for the trial, more or less

9 guaranteed disaster.

10 If you want to have some fun, go back and look

11 at the original 1969 IBM complaint. It sounds so

12 antique.

13 In an effort to make IBM sound like this

14 thundering, huge, unstoppable behemoth, it says its

15 revenues for general purpose computer systems went from

16 600 million to $3 billion, as if that was something that

17 would scare us. But nowadays, $3 billion would probably

18 not be a 1 percent market share in that particular

19 industry.

20 U.S. v. Microsoft, I am the mid-Atlantic

21 distributor of Ann Bingaman's success sheet. I really

22 love what she did in the processor license case.

23 She took it -- I think from the day that the

24 division actually opened the investigation to the day

25 that decree was entered was just about exactly one year.

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1 If you can pick a targeted practice and remedy

2 it on that time schedule, it almost doesn't matter

3 whether it was good or bad, because you look at it on a

4 time schedule where things haven't changed that much and

5 you can actually make a judgment about what you are

6 doing, whether you are doing something that is helpful

7 or the opposite.

8 If it had taken 13 years, it would have been

9 ridiculous. But this is an approach that provided a lot

10 of flexibility and tended to minimize error costs.

11 The broader phase of Microsoft that we have

12 heard spoken about mostly this morning it seems to me

13 extended over a much longer time period.

14 There are a lot of shifts in remedies. You had

15 a change in administration, where certainly the emphasis

16 shifted, and that sort of fits back into the old IBM

17 pattern that you can't -- I believe I heard it said at

18 one point that we were going to go into the liability

19 determination and that phase of Microsoft without any

20 clear idea of what the remedy was going to be.

21 Of course, there were some fairly notorious

22 developments on that subject, both in the District Court

23 and in the Court of Appeals, the bit about, well, we won

24 World War II, so we get to determine how the Japanese

25 have to behave.

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1 And then U.S. versus Western Electric, which was

2 sort of the middle and the end phase of the AT&T

3 litigation. Back in the 1910s, it was thought that AT&T

4 had a monopoly of long distance which it was using to

5 snuff out competition of local telecommunications.

6 In the 1950s incarnation of U.S. versus Western

7 Electric, the theory was that AT&T had a monopoly of

8 telecommunications equipment that was being used to

9 monopolize long lines and local.

10 And then finally in the 1974, the final phase of

11 the case, the theory was that it was the local

12 monopolies that were used to monopolize the other part.

13 So this is a little bit gratuitous. It is

14 perfectly possible that over that horrendous stretch of

15 time, all three theories might have been true when they

16 were asserted. Yet, I think it is only in the final

17 phase that you have a good match between the theory of

18 liability and the remedy that was proposed.

19 I think that's what made -- to the extent it

20 worked, I think that's what made the U.S. versus AT&T

21 decree work.

22 Institutional suitability of different elements

23 of our society, of our political and legal system to

24 manage relief in these large cases, we all know that the

25 legislature can only intervene selectively and to set

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1broad principles.

2 It is very difficult when you do that to try to

3 achieve any kind of economic policy coherence. It only

4 happens rarely, for example, in the Airline Deregulation

5 Act, when essentially Congress said forget economic

6 regulation, we are going back to antitrust.

7 We have sort of the opposite in communications

8 regulation, all kinds of interventions for all kinds of

9 conflicting and indistinct policy purposes.

10 Administrative regulation itself tends to

11 reflect that policy and coherence that often

12 characterize legislation.

13 The executive is a little bit more coherent. At

14 least you have the President theoretically in charge of

15 what the Assistant Attorney General does, and the

16 Assistant Attorney General at least in theory is in

17 charge of what the trial staff does.

18 It tends to be better directed and more

19 coherent, but it is not immune from distractions and

20 from other agendas, as I think is perhaps illustrated by

21 some of the side-winding that has occurred in almost

22 every major Section 2 structural case since World War

23 II.

24 Finally, the judicial role. Of course, the

25 Federal District Court is very much in command of what

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1happens in its own courtroom.

2 Griffin Bell loves to tell the story he was

3 appointed directly to the Fifth Circuit Court of

4 Appeals, and at his investiture the chief judge said

5 "well, Griffin, you made a hell of a mistake, you know

6 up on this court you have to get at least one other guy

7 to agree with you before you can do anything, but in

8 Federal District Court, you are pretty much in command

9 of the courtroom."

10 I think Judge Green's phase of United States

11 versus AT&T illustrates certainly the best of what can

12 happen when he gets ahold of a good structural Section 2

13 case, and maybe in the later phases he might also have

14 illustrated perhaps not the worst of what can happen but

15 some of the disadvantages, that even judges are not

16 immune from the kind of bunker mentality that sets in

17 after you have witnessed these two litigants going back

18 and forth and perhaps have some views of your own, based

19 on the evidence, of course, but nevertheless we do have

20 examples.

21 Judge Wiezanski in United Shoe Machinery

22 Corporation or -- I have forgot the name of the judge in

23 the Paramount decree, and there is also some evidence of

24 that from the New Jersey court, where the same judge had

25 responsibility for administering United States versus

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1Western Electric for '56 to '82 -- anyway, 26 years.

2 You can do the subtraction.

3 In conclusion, if I had to derive a number of

4 crisp, identifiable principles from our hundred-plus

5 years of experience in these kinds of cases, to have a

6 good one, you have to have a legally sound theory for

7 attacking a monopoly and you have to have a good

8 economic analysis that convinces you that the legal

9 theory deserves to be applied.

10 And for our purposes here today, most

11 importantly, you have to be able to identify an

12 effective remedy that can actually be carried out

13 without imposing so many costs on various parts of the

14 system that it is not worth the trip.

15 And if you wanted to identify a good candidate

16 for a structural case, I think given all of these

17 difficulties, you need, number one -- this is something

18 that is only useful for important problems.

19 The administrative costs and complexities, the

20 type of focus, long-term focus on these kinds of issues

21 that is necessary to bring them to successful conclusion

22 means that you don't mess around with lemon carts even

23 if they are monopolies.

24 You are looking for very long-term performance

25 issues and very big and important industries.

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1Finally, to return to the point I was trying to

2 make with the initial presentation about access remedies

3 and essential facilities, you have to be intellectually

4 honest about what you are balancing.

5 You can try some limited remedies. You can look

6 at the possibility of access remedies and more

7 regulatory approaches, either under the rubric of an

8 antitrust case or perhaps you ought to be lobbying a

9 federal agency or a state agency, for that matter, to

10 impose the regulatory alternative, and you also need to

11 ask yourself the question whether given the costs and

12 benefits of all the alternatives, maybe the best thing

13 to do is nothing.

14 So thank you.

15 (Applause.)

16 MS. KURSH: We will take a 10-minute break and

17 then start off with the questions. Thank you.

18 (Recess.)

19 MS. KURSH: Back on the record. Thank you

20 everyone.

21 The way we are going to proceed for the

22 remainder of our time this morning is I will ask each of

23 our panelists in order, starting with Dave, to take just

24 a few minutes to respond to anything they heard from

25 anyone else.

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1 For example, Dave, if you want to respond to Per

2 or anyone else on the panel, you should feel free.

3 And then we will proceed with our moderated

4 question session.

5 The way we have done this in the past, for those

6 of you who haven't been here before, is the agency will

7 be putting up on the slide some propositions. These are

8 not necessarily propositions that the agencies are

9 endorsing, but they are just a way for us to begin the

10 questioning as sort of a springboard for the discussion.

11 So, Dave, why don't we start with you.

12 MR. HEINER: I hate to disappoint, Gail. But I

13 don't think I have any comments to add to what the

14 others said.

15 MS. KURSH: All right, fine. Then we will -- go

16 ahead, Bob.

17 MR. CRANDALL: I'm more loquacious than Dave.

18 A couple things. First, we mentioned this in a

19 conference call. Tad raises the essential facilities

20 doctrine.

21 The problem with the essential facilities is

22 someone has to set the price. I can't imagine in the

23 modern world anything, other than maybe water utilities

24 or gas utilities, in which it would be a very easy task

25 to set the prices efficiently for access to a network

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1 industry.

2 The difficulty in figuring out costs, whether

3 they are forward looking or backward looking costs, of

4 dealing with the problem of the real options for not

5 investing when technology is changing, the stranded cost

6 problem, essentially, are just enormous, not to mention

7 the fact that once you begin to have a regulated

8 approach to essential facilities, you then create

9 enormous tensions in modernizing those essential

10 facilities.

11 Once you have a set of clients using the network

12 of the local telephone companies in the United States or

13 in Europe, then any attempt by the telephone company to

14 change its network technology is going to be opposed by

15 some of those people who are using the current

16 technology.

17 So you create enormous disincentives, both from

18 the pricing and because of the argument over technology

19 for deploying new technologies.

20 So it strikes me that there is a very strong

21 presumption against the essential facilities doctrine in

22 technologically progressive industries.

23 Finally, Tad mentions the fact that there was

24 probably some benefit to breaking up AT&T because they

25 tended to control the technologies through Bell Labs and

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1 everything.

2 There is something to that. Interestingly

3 enough, a lot of the students of telecom think one of

4 the great tragedies of breaking up AT&T was the

5 destroying of Bell Laboratories.

6 But at the bottom, this was a regulatory

7 problem. Had the FCC not engaged in activities to

8 foreclose entry, through the licensing spectrum or

9 through its long distance policy, remember the FCC

10 actually fought in court to try to prevent MCI from

11 offering switched long distance service.

12 The only reason they allowed MCI and the others

13 and in the so-called special access carriers was to get

14 information on what the costs are from another source so

15 they could regulate AT&T a little more efficiently.

16 So the problem at the bottom was the fact of a

17 regulatory regime which was interested in the long run

18 perpetuation of itself. That's a problem which also

19 could exist as we heard in terms of continuing to

20 supervise decrees and why sunset is a good item on

21 decrees.

22 MS. KURSH: Thank you.

23 Per.

24 MR. HELLSTROM: Perhaps a brief comment to

25 something that Dave said.

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1 He said that the aim for competition authority

2 should be to create competitive opportunities rather

3 than engineer a particular market outcome.

4 I just would like to say that I think we fully

5 support that. I think the European Commission does not

6 aim to engineer market outcomes. But, of course, we may

7 disagree on what it actually means to have real

8 competitive opportunities, and there may be some

9 divergence.

10 MS. KURSH: Actually, if I could follow-up on

11 that a little bit.

12 Dave, one of the questions I had for you on that

13 point that you made, would you say that's also true in a

14 case where the theory of liability was based on the

15 monopoly resulting from the exclusionary conduct?

16 MR. HEINER: Well, I think I was mainly focused

17 on the experience Microsoft has had to date, which was a

18 case where there was not an acquisition of monopoly

19 cases.

20 Is that what your question is going to?

21 MS. KURSH: Yes.

22 MR. HEINER: My comment was focused on the

23 monopoly maintenance situation. In that case, it seems

24 appropriate to try to create opportunities but not

25 necessarily go so far as to try to have a particular

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1 market outcome in terms of share.

2 MS. KURSH: Thank you.

3 Tad?

4 MR. LIPSKY: Just maybe to respond briefly to

5 Bob's remark.

6 There is no question that the occasions for

7 invocation of the essential facility doctrine are

8 becoming more rare because of a lot of industries like

9 electric power.

10 As I suggested, the public policy focus has been

11 more on maximizing the areas of the industry that can be

12 deregulated or where market-based solutions can be

13 implemented.

14 So we no longer have a regulated utility kind of

15 as our mental model for the way that that industry

16 works. But it shouldn't be excluded that there are

17 areas that would be candidates for the application of

18 that doctrine.

19 Again, I don't argue with the fact that the

20 costs and complexities of administering an access

21 pricing program can be just enormous. That could be a

22 very good reason for just saying "tough, here is an

23 essential facility."

24 And if Congress isn't willing to adopt a

25 tailored regulatory regime to address it, probably we

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1 are going to do more harm than good by attacking it with

2 antitrust remedies.

3 I think you will actually find at least more

4 than a hint of that style of reasoning in this new line

5 I guess what I would call soft immunity cases in which I

6 would put both Town of Concord versus Boston Edison and

7 also arguably the Trinko case, where you have an

8 antitrust remedy that is sought to be overlaid on a

9 regulatory background and where the court says the

10 standard for immunity for federal antitrust is a very

11 high one.

12 It is the plain repugnancy standard, which was a

13 term first used in Terminal Railroad, that we are not

14 going to rule, we are going to reject the argument for

15 immunity, but nevertheless, we refuse to recognize the

16 validity of the claim.

17 That's why I call it kind of soft immunity. It

18 is a legal ruling that the claim will not go forward.

19 But it is not under the traditional rubric of either

20 express or implied immunity from antitrust prosecution.

21 MS. KURSH: Thanks.

22 Tad, let me follow up a little bit on that. You

23 had said -- and I think that's what you were addressing

24 right now -- that there may be times when the best thing

25 is to do nothing.

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1 Can you set out what are the guideposts for

2 those situations? What are you looking for? When do

3 you make that determination that the best thing is to do

4 nothing?

5 MR. LIPSKY: It is very hard to define in the

6 abstract other than to say you have to look at all the

7 costs and benefits in the particular industry.

8 It is not something that lends itself really to

9 an ideological type of approach.

10 For example, there was a phase of the AT&T case

11 when, and this was the rationale that the entry of the

12 decree was based on and much of the dialogue or debate

13 in the early implementation of the decree, including

14 decisions made on applications for waiver of the line of

15 business restrictions and so forth.

16 You used to constantly hear the phrase that the

17 RBOCs had the incentive and ability to fill in the

18 blank, but basically to goldplate, to enter at less than

19 remunerative prices, to do all kinds of things to

20 exclude competitors and so on and so forth and,

21 therefore, these incentives and the ability to restrict

22 competition in the market they proposed to enter either

23 that they be kept out or that it be conditioned.

24 I think that argument is logically sound. But

25 if all you can say for the arguments is that it is

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1 logically sound, it seems to me you have only taken like

2 the first step, because you had to worry about things

3 like if we exclude the RBOCs, what is going to happen to

4 innovation, what is going to happen to competition in

5 this line of business, who is going to administer the

6 restriction, who is going to decide whether a Humvee is

7 a car if they are applying to enter the car market and

8 they produce a Humvee.

9 All those hideous administrative chores are

10 costly. They encourage strategic behavior. They have

11 all the costs and also some of the benefits that I have

12 identified.

13 It is really the weighing of the costs and

14 benefits which is the critical step. It is not simply

15 having a logical argument as to why a remedy of a

16 certain type ought to address a certain type of

17 anticompetitive behavior. It is very extremely fact

18 specific.

19 MS. KURSH: With that, let's start with our

20 first proposition, slide number 2. I will read it for

21 the record.

22 "Relief should 'terminate the illegal monopoly,

23 deny to the defendant the fruits of its statutory

24 violation, and ensure that there remain no practices

25 likely to result in monopolization in the future.'"

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1 It is a quote from United Shoe Machinery.

2 First, I will start with the basic question whether

3 everyone on the panel agrees that these are appropriate

4 remedial goals in a Section 2 case.

5 MR. HEINER: I will comment briefly.

6 We had occasion to look at this in connection

7 with the Section 2 case against Microsoft, where this

8 particular quote which was brought out.

9 Our understanding of its meaning was that the

10 "terminate the illegal monopoly" part of that would

11 apply in a monopoly acquisition case as opposed to a

12 monopoly maintenance case.

13 Understood that way, it seems to make sense.

14 The next clause, "deny to the defendant the

15 fruits of its statutory violation," I think one has to

16 then look at the causation issue, what were the fruits

17 of the violation.

18 And if as I was saying during my 15 minutes, if

19 the causation is relatively weak, there may be lesser

20 occasion to try to effect change.

21 And the last clause seems to be relatively

22 noncontroversial, I would think.

23 MS. KURSH: Does anyone have a different view or

24 is there a general agreement?

25 MR. CRANDALL: I think it is incredibly

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1 optimistic that the last clause could be achieved by any

2 decree, particularly given the difficulty of even

3 understanding what caused the monopoly to start with.

4 But in high-tech industries, given the rapid

5 rate of change, imagine I guess -- we haven't raised --

6 have you raised MediaPlayer yet?

7 MR. HEINER: I briefly referenced it.

8 MR. CRANDALL: The idea that somehow breaking

9 off MediaPlayer -- that's right, you talked about

10 selling the one without Realplayer.

11 The idea that that somehow was necessary to

12 prevent Steve Jobs from getting into the business of

13 distributing music seems rather naive now in retrospect.

14 I think things change so rapidly you can't

15 possibly satisfy that last clause in a lot of industry.

16 MS. KURSH: But is it an appropriate goal to be

17 reaching for that?

18 MR. CRANDALL: To dream the impossible dream? I

19 suppose.

20 MS. KURSH: I will take that.

21 MR. HEINER: Let me offer two qualifications.

22 The word "ensure" is obviously a very strong word.

23 Whether you could really ensure anything in this area is

24 kind of a question mark, I think.

25 And as I read the quote -- and it may or may not

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1 be what the court had intended -- but I would read it as

2 ensure that there remain no practices likely to result

3 in unlawful monopolization.

4 There may be natural economic forces and there

5 may be someone built a better mousetrap leading to a

6 very high market share. That is something I think we

7 don't try to remedy through antitrust.

8 MS. KURSH: If you were to tweak the quote

9 somewhat, in a monopoly maintenance case would you agree

10 that determining the unlawful exclusionary conduct would

11 also be an appropriate goal?

12 MR. HEINER: I would think so.

13 MS. KURSH: Let me throw out some other

14 possibilities as goals and see what people think about

15 them.

16 Do we get agreement that punishment is not an

17 appropriate equitable goal for the enforcement agencies

18 in the United States anyway?

19 MR. HEINER: You will get agreement from Me.

20 MR. CRANDALL: You mean in a civil sense or a

21 criminal sense?

22 MS. KURSH: Either one.

23 MR. CRANDALL: To the extent you invoke as one

24 of the goals of deterrence, I suppose you can justify

25 doing that.

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1 I can't imagine you could do it for Section 2.

2 That is one of the arguments for criminal penalties or

3 treble damages in section 1. Of course, we have no

4 studies that show whether it works, it deters collusion

5 or not.

6 MS. KURSH: Let me follow up on that for a

7 moment.

8 You used the word deterrents. Do you think it

9 is an appropriate goal of a Section 2 remedy to try to

10 deter others from engaging in Section 2 violations?

11 MR. CRANDALL: Once again, I think it is

12 impossible to imagine that it would work. I can't

13 imagine that somebody engaged in some new industry where

14 he gains 80, 90 percent market share is going to be

15 deterred unless there are criminal penalties associated

16 or very large financial penalties associated with a

17 certain market share, which I would hope would never

18 take place.

19 I can't imagine this is sufficiently certain

20 that it could work as a deterrent in a Section 2 case.

21 MS. KURSH: Tad, do you have any views on

22 whether punishment or deterrence of others are

23 appropriate goals?

24 MR. LIPSKY: I don't think punishment is

25 something that comes in to most questions of

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1 monopolizing conduct.

2 You can imagine episodes that might occur within

3 the context of a Section 2 litigation where other

4 statutes are brought to bear that do properly have

5 punishment and deterrence elements, thinking of things

6 like destruction of evidence or intimidation of

7 witnesses or crimes collateral to any judicial

8 proceeding or government prosecution.

9 But I think there was a case called Empire Gas

10 which was brought as a criminal Section 2 case where it

11 was probably the only Section 2 claim that also included

12 a federal firearms count.

13 I wish I could remember the specific

14 circumstances. Probably somebody riding around the

15 Midwest countryside using a 30 ought 6 to shoot at his

16 competitors' propane tanks or something.

17 AUDIENCE MEMBER: Dynamite.

18 MR. LIPSKY: Dynamite, thank you. It is so

19 helpful to have Greg here in the audience. He really

20 knows his firearms.

21 MS. KURSH: I think I heard at least two

22 panelists, maybe more, maybe Dave and Per mention about

23 helping disadvantaged rivals.

24 What are the views of the panelists on whether

25 that is an appropriate Section 2 remedy, remedial goal?

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1 MR. HELLSTROM: I think I may have mentioned in

2 that I quoted something stated by Mr. Charles A. James.

3 MS. KURSH: What is your view on it, Per? Do

4 you think that in the EU helping disadvantaged rivals is

5 an appropriate goal in a Section 2 case -- not Section

6 2.

7 MR. HELLSTROM: I think if you have a

8 foreclosure abuse that forecloses competition, and that

9 is presumably also some competitors, indeed, a remedy

10 would probably favor some of the rivals in that it would

11 allow if they had been unlawfully foreclosed, allow them

12 to enter or stay in the market, yes. That would be

13 favorable to them.

14 MR. CRANDALL: To the economist, it sounds a

15 little bit like the infant industries argument. And

16 politically it strikes me as a bad general idea because

17 it risks creating a set of clients from whom you can't

18 disengage because they require the favorable environment

19 in order to survive.

20 MS. KURSH: Dave, do you see a distinction

21 between opening up the opportunities for rivals and

22 helping disadvantaged rivals?

23 MR. HEINER: The phrase "helping disadvantaged

24 rivals" could be subject to a range of interpretations,

25 I suppose.

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1 If it means creating opportunities, I think

2 that's exactly what we need to do.

3 One could imagine a fuller interpretation of

4 that phrase that could mean take the assets of the

5 defendant and transfer them to the disadvantaged rival.

6 That would seem to go too far.

7 I think that phrase which Mr. James used

8 possibly could be subject to being misread.

9 MS. KURSH: And, Per, if I could ask you to just

10 comment. Do you see the remedial goals different under

11 European law than in the United States in this area?

12 MR. HELLSTROM: I'm not too familiar with

13 remedial goals in the United States. It is hard for me

14 to comment.

15 MS. KURSH: Do you see them as different than

16 the ones in this proposition?

17 MR. HELLSTROM: Clearly, I would agree with Dave

18 that it is not really the purpose to terminate the

19 illegal monopoly insofar as our Article 82 relates to

20 abusive behaviors.

21 It is more about terminating the abusive

22 behavior and not the dominant position as such.

23 So I would agree with that statement.

24 MS. KURSH: If we can go to slide number 3 for a

25 moment.

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1 I will read this quickly. I think someone

2 already commented on it.

3 "The fruits of a violation must be identified

4 before they may be denied."

5 Of course, that is from Microsoft.

6 In essence, that's saying that one -- we talked

7 about earlier one goal is to deny the fruits of a

8 violation to the defendant.

9 How do you determine what the fruits of a

10 violation are? Does anyone have some thoughts on how

11 you should go about making that determination?

12 MR. HEINER: That is something that is supposed

13 to come out during liability phase, I would think.

14 The next sentence from this decision goes on to

15 say what the fruits were in the Microsoft case. And

16 what they said was that Microsoft had inhibited nascent

17 competitive threats.

18 So the logical remedy the court explained was to

19 remove those inhibitions on a going forward basis, and

20 that's what was done in the consent decree.

21 MS. KURSH: Tad or Bob, do either one of you

22 have some thoughts about general principles that should

23 be applied when deciding what fruits flow from a

24 particular violation or is it just a very fact-specific

25 determination?

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1 MR. CRANDALL: I don't like the term "fruits."

2 It strikes me that this suggests that the real issue

3 here is the monopoly profits of the defendant.

4 I can imagine a situation in which Microsoft had

5 reaped even greater returns from its operating system

6 position, monopoly, and being a perfectly discriminating

7 monopolist, which an economist might say there is no

8 grounds for intervention here because the output is at

9 an optimal level.

10 This is a battle that has gone on for years. It

11 is not so much that the greedy monopolist earned

12 monopoly profits but rather that profits and outputs are

13 distorted.

14 I would prefer it to say the effects of a

15 violation must be identified, the effects on prices and

16 output, rather than fruits.

17 MS. KURSH: Tad?

18 MR. LIPSKY: We have this system in the United

19 States where you have the government which never seeks

20 damages or relief that will redown to the government's

21 benefit as a purchaser.

22 So they don't care about fruits in general,

23 except in the most kind of Elysian and abstract sense

24 that any remedial system like antitrust is supposed to

25 work, you did something wrong, you have to pay back.

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1 Then, of course, we have the fantastic system

2 with these wonderful talk about fruits, subsidies to

3 private action. You have mandatory treble damages and

4 payment of attorney fees and notice pleading and

5 discovery and joint and several liability.

6 It just goes on and on and on so that you have

7 this entire population which stretches 12 stories high

8 from here all the way up to Connecticut Avenue of people

9 working to either get or defend people from having to

10 pay these spectacular sums which are surely in excess of

11 anything that could reasonably be described as fruits of

12 the violation.

13 It is almost like the system is designed so that

14 we will never seek an intelligent answer to that

15 question.

16 It does have a meaning in the sense that it was

17 referred to in the first part of the previous quote,

18 which is if you have a case where you think the monopoly

19 is attributable to a certain type of behavior, then you

20 have a real problem. Then you have to decide whether to

21 actually have a structural remedy where you break

22 something up.

23 Beyond that meaning of fruits, I think we have a

24 problem implementing that in our system.

25 MS. KURSH: All right. Can we turn to slide 5.

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1 Jumping ahead a little bit to keep things

2 moving. We have talked about this a little. Let's get

3 into it in more detail.

4 A famous quote from Trinko, "No court should

5 impose a duty to deal that it cannot explain or

6 adequately and reasonably supervise. The problem should

7 be deemed irremediable by antitrust law when compulsory

8 access requires the court to assume the day-to-day

9 controls characteristic of a regulatory agency."

10 We have had some discussion about this already,

11 but I think it is worth a little more.

12 In Trinko, the Court specifically was addressing

13 refusals to deal.

14 Tad, I would start with you. What if any

15 refusals to deal do you believe are irremediable?

16 MR. LIPSKY: Well, I don't think any refusal to

17 deal is irremediable.

18 The question is whether it is irremediable at a

19 tolerable cost. I think that's what I was trying to

20 suggest.

21 If Judge Green had not had the FCC to fall back

22 on for the implementation of the access charge element

23 of the MFJ remedy, I think he might well have concluded

24 that it was an impossible task, that as meritorious as

25 the division's case was, it was simply not an acceptable

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1 judicial function for him to be involved in.

2 I wonder if he could have just said in the

3 Tunney Act proceeding this is a violation of Article 3,

4 courts don't do this.

5 It is almost what is suggested in this quotation

6 from Trinko, and I suppose that in the right case, he

7 probably would have been upheld in that.

8 MS. KURSH: Are there other types of cases,

9 let's say predatory pricing or other types of refusal to

10 deal cases where you think the cost of a remedy are

11 going to be so high or so difficult to effectively

12 monitor and enforce that the agency should not be

13 bringing the cases?

14 Anyone want to comment on that?

15 MR. CRANDALL: The Robinson-Patman Act. Any

16 reduction in price is unlawful.

17 MS. KURSH: Do you think that even if the cost

18 of a conduct decree is very high that there is value in

19 bringing the case with a simple "sin no more" kind of

20 judgment, the violation is enjoined?

21 MR. LIPSKY: If there ever is a good predatory

22 pricing case brought, I think that would be a good

23 example.

24 The IBM case started that way. It started

25 essentially as a predatory pricing case involving a

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1 Model 90 and very advanced for them, very advanced

2 computers that control data -- they were beating IBM to

3 the prestige customers like the MIT Labs and Lawrence

4 Berkeley and so forth.

5 So there was a valid predatory pricing claim

6 that could have been discussed back in 1969.

7 Unfortunately, things worked out so that that

8 aspect of the case was obscure.

9 But there would be an occasion to say all right,

10 let's have a big fine, let's have a big kind of remedial

11 punishment for engaging in blatant predatory pricing

12 behavior.

13 MS. KURSH: But for -- I'm sorry. Let me just

14 follow up on that.

15 In a government case, what do you see as the

16 appropriate relief in a predatory pricing case that you

17 believe should be brought?

18 MR. LIPSKY: I think arguably you could just

19 have some kind of fine or penalty. I'm not suggesting

20 that the remedy in a predatory pricing case would be

21 price regulation.

22 I think especially in a market like that, which

23 was extraordinarily dynamic and remains dynamic, I

24 wouldn't attempt to impose any kind of forward-looking

25 remedy.

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1 MS. KURSH: Dave?

2 MR. HEINER: I would just say generally I think

3 that a sin no more remedy, once the sin is identified,

4 will likely be more efficacious and easier to administer

5 than remedies in the form of thou shall do something.

6 Whenever you have a defendant creating something

7 new or doing something they haven't done before, I think

8 we are getting into more challenging areas and certainly

9 have seen that in various Microsoft remedies, I think.

10 MS. KURSH: If oversight, control, regulation is

11 unworkable or extremely costly, should that be a basis

12 for a structural remedy? Anyone? Any takers?

13 MR. CRANDALL: Not necessarily. It may well be

14 that -- as an economist, when I talk about cost, I'm

15 talking about the effect on output, not just the

16 administrative cost of carrying out the decree.

17 It may well be that the structural remedy

18 creates more economic cost than doing nothing.

19 So ruling out a behavioral decree and then

20 looking at a structural decree is okay, but that doesn't

21 mean to say necessarily you go with a structural decree.

22 MR. HEINER: It may well be also, I think, as I

23 was suggesting earlier, if it is so costly to administer

24 an access remedy, that may reflect in part the fact that

25 perhaps the underlying objective is too ambitious or

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1 there shouldn't really be liability in the first place.

2 MS. KURSH: I wanted to follow-up. Do people

3 agree with that, if there does not seem to be an

4 appropriate effective remedy, that suggests that maybe

5 there was not underlying liability to begin with?

6 Per, do you have a view on that?

7 MR. HELLSTROM: I have my doubts on that

8 approach. I think that puts the cart before the horse

9 in a sense.

10 I think one should carefully analyze the

11 behavior and try to establish whether there is an abuse.

12 As we said, there are various alternative

13 remedies. A simple cease and desist order could be an

14 appropriate remedy, together with a fine.

15 So I'm not sure if indeed there are such

16 situations.

17 MR. LIPSKY: I hesitate to make any absolute

18 statement about that. The theory is the theory and the

19 remedy is the remedy. You can imagine good theories and

20 bad remedies and vice versa.

21 MR. HEINER: My statement was not absolute

22 either. It was a maybe kind of statement.

23 Just to elaborate on it a little, the central

24 antitrust issue involving Microsoft over the past 10

25 years or so has been this question of building features

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1 into Windows and this second question involving

2 interoperability that has become quite prominent

3 recently.

4 I have really been struck by this tying issue,

5 as we have gone around the world literally talking to

6 enforcement agencies about it, that the agencies may

7 have a clear view on liability, but we don't seem to get

8 to a remedy that will be deemed satisfactory.

9 Again, this is why we really couldn't settle the

10 European Union case. The Commission had taken the view,

11 not unreasonably, that a settlement really ought to

12 address the issue on a going-forward basis for years to

13 come. It should not just address MediaPlayer

14 functionality.

15 So Commissioner Monti was looking for something

16 that we could really generalize. And, frankly, there

17 was nothing we could come up with.

18 It seems to me that the reason for that was that

19 anything you would propose, the remedy was worse than

20 the perceived harm. You would lose the benefits of

21 integration over time.

22 It is those benefits that also lead us back to

23 thinking, gee, should there be liability in the first

24 place.

25 And then we have the remedy which didn't come

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1 out of the settlement but was imposed and further drives

2 on the point that there shouldn't be any liability. We

3 will hear from the European court on that and see how it

4 comes out.

5 MS. KURSH: Do any of the panelists have a view

6 on what is appropriate equitable relief in a product

7 design case?

8 Are there limitations? Is there a template that

9 we should be following? No? Okay.

10 MR. CRANDALL: I don't know how you can

11 generalize that.

12 MR. DUCORE: I would like to follow up a little

13 on this point about irremediability, if there is such a

14 word.

15 And maybe I will be provocative here. Maybe I

16 should give the disclaimer that I should have given

17 before, that whatever I say are my own views and not the

18 views of the Commission or commissioner.

19 But from the perspective of an enforcement

20 agency, does anybody on the panel think, especially in

21 the context of the U.S. system, where you can have

22 follow-on private litigation -- that's all about money

23 generally.

24 Is there a value in an agency, enforcement

25 agency taking on perhaps a difficult, complex situation

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1 and establishing the point that what took place was a

2 Sherman 2 violation or a Section 5 violation and even if

3 it is not able to fashion a specific, effective going

4 forward conduct remedy, set the stage for the victims of

5 that conduct then coming forward with follow-on

6 litigation to get the damages that, after all, the

7 agency generally doesn't seek on its own?

8 MR. CRANDALL: I will offer a view on that.

9 I don't see the antitrust laws as being designed

10 to redistribute income.

11 The way you put it, you avoided one large class

12 of people, namely, the trial attorneys who are going to

13 benefit from that.

14 I don't see that there is an overwhelming social

15 benefit from doing that, and there have to be better

16 ways to redistribute income than doing it that way.

17 MR. LIPSKY: Given all of the incentives for

18 private litigation that exist under the U.S. system, I

19 would say that what you are proposing is kind of

20 dangerous, because it used to be that you have a

21 criminal case and there would or wouldn't be a trial and

22 there would be a plea, and sort of word would get out,

23 and at some point the private litigation, the class

24 actions would follow.

25 Nowadays, all you need is a press release saying

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1 that some agency somewhere in the world is investigating

2 some industry, and, kaboom, you have an MDL, even where

3 the press release says it is the European Commission

4 investigating, not even the United States that is

5 investigating.

6 Given this -- it just happens -- there used to

7 be just the criminal cases and then it went to all the

8 horizontal cases. Now it is even vertical cases, like

9 Dentsply.

10 You immediately get follow-on class actions the

11 minute something comes to light. The same with U.S.

12 Tobacco.

13 The whole litigation bar is sitting out there

14 like the Strategic Air Command on hairtrigger alert.

15 I think the necessity for the agencies to go

16 forward and establish liability, as you have described,

17 I think that's in many ways a dangerous approach.

18 Now, it is another thing to say should the

19 agencies be articulating and focusing on competition

20 problems. Absolutely. Usually, at least for the major

21 Section 2 cases, all of these cases arise in kind of a

22 broader policy context.

23 The AT&T case are years of debate about what to

24 do about this or that part of telecom, and there is a

25 White House Office of Telecommunications policy that was

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1 involved and the FCC was involved.

2 And the Division and the Commission should be

3 vigorously involved in those kinds of debates. And they

4 have investigative tools that are appropriate for

5 situations like that.

6 But on the narrow proposition if there is no

7 hope of an efficacious remedy should the agencies

8 nevertheless go forward and prosecute just to get the

9 determination on the record that this was bad, somehow

10 that rubs me very much the wrong way.

11 MR. DUCORE: What about to establish the points

12 of that so it might be easier to challenge the next

13 conduct that's similar earlier in the process, maybe at

14 a point where you could more easily follow up on an

15 efficacious remedy?

16 MR. CRANDALL: If? I don't understand.

17 MR. DUCORE: In other words, take on a hard

18 case, hoping to be able to design a good remedy but not

19 steering away from the case I will say simply because

20 you are not sure you can develop the remedy but

21 nevertheless if you establish liability, then setting

22 the stage so that if the next industry comes along and

23 does the same thing, you are better positioned perhaps

24 to challenge it more quickly and stop it before it

25 reaches a point where it is irremediable.

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1 MR. LIPSKY: I guess you could defend the United

2 States versus Robert Crandall on that case. But it is

3 not the same Bob Crandall. It is the former chairman of

4 American Airlines.

5 I think it is a good point in the context of

6 legal theory. U.S. versus Crandall is sort of the

7 perfect illustration of something that was conduct that

8 was debatably within the attempt defense. I think it

9 was brought as a civil case primarily for that reason.

10 It did have the result that the agency wanted,

11 which was to establish that this kind of inchoate offer

12 to collude would work as an attempt case where the

13 parties could collectively exercise monopoly power.

14 Of course, inchoate collusion, invitations to

15 collude has since become kind of an active prong of

16 antitrust under other statutes as well. I think it

17 served the intended purpose.

18 I think well-advised business people are told

19 that inchoate forms of collusion, offers to collude,

20 even though they may not meet the standards of Section 1

21 of the Sherman Act, are nevertheless very bad ideas.

22 In the Section 2 area, in the monopolization

23 conduct area, though, I wonder if there isn't enough

24 difference industry to industry and form of conduct to

25 form of conduct.

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1 It might be a relatively rare case where you

2 actually want to accomplish or where there is any

3 objective in trying to accomplish the plausibility.

4 Offering natural gas and gas water heaters as a

5 bundle might be more or less desirable in ways that

6 offering a computer operating system and a

7 Windows-compatible Internet browser are not. It could

8 go either way.

9 So I think you query what you really accomplish

10 in trying to establish a standard, given that a lot of

11 these cases occur in very dynamic industries.

12 MS. KURSH: Tad, on a somewhat different point,

13 I have a question for you.

14 In Aspen Skiing, the District Court had ordered

15 the parties to offer jointly a four-area coupon book, as

16 you might recall, similar to the one that Ski Co was

17 offering at another resort.

18 Do you have any view on whether this aspect of

19 the remedy in Aspen Skiing helped or hurt consumers and

20 when if ever forceing the only two competitors in a

21 market to collaborate is good for consumer welfare?

22 MR. LIPSKY: Well, Aspen is a funny little case,

23 because the market power issue was stipulated the wrong

24 way.

25 But if you can force yourself to imagine that

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1 the four ski slopes in Aspen, Colorado had a monopoly

2 anything, maybe you can picture a world in which all the

3 ski slopes in North America are owned by two companies,

4 and one owns 75 percent of them and the other owns 25

5 percent of them. So in the average ski resort, you

6 would have a situation like Aspen.

7 You could respectively argue that this is more

8 like the U.S. versus Associated Press or Gamco Warehouse

9 kind of situation.

10 Here is an efficient arrangement. The terms and

11 conditions have been set historically by the parties for

12 ordinary profit-maximizing reasons. And you could order

13 them to collaborate if you thought that the conduct

14 was -- that the larger competitor's conduct in cutting

15 off cooperation with the smaller competitor was an

16 attempt to maintain this monopoly.

17 There is a leak in that theory, though, and that

18 is in order to get its refusal to cooperate with I

19 forget which ski company was the evil monopolist and

20 which one was the gallant David challenging Goliath.

21 But the problem was the David ski company said

22 we will give you a voucher, we will give our customers a

23 voucher redeemable at the local bank in cash.

24 It was actually more remunerative for the

25 monopolist to accept that voucher than to allow people

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1 to use their credit cards, because they didn't even have

2 to pay the merchant fee, the clearance fee associated

3 with use of the credit card.

4 To me, as I say, if you can force yourself to

5 believe that it was a monopoly case, I think the whole

6 case could have been solved simply by enjoining that

7 act, that the defendant should have been required when a

8 customer of the other ski company came up and said

9 "here, I will give you this cash, this face value cash

10 cost-free voucher for your tickets," the defendant could

11 have been required to accept that and that would have

12 solved the whole problem.

13 Now, I think maybe the issue you were trying to

14 get at is the one lurking below the surface of

15 cooperation between competitors.

16 Of course, that is a huge problem and it is

17 alluded to in Trinko, of course. But Aspen Skiing

18 actually is a little bit different because of the

19 externality, the joint product of allowing customers to

20 use all the competitors.

21 That is actually a product that had independent

22 utility to customers in Aspen Skiing, which would not be

23 true.

24 You wouldn't buy a form of long distance service

25 just because it allowed you to make a call on MCI and on

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1 AT&T. That would make no sense.

2 It is in the AT&T-type situation, where there is

3 no utility in the use of multiple competitors, that you

4 have the much greater danger and no apparent benefit of

5 the forced collaboration.

6 MS. KURSH: In a refusal to deal with a rival

7 situation, how does the court, the agency establish the

8 terms in which the rivals have to deal?

9 MR. LIPSKY: That's, of course, what most of my

10 remarks were devoted to, what a terrible dilemma that

11 is.

12 The presence of a regulatory agency helps, query

13 whether a court can ever do it absent the Associated

14 Press/Gamco Warehouse kind of situation.

15 MR. CRANDALL: I would demur on that.

16 My discussion of this with the regulatory agency

17 in many cases can't come close to getting it right. The

18 fact they have more resources to throw at it doesn't

19 suggest they will get the prices right.

20 It may be something for courts to avoid. It

21 doesn't suggest a regulatory solution necessarily.

22 MR. LIPSKY: Bob, do you allow the intellectual

23 possibility that there could be a case where as

24 imperfect as the regulatory solution might be, with all

25 the costs and benefits considered, it might be better to

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1 regulate rather than if your alternative is to do

2 nothing?

3 MR. CRANDALL: I suggest something like water

4 distribution or gas distribution, something where the

5 technology is extremely simple and not changing very

6 much. That's a possibility.

7 Once you get beyond that, I think it is

8 problematic.

9 MS. KURSH: Thank you very much.

10 Dan, do you have something?

11 MR. DUCORE: One question to try to wrap that

12 up.

13 The FTC and DOJ have slightly different

14 functions. We are not always in front of a judge.

15 I guess the question for a panel is whether they

16 see a value in whether you call it an investigation or

17 administrative litigation that leads to some report that

18 identifies the issue and sort of tees it up that a

19 court-type remedy doesn't seem workable here, Congress

20 should step in and deal with it in some way?

21 MR. CRANDALL: You are suggesting just an

22 investigation, an inquiry, but not necessarily

23 litigation?

24 MR. DUCORE: If the concern is that we are not

25 equipped to write a decree or order, that it goes

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1 forward and specifically modulates conduct and there

2 isn't an existing regulatory agency that we think would

3 be well equipped but at least flag it for consideration.

4 MR. CRANDALL: I think it is perfectly

5 appropriate for the FTC or the DOJ to be doing analyses

6 of these things.

7 The question is do they bring cases. Earlier

8 you were suggesting you might bring a case even though

9 you don't have an appropriate remedy and it's just a

10 learning experience so that you are better prepared next

11 time.

12 I think Dave might be concerned that you spent

13 10 years on Microsoft trying to learn how to do it

14 better the next time.

15 MR. DUCORE: What I was getting at is if all you

16 can get -- my earlier point I don't think I made it as

17 clear.

18 If you could only have what is called a

19 sin-no-more remedy, you did this, this was unlawful,

20 don't do that again, that obviously may set up private

21 actions, but it also sets the precedent so we have told

22 you not to do this again, if the next guy comes along

23 and maybe he is doing it, maybe we could get a judge to

24 tell him stop earlier in the process.

25 It is not that you couldn't have a remedy. It

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1 is that the remedy would simply be you shouldn't do that

2 anymore.

3 MS. KURSH: All right. On that note, I would

4 ask everyone to join me in thanking our panelists for

5 their insight.

6 We will see everyone this afternoon at 1:30. We

7 pick up on remedies and some other interesting topics to

8 get into.

9 Thank you. 12:00 p.m.

10 (Whereupon, at 12:00 p.m., the hearing was

11 recessed, to be reconvened at 1:30 p.m. this same day.)

12

13

14

15

16

17

18

19

20

21

22

23

24

25

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1 AFTERNOON SESSION (1:30 p.m.)

2 MR. ELIASBERG: Welcome to the second remedies

3 panel, part of the ongoing series of hearings on

4 single-firm conduct.

5 I'm Ed Eliasberg. I'm a lawyer with the legal

6 policy section of the Antitrust Division. My

7 co-moderator today is Dan Ducore, the assistant director

8 of the compliance division in the FTC's Bureau of

9 Competition.

10 The Department of Justice and Antitrust Division

11 and Federal Trade Commission are jointly sponsoring

12 these hearings to help advance the development of the

13 law concerning Section 2 of the Sherman Act.

14 Transcripts and other materials from the prior

15 sessions are available on the DOJ and FTC Websites.

16 These are the next to last set of hearings. We

17 will be holding a wrap-up in the coming months and ask

18 that you check the Division's and FTC Website pages for

19 more information about it.

20 Today's session concerns remedies in actions

21 brought under Section 2.

22 Accepted wisdom seems to be that effectively

23 remedying violations of Section 2 can be a challenge.

24 Our panelists may have differing views on how well

25 remedies in past Section 2 matters have furthered the

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1 purposes of the antitrust laws.

2 The discussion session in this panel will have

3 particular emphasis on structural and conduct remedies

4 in Section 2 matters.

5 Also on our panel is a representative from the

6 European Commission to share his perspectives based on

7 emerging remedies under European law.

8 On behalf of the Division, I thank our panelists

9 for participating today and sharing their views with us.

10 I will introduce each in more detail before he

11 speaks. But in brief, our speakers in the amended order

12 of appearance are the following.

13 Andy Joskow is a senior vice president and

14 director of NERA Economic Consulting.

15 Dietrich Kleemann is head of the task force on

16 ex post assessment of merger decisions, Directorate

17 General for Competition, European Commission.

18 We are scheduled to have also Franklin Fisher,

19 who is the Jane Berkowitz Carlton and Dennis William

20 Carlton professor of microeconomics at the Massachusetts

21 Institute of Technology, and hopefully he will be able

22 to join us in a few minutes.

23 Then John Thorne, who is senior vice president

24 and deputy general counsel at Verizon Communications.

25 And Richard Epstein, the James Parker Hall

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1 distinguished service professor of law at the University

2 of Chicago Law School.

3 Thanks to my colleagues at the FTC and the

4 division for organizing this hearing.

5 The organization of the panel is as follows. We

6 will have three panelists speak for approximately 15

7 minutes each. Then we will take a short break. The

8 final two panelists will speak.

9 Each panelist will have a couple minutes to

10 respond to the other presentations, and then there will

11 be a moderated discussion led by Dan and me.

12 In that time period also, David Heiner, who was

13 on the panel this morning who is, I believe, deputy

14 general counsel of Microsoft, has graciously agreed to

15 join us and maybe will also be participating, if he

16 likes, in the moderated discussion.

17 We will not be taking any questions from the

18 floor, and we plan to end at 4:30.

19 Before introducing our first speaker, I would

20 like to turn things over to my co-moderator, Dan Ducore.

21 MR. DUCORE: On behalf of the Federal Trade

22 Commission, I want to thank our panelists for graciously

23 volunteering their time and their views today to help

24 assess remedies for single-firm antitrust violation

25 cases. I was going to say Sherman 2, but we do it under

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1 Section 5 of the FTC Act.

2 As I think it became pretty clear in this

3 morning's session, I will say Sherman 2 violations are

4 sometimes hardest to make out.

5 I think it is probably equally true that once

6 you have made them out, figuring out the best way to

7 remedy those problems is at least equally hard.

8 And unlike some other areas in merger

9 enforcement and certainly horizontal agreements

10 enforcement, Sherman 2 single-firm conduct violations

11 are of necessity, particularly fact intensive when it

12 comes to designing remedies, both in terms of what the

13 theory of the harm is and how the industry operates.

14 As someone whose office has to deal with

15 remedies for all kinds of antitrust cases every day, I'm

16 going to be particularly interested in hearing about

17 broad approaches as well as some of the more detailed

18 issues having to do with administrability and, as part

19 of that, what do you do if it is not clear that a

20 remedy, a workable remedy doesn't do more harm than

21 good.

22 We talked a little bit about that this morning.

23 This afternoon we are going to focus a little more on

24 the difference between the conduct remedy approach and

25 the structural approach.

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1 So with that, we are about to start, except I

2 have to make a couple of logistical announcements.

3 One is in case of an emergency and if an alarm

4 goes off, walk, do not run, to the exit and do not take

5 the elevator but take the stairs down stairs and walk

6 across the street, and there will be obviously people

7 directing you to where to go. I suspect that won't be

8 an event this afternoon.

9 Also, the restrooms, if anybody in the audience

10 needs them, are out the hall to the left, the men's room

11 to the immediate left, the women's room past the

12 elevators to the left.

13 Finally, please turn off all electronic devices,

14 especially cell phones, Blackberries and other hand-held

15 devices which in particular can create static if they

16 are operating near the microphones.

17 So without any further ado, and I don't know if

18 you are going to restructure the order again.

19 MR. ELIASBERG: We have the good fortune that

20 Dr. Franklin Fisher has been able to join us now.

21 Welcome, Frank.

22 Frank, I will sort of leave it to you. If you

23 need a moment to catch your breath, we can have Andy go

24 first.

25 DR. FISHER: I can go first.

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1 MR. ELIASBERG: I appreciate you going back to

2 the bullpen, Andy.

3 DR. FISHER: Of course, you understand that I am

4 tempted to talk about the effects of deregulation on the

5 behavior of airlines. Perhaps not.

6 MR. ELIASBERG: Franklin Fisher is the Jane

7 Berkowitz Carlton and Dennis William Carlton professor

8 of microeconomics at the Massachusetts Institute of

9 Technology, Emeritus, where he has taught for 44 years.

10 He has served as director of CRA International

11 since 1967 and is a director of the National Bureau of

12 Economic Research.

13 His book, "Industrial Organization, Economics

14 and the Law," is widely read by lawyers and economists

15 alike.

16 Frank, let me assure you we are delighted to

17 have you here today.

18 DR. FISHER: Thank you. I am delighted to be

19 here, although somewhat more stressed than I thought I

20 was going to be.

21 All right. Well, the question of how to design

22 remedies in Section 2 cases isn't easy.

23 Unlike prospective mergers which can be blocked

24 or price fixing cases or collusion cases where actions

25 can be enjoined, single-firm monopoly cases even when

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1 won tend to founder on remedy issues.

2 Structural relief can be and often is seen as

3 too drastic, and injunctive relief can simply turn into

4 an effort to prohibit actions already in the past and

5 already obsolete or can require continuing and perhaps

6 continual judicial supervision.

7 Too often in the past antitrust authorities have

8 failed adequately to consider the problem of remedies.

9 And I'm delighted to see an actual hearing is taking

10 place on this subject.

11 With those encouraging remarks, I have two parts

12 to this talk.

13 I want first to discuss what I think the

14 desirable objectives are that a Section 2 remedy or

15 maybe any remedy should be, and then I want to exemplify

16 some of this by talking about the Microsoft case and

17 suggested remedies in it.

18 I was the principal economic witness for the

19 Division in that case. And I'm going to talk about

20 these two things.

21 Here are the five things that I think one ought

22 to try to achieve, and it will turn out that some of

23 them are impossible to achieve and you can't achieve

24 some of them without making some of the others

25 difficult.

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1 And while I don't think it is a whole mess, I do

2 think it is a very complicated issue.

3 The first one is one ought to want to restore

4 competition. That ought to be a primary objective. One

5 ought to want to undo the anticompetitive effects of the

6 violation.

7 That may not be possible. Indeed, it may not be

8 clear what would have happened in the absence of the

9 violation. That's particularly true in innovative

10 industries.

11 Second, the punishment as it were ought to fit

12 the crime. I realize these are civil cases, but you

13 know what I mean. One wants to fit the remedy to the

14 violation.

15 It is natural to require that the remedy be

16 reasonably consonant with the liability findings. In

17 particular, it is natural to require that the remedy be

18 such that had it been in place at the time, the

19 violations would not have occurred.

20 But while that requirement is as the law is

21 developed as I understand it, that requirement may

22 satisfy the standard for consent decree hearings under

23 the Tunney Act, it is not guaranteed to satisfy the

24 important objective of restoring competition.

25 I will exemplify that when we talk about the

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1 Microsoft case.

2 A broader remedy that prohibits violations, not

3 merely those found liable but similar to those to be

4 liable, may still not work.

5 This is likely to happen if the defendant used

6 the anticompetitive actions to ward off a threat to its

7 monopoly power at a crucial moment, with similar threats

8 unlikely to arise again or perhaps ever.

9 Next one would like to disgorge monopoly

10 profits. The violator shouldn't be permitted to profit

11 from the violation. Otherwise, there won't be any

12 disincentives for it or others to repeat such

13 violations.

14 But, of course, fines are unusual in Section 2

15 cases. On the other hand, fines may not be necessary.

16 The treble damage provision of the Clayton Act

17 certainly encourages private suits, and the loss of such

18 a suit can result in considerably more than the

19 disgorgement of monopoly profits.

20 I really don't like that answer. I can't tell

21 from your faces whether you like it or not, but I don't.

22 Treble damages also encourage -- here, by the

23 way -- I don't know if you have been given my text. If

24 you have, in the text there is a really Freudian error.

25 The text I recently discovered says "treble damages also

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1 encourage reasonably basic private suits" --the word

2 "basic" should be "baseless" -- "sometimes suits that

3 follow a federal investigation, even though that

4 investigation doesn't result in an actual case and

5 finding of liability."

6 Particularly in large class action suits, this

7 results in a kind of legalized privacy, with the mere

8 certification of a class enough to produce settlement by

9 defendants greatly at risk.

10 That's mainly a problem I think for Section 1

11 cases. But the whole issue of treble damages is too

12 complex to simply assume that they should continue and

13 will result efficiently in the disgorgement of monopoly

14 profits.

15 One possible answer would be to require the

16 defendants to compensate those that were injured (back

17 to the federal case) as well as paying something above

18 that, since otherwise they or others may be tempted to

19 take advantage of these situations, and in return the

20 compensated victims should give up their rights to sue

21 for treble damages.

22 D, I'm quite fond of this one, but it is

23 difficult. Make the remedy self-enforcing. If

24 possible, one wants the remedy to serve for itself.

25 You want a situation to be created in which

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1 market forces prevent the recurrence of the same or

2 similar violations, as opposed to injunctive relief.

3 That kind of remedy ideally doesn't require

4 continued and long judicial supervision and continued

5 wrangling and litigation that can go with that.

6 Ordinarily, of course, this is going to require

7 some sort of structural remedy. That isn't easy to do.

8 In the first place, courts are traditionally

9 reluctant to grant structural relief, which usually

10 means divestment or breakup. In the second place,

11 crafting one is not easy and may sometimes be

12 impossible.

13 Too often in the past the antitrust

14 authorities -- let me say for the moment I will talk

15 about something in the quite distant past. You don't

16 have to worry, guys. You weren't around. I was.

17 The antitrust authority has simply assumed that

18 a somewhat arbitrary divestment is what is called for.

19 That may have gone hand in hand with the naive belief

20 that monopoly power equals large market share, so that

21 simply breaking up the defendant would be sufficient

22 without the relationship of the breakup to the

23 violation.

24 That was certainly true of the great fiasco of

25 the IBM case. I, by the way, was the principal witness

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1 for IBM in the IBM case.

2 The government's remedy proposal never reached

3 the court but was discussed at deposition by an

4 economist whom I will courteously not name.

5 He proposed breaking up IBM into four successor

6 companies, each of which would have one and only one

7 tape plant or disk plant. No consideration was given to

8 whether computer companies with only one such plant were

9 likely to be viable.

10 The focus was exclusively on reducing IBM's

11 supposedly very large market share, which was measured

12 by the government in truly peculiar ways, having nothing

13 to do with market power.

14 Structural remedies need to be better thought

15 through than that.

16 I'm sorry. I can't stop myself from telling the

17 following story:

18 That witness never testified at trial. It came

19 out at his deposition.

20 And there was a truly peculiar set of things in

21 the deposition, which began with the witness being

22 instructed not to answer the questions of how many

23 successor companies he proposed to have. And the

24 grounds for that -- first, I quote the lawyer in

25 question -- "I won't tell you."

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1 Upon being told that that was not cognizable

2 under the Federal Rules, he offered to tell if the room

3 would be cleared of people not connected with the case.

4 IBM's lawyer said "I don't see anybody in the

5 room not connected with the case." And the lawyer for

6 the Justice Department observed that my son and the son

7 of the late John McGowan, who both of us were working on

8 the case, were present he said "the boys."

9 So they sent the boys out of the room. And now

10 the lawyer was willing to give the grounds.

11 He said "I'm not going to let him tell because

12 it might upset the stock market."

13 Well, there was some discussion as to whether

14 that came under the Federal Rules, and decided to let

15 the answer go on, provided the room was still further

16 cleared of everybody not totally essential.

17 Nicholas Katzenbach, then general counsel for

18 IBM, asked if it was okay if he stayed. The lawyer said

19 yes, but I couldn't.

20 I said I was going to go out and join my

21 12-year-old son, who was no doubt calling his broker at

22 that very moment.

23 The witness then testified about the tape plants

24 and the disk plants. But the number was sealed and

25 referred to as X in the transcript.

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1 The motion to unseal, like many things in the

2 IBM case, remained undecided. That was in 1974. The

3 case ended in 1982 with that motion still undecided by

4 Judge Edelstein.

5 That number was four to anybody with any sense

6 who can count the number of tape plants and disk plants

7 that IBM had, and it was also four to anybody who was

8 with that same witness at a cocktail party a couple

9 weeks later and heard him say it was four.

10 Believe me, the IBM case was full of things like

11 this, some much worse.

12 Anyway, I could not talk about remedies without

13 getting to that. It lives with me still.

14 The last thing is I think, as I already said,

15 one ought to try to avoid remedies that require

16 prolonged and complicated judicial oversight.

17 That's likely to be true of complicated

18 injunctive relief, and it is particularly burdensome if

19 the injunction is to hold for long periods of time in a

20 changing industry.

21 Now I want to talk about Microsoft.

22 One of the things about Microsoft is almost none

23 of the remedies proposed were without flaws, maybe none

24 of them without.

25 I have to talk first a little bit about the

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1 underlying economics and what is called the

2 "applications barrier to entry", and then I have to talk

3 about the violation.

4 This won't take very long, and then the conduct

5 remedies all the problems and the structural problems,

6 ultimately some problems.

7 Here is the story on the underlying economics.

8 How long have I got? I will speak slower.

9 First place, this is the way things stood in the

10 business in the late 1990s and to some extent still

11 stand, I think.

12 Applications written for one operating system

13 generally don't run on others. It is expensive to port

14 them. You have to start all over to port them to

15 another operating system.

16 Secondly, software application writing has large

17 economies of scale. The costs are all up front, big

18 costs. They are the costs of writing the program,

19 debugging the program, writing the manuals that go with

20 it. Putting out extra copies of the program costs

21 essentially zero.

22 As a result, application writers prefer to write

23 for operating systems which have many users so they can

24 spread the fixed costs over a large number of customers.

25 On the other hand, not surprisingly, computer

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1 users prefer operating systems that have a large number

2 of applications.

3 As a result, an operating system that becomes

4 relatively popular for whatever reason attracts more

5 applications. These attract additional users, which in

6 turn attract even more -- well, this is badly written.

7 It should say which in turn attract even more

8 applications, which in turn attract even more users and

9 so on.

10 Eventually that operating system attains

11 monopoly power as other operating systems find it

12 difficult or expensive to attract application writers.

13 This is the so-called applications barrier to entry.

14 Microsoft was the beneficiary of this, starting

15 at least with Windows 95 and continuing onward. And if

16 Microsoft had simply been content with this relatively

17 natural phenomenon, there would not have been an

18 antitrust case and there certainly wouldn't have been a

19 successful antitrust case.

20 But Microsoft was not content with this. It

21 sought to destroy or contain two innovations, Netscape's

22 browser and Sun Microsystem's Java, that threatened to

23 weaken or remove the applications barrier to entry.

24 I'm not going to discuss exactly how those would

25 have worked, but I will -- that's relatively available

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1 elsewhere.

2 There is -- I can't resist it -- government

3 Exhibit 39. By the way, you mustn't think that I retain

4 in my memory after whatever it is, eight years, what is

5 in every single exhibit in the case. This happens to be

6 my favorite.

7 Government Exhibit 39 is an e-mail that says you

8 should care about the browser even more than does Bill

9 Gates, because if we lose the browser, we lose basically

10 everything, and goes on about the operating systems will

11 turn into a commodity and so on.

12 Microsoft basically was found to have violated

13 the antitrust laws by its actions in those two

14 dimensions.

15 This was a great victory for the government.

16 But the events leading to the remedy, in my opinion,

17 eventually turned that victory into another fiasco.

18 What remedies were suggested and what were the

19 problems with them? Well, with perhaps one exception

20 which wasn't exactly considered seriously by the

21 government, I believe, every suggested remedy had

22 important defects in terms of the objectives that I

23 listed above.

24 I begin with the conduct remedies.

25 There is the one in the ultimate settlement.

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1 This is a remedy -- basically it is a conduct remedy

2 that matched the violation. It did that and might deter

3 similar conduct.

4 It didn't restore competition, and it may have

5 left Microsoft secure in having destroyed two really

6 important threats.

7 Well, there is an issue here. That would

8 satisfy and did satisfy Tunney Act proceeding. But this

9 wasn't an ordinary a Tunney Act proceeding.

10 This wasn't a proceeding before liability. This

11 was a proceeding after liability had been decided,

12 appealed, affirmed, certiorari had been denied, and the

13 case came back again with a remand on remedy.

14 By the way, I didn't have much to do with the

15 remedies which is why I'm criticizing them. I was

16 retained briefly by the Antitrust Division after the

17 remand on remedy, but there was no serious work involved

18 in that.

19 The remedy that eventually emerged might have

20 been appropriate for a pretrial consent decree, but it

21 wasn't appropriate after liability was finally decided.

22 It gave up the fruits of victory.

23 It is entirely possible -- one doesn't know --

24 that if you think about it, Microsoft may have succeeded

25 in destroying the threats to the applications barrier to

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1 entry at the golden moment in which they were there.

2 And trying to put the toothpaste back in the tube

3 afterwards doesn't work.

4 Another remedy that was a conduct remedy

5 suggested was allowing other operating systems to use

6 the application programming interface of Windows; that

7 is, give the other makers of other operating systems

8 enough information so that programs written for Windows

9 would run on their operating system. They could design

10 their operating systems that way.

11 Well, that would certainly have been effective

12 if it had succeeded. It would, however, have

13 required -- it might have gone too far, in fact.

14 It would have required prolonged and complicated

15 judicial oversight. Anybody who has ever been involved

16 in writing a complicated software program -- and believe

17 me, I know at the moment from bitter experience and the

18 programs I'm involved with are nothing like as

19 complicated as operating systems -- knows that even with

20 the best will in the world, if you try to make the

21 program available to other programmers or teach them how

22 to do things with it, it is very hard.

23 And there wouldn't have been the best will in

24 the world, and there would have been for a very long

25 time continued wrangling over whose fault it was that

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1 this wasn't succeeding. And that would have required

2 continued judicial oversight.

3 Now I come to structural remedies. The first is

4 the one one might most naturally think of. It was

5 called the Baby Bills for reasons that should be

6 apparent.

7 It was one in which there would have been three

8 successor companies made out of Microsoft. Each one of

9 them would have had the right to Windows.

10 There were a number of objections to this, some

11 of them valid, some of them not quite so impressive.

12 The first one was; Would successor companies

13 have kept their versions of Windows compatible with the

14 installed base of programs? There was a lot of talk

15 about that.

16 I think the answer was of course they would,

17 because they would have had a big incentive to attract

18 the people with the installed base of program.

19 The second one sounds funny but isn't, the

20 question of who would get Bill Gates, who may not have

21 been an asset in the trial, believe me, but he was

22 certainly an asset to the company and would still be.

23 And you can't divide him up, so to speak.

24 The one that wasn't typically mentioned but I

25 think ought to be bothersome is the following.

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1 Eventually the phenomenon that I talked about in

2 the underlying economics would take over again, and one

3 or the other of these companies would get ahead, the

4 snowball effect would take over, the application remedy

5 would occur and the thing would be restored.

6 Of course, each of these companies would be

7 owned by the original Microsoft shareholders, so that in

8 some sense anyway the monopoly profits it would have

9 earned later would accrue back to the owners of the

10 violator.

11 The remedy proposed by the Antitrust Division

12 was to break up Microsoft into two successor companies,

13 one with the operating systems and the other with the

14 applications, particularly Microsoft Office, in the

15 belief or the hope that the applications company would

16 have a big incentive to encourage competition and

17 operating systems.

18 Maybe that would have worked. It is somewhat

19 roundabout, and it is not obvious that if it worked, it

20 would have been self-enforcing.

21 Not obvious that it would have worked, and I

22 don't find it particularly attractive. It never got, so

23 to speak, much past the starting block.

24 The remedy that I think is attractive, although

25 also has problems, is the one proposed by Herbert

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1 Hovenkamp, but so far as I know, not apparently

2 seriously discussed in the higher reaches of the Justice

3 Department.

4 This was the following. Pick a number, N. You

5 have to study what the number N should be. Then require

6 Microsoft to auction off N licenses to Windows together

7 with the requisite know-how. Do nothing further.

8 This is simple. And it improves competition.

9 No breakup is required. If the ultimate monopoly gains

10 do not necessarily occur, the ultimate gains don't

11 necessarily principally accrue to the original Microsoft

12 shareholders, which is attractive, as opposed to the

13 Baby Bill remedy.

14 This seems to me to be a model of remedy design,

15 despite its possible flaws. And I wish it had been more

16 seriously discussed.

17 But Microsoft, like other cases, is a case in

18 which it was not obvious that there is any really,

19 really good remedy.

20 I happen to hate the one that eventually arose

21 in the settlement, but other people made that.

22 Thank you.

23 (Applause.)

24 MR. ELIASBERG: Thank you, Frank.

25 Dietrich Kleemann is head of the task force on

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1 ex post assessment of merger decisions, Directorate

2 General for Competition, European Commission.

3 Dietrich, welcome.

4 Can we just check with the panelists,

5 double-check to be sure the Blackberries are off. Thank

6 you.

7 MR. KLEEMANN: Frankly spoken, at first I think

8 I'm not the best place to speak to you here today in

9 this hearing because of our more than 16 years since the

10 beginning of your merger work, I was a member of the

11 merger task force and today a proud member and followed

12 the European Commission.

13 However, I think that there are quite

14 significant similarities between remedies under merger

15 regulation and remedies that would be called abuse cases

16 under Article 82 of what you would call attempt to

17 monopolize.

18 But let me just take a short look at our

19 experience in the remedies.

20 Since we started, we have had more than 3000

21 final decisions in European merger control, but out of

22 them, only 19 prohibitions and maybe 28 restores in the

23 second phase.

24 That is what you would call a second request,

25 more or less, which is normally like a prohibition

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1 decision.

2 On the other hand, we had 140 clearance

3 decisions with remedies in the first place and 79

4 decisions with remedies in phase two. And frequently

5 these decisions were not only related to the remedy but

6 to the whole package.

7 So I think one can say that around 8 percent of

8 all our cases we intervened by way of remedies, and the

9 question is now can the antitrust practice use a benefit

10 from this rich experience in merger control.

11 I said there are similarities. However, there

12 are also differences between the remedies in merger

13 control and antitrust.

14 First of all, from a more formal point of view,

15 our remedies are based on commitments proposed by the

16 parties.

17 The remedies in abuse cases are imposed by the

18 authority on the parties. However, I would say this is

19 a more formal difference because of costs.

20 In a merger case the Commission would always

21 negotiate remedies with the merging parties and give

22 guidance and indicate what would be necessary to clear a

23 case at the end for the parties to have any incentive to

24 follow this guidance in order to avoid the prohibition

25 decision.

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1 I think more important is the difference between

2 behavioral and structural remedies.

3 As my colleague, Per Hellstrom, certainly

4 outlined this morning, for cases under violation 1 of

5 2003, behavioral remedies are the rule and structural

6 remedies are only the exception.

7 I think we will come back to this point later in

8 the discussion certainly.

9 By contrast, in merger control, because it deals

10 with structural competition problems, not just behavior

11 of a party, the most adequate remedies are normally

12 structural ones. That meets the classical divestiture.

13 Although I must admit the borderline between

14 structural remedies and behavioral remedies is not

15 always clear. It is only clear if I limit the

16 structural remedy. There are many other instances where

17 you could say it has behavioral elements but also

18 structural elements.

19 However, having said this, in appropriate cases,

20 we accept also typical behavioral remedies. This is the

21 case that divestiture, for instance, is not feasible or

22 would not be meaningful. However, to prohibit blankly

23 the case would not be proportionate.

24 And there we have two groups in particular. To

25 one are those I would call the access remedies. I will

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1 go through this later on. The other group which also

2 plays a significant role are changes to long-term

3 exclusive contracts.

4 However, as I said, we have structural remedies.

5 Here you see an overview from our so-called remedy

6 studies carried out on 96 cases between '96 and 2000.

7 And you see around 60 percent of remedies were

8 divestitures. The others were sometimes cutting links

9 between competitors by exiting a joint venture was even

10 17 percent.

11 Long-term exclusive licenses which are sometimes

12 replacing classical divestitures because they were

13 partially related to what they call -- they have limited

14 competition.

15 You can't divest forever a brand because there

16 would then -- there would be more companies in different

17 countries.

18 So we intend to exercise and that, I must say,

19 wasn't always very successful. Not surprisingly, the

20 most successful remedy was to find in the right place

21 the transfer of a stand-alone business, where you didn't

22 have to make a package, a remedy to cut off all

23 services. It was a clear-cut business which was sold.

24 I emphasize the importance of access remedies in

25 merger.

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1 They are maybe related to the access to

2 infrastructure, for instance, to a network, platforms,

3 the telecommunications sector and so on, to technology,

4 which implies the licensing of intellectual property

5 sometimes and access to what I would call essential

6 inputs.

7 This talks about, for instance, in the media

8 sector, the content, TV content and so on or, for

9 instance, in the electricity sector, we had the case

10 where we organized auctions to open up the market to

11 give excess electricity in a situation where we had a

12 merger structure.

13 The main purpose was always either to avoid

14 foreclosure effect, maybe resulting from vertical links,

15 where we had to get control of our essential upstream

16 facilities, such as a decoder base, for instance, and so

17 on.

18 And the second purpose which went way off with

19 the first one together was to lower barriers to entry so

20 as to outbalance the loss of competition but open up the

21 market to new competitors.

22 A crucial issue, however, with these kind of

23 remedies, much more than was with structural remedies,

24 is the way how you implement it.

25 First of all, sometimes nearly part of the

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1 problem is how to determine from the outset the terms of

2 access, price to be paid, for instance, the general

3 conditions.

4 It has taken one to lead a very strong and

5 mandatory, which is very often not feasible for the

6 Commission itself. You wouldn't set up otherwise a task

7 force for 10 years for an individual case.

8 So we need there to rely on trustees, sometimes

9 in a very official way on regulators, which help us to

10 monitor these remedies.

11 And the last one is the best one, a kind of

12 safeguard by the market when you impose a rapid

13 evaluation procedure, a fast resolution period.

14 And just not to run out of time, I will give you

15 at the end maybe a practical example which was the case,

16 Newscorp Telepiu, a case of pay TV in Italy where one of

17 two TV players controlled by Newscorp acquired Telepiu,

18 the by far leading pay TV player in Italy.

19 The case led virtually to a monopoly. On the

20 other hand, we were confronted with a scenario where

21 although this was not a failing company case, there was

22 quite a high likelihood that the second player would

23 accept the market over time, and that would mean we

24 would have had a monopoly in any event.

25 So on balance, it was better for the consumer

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1 and better for the market to have some kind of a

2 regulator place a number of far reaching commitments

3 which were all designed to facilitate new entry into

4 this pay TV market so to have at least a chance that in

5 the future in the evolving market there won't be this

6 problem.

7 We see typically a set of remedies which are

8 here combined but are used separately. The first was

9 limiting exclusivity for TV rights so to make them

10 available for newcomers.

11 There we had a commitment getting the output

12 rights for early termination for existing, limiting on,

13 the other hand, distribution of future output use or

14 football rights to two, prospectively three years, and

15 limiting the exclusivity to the DTHI, their viewers, so

16 as to enable user companies pay for the other TV spot.

17 It was such as the upcoming ADSL such that the

18 DVD or such as the cable network, which are not very

19 much involved in Italy, get a chance to get premier

20 content on their transmission means.

21 The second one will also enable them further to

22 have immediately the necessary anchor channels you need

23 for a successful pay TV.

24 So Telepiu had to grant access to third parties

25 to its premier content, the premium sport channels and

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1 the premium Hollywood TV channels.

2 Of course, this raised the question how to

3 calculate the price. We did that at a fixed rate and

4 so-called retail market basis.

5 That means looking at the retail price of

6 Telepiu and deducting the costs of that on the basis of

7 a wholesaler. It means the costs added on some other

8 factors like benchmarking were similar to situations in

9 other countries.

10 As a counterpart, they had to grant access to

11 third parties to their technical platform, the

12 condition, the related services, which would enable a

13 new entrant to access the old channels now on DTH,

14 because without access to the similar decoder base of

15 Telepiu, this would not have been possible.

16 There was a classic element that said if you had

17 to divest this DTT business, the two channels, in this

18 evolving market, in particular in Italy, all this was

19 subject to a detailed dispute resolution arrangement,

20 and here in particular the most sensitive parts were

21 taken over by the Italian media and telecom regulator,

22 the so-called Ajicom, which was committed to apply his

23 own word in dispute settlements to this specific case,

24 and in fact did it very successfully.

25 I think two years ago in the decision they

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1 reduced the price for the wholesale offer for premium

2 content by around 40 percent.

3 Having said this, this is a typical example, but

4 also you have a very limited number of cases where you

5 have this complex set of remedies which we thought were

6 the appropriate solution in this specific situation.

7 You may notice that many of the features in this

8 case or general features of merger committees could also

9 play a major role in antitrust abuse cases.

10 But on balance, I would say antitrust can

11 benefit from our experience in merger control, certainly

12 as the implementation is concerned, all the technical

13 stuff with trustees and so on.

14 But I think also in certain instances in terms

15 of the substantive solution.

16 Thanks.

17 (Applause.)

18 MR. ELIASBERG: Thank you, Dietrich.

19 Our last speaker before the break is Andrew

20 Joskow.

21 Andrew is senior vice president and director of

22 NERA's Washington, D.C. office.

23 Dr. Joskow is a former deputy assistant attorney

24 general for economics at the Antitrust Division and also

25 a senior staff economist on the President's Council of

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1 Economic Advisors and a member of the joint FTC/DOJ task

2 force on efficiencies that drafted the efficiency

3 sections of the 1992 horizontal guidelines.

4 Andy, welcome.

5 DR. JOSKOW: Thanks for inviting me.

6 It is very nice to see some old Department of

7 Justice colleagues here. Thanks for coming.

8 When I was listening to Professor Fisher talk

9 about the IBM case, it became clear to me that these

10 cases just infect people's beings over time.

11 The expert that Professor Fisher was talking

12 about was a professor at the school where I went to

13 undergraduate college. And as an alumnus -- I will keep

14 you guessing -- as an alumnus, I met him a number of

15 years later, and it was clear to me that he never

16 recovered.

17 So in that vein, what I want to talk about today

18 is this issue of structure versus conduct.

19 What I want to do is take it from the point of

20 view of merger remedies, which is a somewhat settled

21 area, and try to talk a little bit about the principles

22 that make us say structure, yes in mergers. Behavioral,

23 no. But in Section 2, maybe less yes, structural, maybe

24 more yes, conduct.

25 And as I said, it is quite well developed and

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1 the Antitrust Division has a merger policy guide, and it

2 kind of lays out things quite simply.

3 But when we start talking about Section 2, we

4 just see a whole host of issues where there are lots of

5 possibilities, but each possibility seems to create

6 problems.

7 We talk about divestiture or breakup, all kinds

8 of organizational design problems. If you make a

9 mistake, you can't go back.

10 Exclusive dealing contracts, you can prohibit

11 them, but there are lots of ways or often ways to

12 recreate those contracts in other ways.

13 You can prohibit the tie in a tying case, but

14 you risk the loss of certain integration efficiencies in

15 certain cases.

16 Predatory pricing, I don't know what to do in

17 that case. I will talk about that a little bit later.

18 You have all kinds of various cease and desist

19 orders, some of which could be beneficial, but at the

20 same time you risk them being anticompetitive or outside

21 the violation being discussed.

22 So mergers, there is a single goal. The remedy

23 isn't trying to make competition better than it was

24 before the merger, just trying to restore competition.

25 The structure seems to strongly prefer a way to

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1 do that, a structural remedy, usually through divesting

2 assets or an existing business, and all that with the

3 hope of preserving any efficiencies inherently in the

4 merger.

5 Quoting from the guideline, "restoring

6 competition is the only appropriate goal with respect to

7 crafting a merger."

8 It is interesting that these guidelines are

9 written almost in the negative in the sense they talk

10 about why conduct remedies would be bad, less why

11 structure would be good.

12 Why are conduct remedies bad in a merger case?

13 Well, there is the direct cost of just monitoring a

14 conduct remedy through the life of a consent decree.

15 That should be "cost," not "coast."

16 Indirect costs of evading the spirit of a

17 decree. For example, you could say you have to have a

18 price cap, but there are lots of ways of undermining a

19 particular price cap, and, of course, that doesn't

20 necessarily get to all -- prices don't necessarily get

21 to all the aspects you want to preserve in a competitive

22 market.

23 If you constrain pro-competitive behavior, for

24 example, prohibiting price discrimination could

25 eliminate the possibility for efficient pricing in some

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1 cases and just generally constrain the ability of the

2 merger, of a firm to flex its muscles in the market.

3 It seems clear that structure is the way to go.

4 And mergers are about changing structure, and what you

5 want to get out of competition is lower prices, improved

6 quality, more innovation.

7 And the way to get that is to maintain rivalry

8 within the market, and that means separating assets.

9 If you went the other way, as I said, price

10 protection as an example, that really undermines the

11 multiple -- it doesn't preserve the multiple dimensions

12 of competition that we were talking about.

13 This is the benefit of the Hart-Scott-Rodino

14 Act. It allows assets to be divested before they are

15 scrambled so you don't have to deal with this problem of

16 where do we put Bill Gates and these assets. Everything

17 is already separate.

18 Now, there is a preference in these situations

19 to divest an existing business entity.

20 That is something that Dietrich mentioned in one

21 of his examples. And that begins to get to the issue

22 of, well, what is it we are trying to do, once you have

23 found a violation in a merger, what is the but-for world

24 that you are looking for?

25 Are you trying to get the Herfindahl back to

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1 1800 if you went from 1800 to now? Well, not

2 necessarily because once you get to the remedy phase,

3 you are really looking to make sure you created an

4 entity that will allow competition to be restored.

5 That may mean taking more than just bringing the

6 merger back to 1800. We need to have sufficient assets

7 in order to make sure the firm has the incentive to

8 compete.

9 In a sense, there has been a market test in a

10 merger case because the business is already designed.

11 You have a sense of what assets are necessary in order

12 to compete in the premerger world.

13 Even so, after all that, being kind of the

14 general way to go, the FTC studied these things back in

15 1999, and they found kind of a mixed bag in the success

16 of structural remedy.

17 So even in a merger case, you really need to be

18 careful. One of the things that actually came out of

19 that study was the increased preference for an ongoing

20 business that already existed as a form of public

21 remedy.

22 So what about in the Section 2 case? The

23 conduct arises from the existence of monopoly power. So

24 the thought would be, well, you want to change the

25 firm's structure so that it doesn't have the ability or

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1 incentive to restrain competition in the future.

2 But what does that mean? You want the remedy to

3 be tied to the violation, as Professor Fisher said.

4 But how far do you want to go? This is

5 something maybe we can talk about in discussion.

6 What is the but-for market structure? If

7 Microsoft had an 80 percent market share and whatever it

8 did violating Section 2 brought it to a 90 percent

9 market share, does that mean we just want to bring it

10 back to 80 percent or do we say that's not enough, it

11 will just happen again and you want the Baby Bills?

12 Exactly where do we want to go?

13 I think the difficulty in going very far is

14 because the structural remedy is very difficult because

15 firms just aren't divided up this way.

16 In the case of a horizontal divestiture, it is

17 not necessarily neatly divided in that way.

18 What are the necessary assets, what are the

19 necessary intellectual property, what are the necessary

20 employees to create a going concern and have these

21 separated entities?

22 It seems that the risk of failure in a situation

23 is quite great, that you just don't create the right

24 firm. The market essentially unravels and goes back to

25 the way it was.

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1 And I think this is why we really don't see this

2 very much, this type of remedy, the horizontal

3 divestiture.

4 We have to go back to 1911 for the Standard Oil

5 case and the American Tobacco case to see that. It was

6 rejected later in the United Shoe case. And I think the

7 horizontal, "let's turn Microsoft into three," was

8 fairly quickly rejected early on.

9 What about vertical divestitures? Does that

10 work?

11 There you would think that the lines within a

12 firm may be clearer. You have the input part of the

13 firm, the output part of the firm. You can see how

14 changing the vertical relationship between two companies

15 might change the incentives for foreclosure.

16 So this is what happened in AT&T. We had a form

17 of a vertical divestiture. But even there, when we had

18 structural relief, we had it seemed like limitless

19 ongoing needs to monitor the lines of business the Bell

20 operating companies were in.

21 There were connecting issues simply because

22 there had to be an ongoing relationship between the two

23 companies, not just two companies, but the long distance

24 companies and the operating companies.

25 In Microsoft, again, maybe it would have been

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1 easier to split along operating system lines and

2 application system lines.

3 But I sort of agree that even if there weren't

4 huge loss of efficiencies, it is not clear to me that

5 this indirect type of divestiture would have led to the

6 ultimate entry of a competing operating system company.

7 It seemed highly theoretical.

8 Again, it could have -- because of the network

9 effects, it could have easily unraveled and gotten the

10 market right back to where it was.

11 There is just no practical experience really in

12 having a world of competing operating systems. It seems

13 like quite a leap to think "well, we can just do it."

14 So in thinking about structure, it seems that in

15 mergers, the benefits are pretty high to having some

16 type of structural or divestiture remedy, whereas, the

17 costs are pretty low. They often can be accomplished

18 without forgoing efficiencies.

19 When you have to forgo a lot of efficiencies,

20 the case for divestiture might be weaker, but in general

21 I think it is pretty strong.

22 In Section 2 cases, on the other hand, it seems

23 like the costs are pretty high. You don't really have

24 much experience in competition in the particular market,

25 and it is not clear that the competitive process would

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1 necessarily be enhanced if the market just reverted back

2 to monopoly.

3 It would be difficult to determine how far to go

4 with structure if your goal is really just to try to

5 apportion how much of the monopoly was gained as a

6 result of the anticompetitive conduct.

7 The efficiency losses could be pretty

8 substantial.

9 Still, most likely you will require ongoing

10 monitoring anyway, particularly in the vertical case and

11 possibly even in the horizontal case.

12 So what about behavioral remedies in Section 2?

13 Well, like any behavioral remedy, there is ongoing

14 monitoring.

15 Evasion clearly can be a problem. But it seems

16 to me that in certain cases, exclusive dealing, tying,

17 bundled discounts, they can be prohibited fairly broadly

18 within consent decrees.

19 And they do get at this issue of, well, what is

20 the incremental effect of the anticompetitive conduct.

21 Because it focuses on the effect on facilitating entry,

22 and even if there is some loss of efficiency to the

23 dominant firm, it seems like that loss in many cases is

24 worthwhile in order to in a sense help rivals and

25 improve and facilitate entry.

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1 Dentsply is a particular example of a pretty

2 simple remedy, not attempting to break up Dentsply.

3 That leaves us with attempted monopolization,

4 which seems to me to fall outside of both of these

5 cases, structural versus conduct.

6 Is there an irremediable violation? That

7 question has been asked. This one has bothered me for a

8 long time.

9 It seems that whenever anyone thinks of

10 prohibiting lower end prices, that seems

11 anticompetitive, expanding output, that seems

12 anticompetitive, limiting the magnitude of price cuts,

13 that seems also anticompetitive.

14 Breaking up the airline doesn't seem to be the

15 way to go if you think about the American Airlines case

16 because there are strong network effects. There aren't

17 many hub airports with two hub carriers.

18 So, again, that seems really not the way to go.

19 Maybe fines are a remedy, although in the American

20 Airlines case, you really didn't have recoupment.

21 I'm not sure if this would be a disgorgement or

22 some kind of fine for deterrence.

23 Is guess that leaves open the question if you

24 don't have a remedy, is there a case.

25 The agencies have the obligation to enforce the

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1 antitrust laws, but they certainly have an interest in

2 deterring what they think to be anticompetitive

3 predatory pricing.

4 But it seems to me that this may be a situation

5 where there is no clear structural or conduct remedy

6 that one could put forward in any kind of very

7 broad-based fix, such as thou shalt not violate Section

8 2, or something like that.

9 It just seems like it doesn't really get at the

10 specific conduct and it is just adding a criminal

11 contempt portion to one's obligations under the Sherman

12 Act.

13 So just in summary, it seems that in mergers,

14 the structural remedies and the basis for those remedies

15 seem pretty clear.

16 In Section 2 cases, I think the case is weaker.

17 That's not to say never, but I think that the historical

18 experience has been limited, which would probably limit

19 one's desire to go in that direction.

20 So I think in the case of Section 2, I think it

21 is more likely desirable to focus on some form of

22 conduct remedy.

23 Thank you.

24 (Applause.)

25 MR. ELIASBERG: Thank you, Andy.

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1 Why don't we take a 10-minute break and come

2 back for the last two speakers.

3 Thank you.

4 (Recess.)

5 MR. ELIASBERG: Welcome back.

6 Our first speaker will be John Thorne, who is

7 senior vice president and deputy general counsel at

8 Verizon, where he works on antitrust trade regulation,

9 merger review and strategic initiatives. He is coauthor

10 of several academic treatises, including "Federal

11 Communication Law and Federal Broadband Law."

12 John, welcome.

13 MR. THORNE: Thank you very much. I don't have

14 any slides. So you can relax your eyes a little bit.

15 The first thing I want to say is I did read in

16 preparation for this session Richard Epstein's new book

17 on consent decrees, and I cannot praise it enough. It

18 is a wonderful concise summary of an awful lot of

19 history, and I found it very useful in preparation here.

20 I recommend it to the Commission. I wanted to

21 offer my own gift to the people studying this topic,

22 partly because this is a book that was written in 1992.

23 It has been revised and it is way out of date. You

24 can't find it anyplace.

25 But it has a full history of the AT&T breakup

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1 decree and prior decrees in a way that you can't find.

2 When we rewrote the treatise, even though this

3 is longer, there is hardly anything in here about Judge

4 Green anymore.

5 Dan, I want to give you those as a present.

6 MR. ELIASBERG: Thank you, John. We greatly

7 appreciate it. But Richard's book was only 144 pages.

8 MR. THORNE: I'm serious. You may actually find

9 those are useful as references. Put it in the library.

10 MR. ELIASBERG: Thank you very much.

11 MR. THORNE: My experience and the reason I'm

12 the token business person on this panel is I worked on

13 the AT&T breakup remedy from 1983 to 1996.

14 I also worked on several antitrust consent

15 decrees along the way, for example, most recently the

16 Verizon-MCI merger decree, which is still pending before

17 Judge Emmett Sullivan in the D.C. Court.

18 I wrote some books about the experience. There

19 is an awful lot to say about the AT&T breakup decree,

20 and I'm attempting to tell you interesting stories about

21 it.

22 The first story I will tell is it was actually

23 the third of three government cases that resulted in

24 consent decrees against the AT&T company.

25 In fact, the second one, the one that resulted

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1 in a consent decree the year I was born, 1956, it is

2 interesting. If we have time, maybe if we have

3 questions, I want to come back to it.

4 I know a current question relating to my friend

5 Qualcom or Microsoft or others is should we take all of

6 their intellectual property and let other people have it

7 at either free or at discounted nondiscriminatory terms.

8 That question was answered and implemented in a

9 consent decree in 1956 against the Bell system.

10 There is some interesting history there. The

11 one decree I was going to focus on for a couple minutes

12 is this 1982 AT&T breakup decree implemented in 1984.

13 It was agreed to by the parties and approved in

14 1982. A lot of litigation preceded that. I could talk

15 about that. I won't.

16 Starting in 1982, that was not -- when you think

17 of settlement, consent decree, that's the end of the

18 case, done. The lawyers go home, the parties now start

19 complying.

20 That was actually the beginning of more

21 litigation than had preceded the decree. There were

22 7,782 briefs filed with Judge Green, plus an additional

23 large number.

24 I didn't actually count them. I can get the

25 numbers if you guys want the number, a large number of

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1 briefs, hundreds if not thousands of briefs filed with

2 the Department of Justice, which had its own shadow

3 docket.

4 In fact, every week, if you went to the DOJ

5 offices, they had an updated table of what was pending

6 at DOJ, the motions docket on the purple table.

7 Judge Green issued countless orders. There was

8 a criminal trial and a conviction of NYNEX for

9 criminally violating the decree's provisions. It was

10 overturned in the D.C. Circuit.

11 Besides that appeal, there were 15 other

12 consolidated groups of appeals in the D.C. Circuit.

13 There were about a half a dozen certiorari issues.

14 The '82 decree itself was summarily affirmed in

15 the Supreme Court, over a dissent by three justices. It

16 was written by then Justice Rehnquist, who wasn't the

17 chief at that point.

18 He was concerned that Judge Green was embarking

19 on a nonjudicial function. He did not want to

20 inadvertently create a judicial branch, the common

21 carrier bureau of the FCC, and he was worried that might

22 ensue. He recognized that was a bad thing.

23 If you go over to the D.C. court's new annex

24 where they built that sort of circular structure right

25 next to the old Barrett Prettyman Courthouse building,

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1 you will see a series of exhibits.

2 I contributed one of the exhibits. It is about

3 Judge Green and the legacy he left, because in fact he

4 did create something like the FCC's common carrier

5 bureau.

6 He and the 1982 decree were put out of business

7 with the 1996 act of Congress called the

8 Telecommunications Act of 1996.

9 Now, there is an interesting debate. I don't --

10 I will just give you my view of it quickly, an

11 interesting debate on whether the AT&T decree did any

12 substantive good at all in terms of competition.

13 People who say it did a lot of good claim that

14 the decree brought down long distance prices by 70

15 percent and gave us colored telephones.

16 Both of those statements are not true. Long

17 distance prices did come down very substantially, but

18 more than 100 percent of the price decrease is

19 attributable to a different phenomenon that was going on

20 over at the FCC, a reduction of access charges. Major

21 costs for long distance prices came down almost as much

22 as the access prices came.

23 The colored telephones, the plethora of new

24 devices, that is something the FCC accomplished before.

25 They came up with a plug and play rule. You have a plug

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1 in the side of your wall, and you start mixing and

2 matching telephones.

3 That was not a benefit of the decree. There was

4 a different effect from the breakup, and that is that

5 the breakup disbursed the power of a single firm.

6 A very powerful single firm was broken up into

7 eight or 10 or 11 entities. It was AT&T, which was the

8 long distance manufacturing arm initially, seven

9 regional local telephone companies.

10 They had a jointly owned separate services

11 company, Bellcorp, and there was Cincinnati Bell and

12 Southern New England Telephone, which had been partially

13 owned by AT&T.

14 The diversity of behaviors of the different

15 firms you would have expected. If you sliced up one

16 thing and sent the pieces off on their own, the

17 diversity was largely stifled by line of business

18 restrictions that attached to seven of the firms.

19 Judge Green had said in approving the decree

20 that we the public would not tolerate a king over the

21 means of our political processes or economic processes,

22 in his view much better to have local warlords.

23 That's what we got. Some of the efficiencies of

24 a larger firm were sacrificed. Many of those

25 efficiencies have been recreated since, reachieved since

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1 the divestiture happened.

2 But the topic here is not what is the applicable

3 structure of telecommunications markets. The question

4 is what did we learn about remedies, both structural and

5 conduct remedies.

6 The AT&T decree involved both kinds of remedies.

7 Both the structural and the conduct aspects of

8 the AT&T decree derived from a belief held by Bill

9 Baxter -- maybe there's some in the room who worked with

10 him -- the belief that vertical integration by a

11 regulated monopoly firm is a bad thing.

12 So the solution was in part structural, take

13 apart the vertically integrated pieces, separate things

14 that are competitive from the regulated monopoly

15 businesses.

16 And there was a regulatory component. Let's

17 forbid the reintegration of the new vertical, things

18 that will sprout, let's quarantine the regulated

19 monopoly.

20 The structural remedy was very painful, it was

21 expensive. It changed an awful lot of things.

22 It made an opportunity for me personally. So

23 Green that he was able to pull it off. He was an expert

25 administrator and he got it done.

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1 The conduct regulation is what created the 8,000

2 briefs filed afterward.

3 The basic idea was almost everything was

4 prohibited and it required Judge Green repeatedly and

5 the Justice Department even more so to keep answering

6 these two kinds of questions, what is allowed, what is

7 okay and, on the other hand, can we have an exception,

8 please.

9 So, for example, I can't do this justice -- the

10 books do it justice -- but March 22, 1985, Judge Green

11 issued this order from his court, "Pacific Bell" -- that

12 was one of the telecoms in California, now it is AT&T --

13 "is permitted to provide telephone service to Mrs. Mary

14 Campbell who lives in the Plymouth exchange in the

15 Stockton, California LATA via the Placerville central

16 office in the Sacramento, California LATA."

17 September 10, 1991, June Green ordered,

18 "Wisconsin Bell may provide interLATA cross-boundary

19 foreign exchange service to Ms. Vicky Mallard and

20 Mr. Ricky Schultz."

21 There is a category of behaviors or services

22 called information services. Green ruled it was okay to

23 provide time and weather announcements as a public

24 service and separately a kind of wireless service that

25 had been prevalent, paging services -- nobody in this

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1 room uses paging services anymore, but people used to

2 carry pagers to be summoned.

3 Green said it was okay for the local telephone

4 companies to provide paging services, provide time,

5 provide paging, but not okay to provide the time over a

6 paging signal to your wristwatch. He ruled that was not

7 okay.

8 The telephone companies were forbidden from

9 manufacturing customer telephone equipment or network

10 telephone equipment.

11 And the question came up what if it breaks, can

12 you fix it, is repair a permitted or prohibited

13 manufacturing function.

14 Judge Green answered the detailed question "what

15 does it mean to manufacture." And Bell Atlantic -- I

16 was there at the time -- filed a brief which we called a

17 certificate of compliance, which was our way of trying

18 to get an answer to a further question.

19 We were going to tell them how we are going to

20 comply with his definition of manufacture. We said we

21 understood we could continue providing advice, not

22 repair, but advice to manufacturers to help fix product

23 defects.

24 Judge Green issued an order saying I refuse, the

25 court refused to clarify the point.

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1 Instead, he declared some of what we were

2 proposing may be forbidden and it would be subject to

3 enforcement proceedings.

4 That's 1988. Judge Green directed us to seek

5 guidance from the Department of Justice. The Justice

6 Department refused to provide guidance because it has

7 neither the obligation nor the resources to do so.

8 But later the Justice Department told a

9 different Bell company it could engage in some repair

10 functions.

11 We took that as a good sign. DOJ asked Judge

12 Green to confirm the DOJ interpretation because, quote,

13 "the decree's manufacturing prohibition is ambiguous

14 with respect to repairs."

15 Judge Green refused to consider the DOJ request.

16 Three years later, it was my son's birthday, I

17 remember this. It was July 10. All of the telephone

18 networks in suburban Maryland and Northern Virginia and

19 Washington, D.C. went out.

20 There was a problem with signaling machinery

21 that was generating a bunch of garbage messages. All

22 the networks went down.

23 Bell Atlantic thought they had people who knew

24 how to fix this. They flew to Texas to Alcatel here are

25 our ideas for how to solve the problem.

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1 I called up whoever was on duty at DOJ that day.

2 I think it was Connie Robinson. She may have been on

3 holiday or something. Don Russell had to take the call.

4 I said, "Don, we want to send people to try to

5 fix the phone." I don't remember if I called or not;

6 the phones weren't working.

7 I got a message through to DOJ, "we will try to

8 help repair this, is that okay with you?" They said

9 "well, we don't know."

10 They had an emergency motion in front of Judge

11 Green, asked can we go help try to fix the telephone

12 networks that had been out for several days.

13 Green agreed and immediately authorized it and

14 wrote "repair and fixing and troubleshooting and so on

15 are things that are normally done, that are

16 appropriately done. I don't think can by any stretch of

17 the imagination can they be regarded as either the

18 manufacture or design of the equipment."

19 Wireless service is now a big business. There

20 are now more wireless phones. Everybody has one, just

21 in case you get summoned for something.

22 1983, that was not the case. 1983 AT&T is in

23 the middle of the divestiture negotiations. We signed

24 the decree in '82 implementing it and drawing these

25 boundaries around what are the permitted calling areas.

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1 They were drawn with respect to the land

2 facilities, the 99.9 percent of what the local Bell

3 companies had.

4 AT&T went to DOJ and said, wait a minute, these

5 wireless phones won't fit neatly in the land boundaries,

6 moving customers don't respect the geography the same

7 way, the networks will have different scales.

8 And DOJ said, wait a minute, of course wireless

9 is confined to the LATA boundaries, just like the land

10 services are.

11 This was probably, in contract terms, a mistake

12 of law, a mistake of fact. There had been no meeting of

13 the minds on how to treat wireless.

14 We went to Judge Green, and Green ruled wireless

15 would be confined. So for 13 years, every time we

16 wanted to expand a wireless service area, we had to go

17 back to Judge Green to get it preapproved.

18 The long distance prohibition, very easy in

19 concept, a difference between local and long distance

20 calls.

21 Left to answer were things like can you switch a

22 long distance call. It is not carrying a long distance

23 call but can the local switches switch a call, can they

24 provide directory assistance or operator service, is it

25 okay to put out a local pay phone that is capable of use

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1 for long distance calls.

2 These were all big issues and briefed

3 extensively.

4 Small number of lessons from this experience.

5 One -- and you will hear this more from Richard, I

6 expect, or certainly read it in his book -- is a lesson

7 that humility is much to be preferred than exuberance,

8 enthusiasm of ambitious remediers.

9 Richard's subtitle, "less is more," that is

10 absolutely right.

11 When markets and technologies are changing,

12 nobody, not even the very good staff of the Justice

13 Department, is accurately able to predict how that will

14 end up.

15 We have examples of what seemed like very

16 reasonable predictions on which much was staked that all

17 came to nothing.

18 I suggest as a very positive concrete idea the

19 Antitrust Division manual on remedies, which goes

20 through lots of boilerplate. It ought to be added

21 something about considering the limits of your knowledge

22 for predicting the future.

23 There is an obvious connection between the

24 quality and the sureness, the certainty of your

25 substance and how good the remedy is going to be.

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1 Section 2 is a harder thing to figure out,

2 whether you actually have a violation. It translates

3 immediately into the difficulty of coming up with a good

4 remedy.

5 Bill Baxter, God bless him, wanted to forbid all

6 vertical integration by a regulated monopoly. It was

7 premised in a kind of regulation that was going out of

8 style then.

9 That remedy ignored the other technologies that

10 were looming, wireless and Internet. It resulted in a

11 freeze of things as they existed in 1982, so simple

12 things like telephone service or complex things like

13 whether there were vertical deficiencies or vertical

14 problems.

15 In one important respect, the Bell decree was

16 very, very bad. Probably the worst thing about it was

17 it reached out and covered markets that had not been the

18 subject of the litigation.

19 There was a category of activities that had been

20 part of a bill in Congress that hadn't passed called

21 information services.

22 The government, thinking it is a competitive

23 business, just like long distance or equipment

24 manufacturing, said let's prohibit any involvement with

25 overly regulated monopolies in information services.

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1 That had effects that ranged from tiny to significant.

2 On the tiny side, useful services like voice

3 mail were delayed by my estimate about four years. It

4 turns out that voice mail, if you don't answer the phone

5 and someone takes a message, that's something a local

6 telephone company can provide for you more efficiently

7 than any external service provider.

8 Four years of delay getting that. More

9 significant effects were wireless business which was not

10 litigated or really meant to be covered by the decree.

11 I think that was crippled compared to Europe.

12 We were delayed compared to Europe in deployment

13 of wireless services as a result of the restrictions on

14 wireless.

15 I personally think, not to go through this in

16 detail, that our development of the Internet was delayed

17 by about a decade by these restrictions.

18 We had the second string building the Internet

19 instead of the people that had more of the core assets

20 needed to do a good job of it.

21 It is important before I sign off here to

22 compliment Judge Green, give him and the staff of DOJ

23 the highest compliments that are possible.

24 Judge Green had -- I have anecdotes about Judge

25 Green being a great administrator before he got the job

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1 and when he got the job.

2 But he could not keep up with the pace of

3 regulation that this decree produced. That means it

4 can't be done by anybody. I have statistics on that.

5 But that's gilding the lily.

6 One last point, then. I think there is a strong

7 connection from the certainty of your substance to how

8 the remedy is going to work.

9 But there is an opposite effect as well. There

10 is sort of a feedback from problems of remedy to

11 substance.

12 You see this reflected in the recent Trinko

13 decision, where Justice Scalia writes, "Effective

14 remediation of violations of regulatory sharing

15 requirements ordinarily require continuing supervision

16 of a highly detailed degree. We think Professor Oleto

17 got it right that no court should impose a duty to deal,

18 a substantive requirement that it can't explain or

19 adequately and reasonably supervise."

20 If a problem is irremediable by antitrust law,

21 we shouldn't have that as a problem, or, in my terms,

22 you shouldn't be setting yourself up to find violations

23 you can't fix. It is better to cut the law off.

24 This comes up probably most vividly in the

25 current debates over whether discounted bundles should

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1 be Section 2 problems. Microsoft offers you a

2 discounted bundle of multiple products, should that be a

3 violation.

4 And if you can't fix that, then the answer

5 probably is it shouldn't be a violation. I will stop

6 there.

7 (Applause.)

8 MR. ELIASBERG: Thank you, John.

9 Richard Epstein is the James Parker Hall

10 distinguished service professor of law, faculty director

11 of curriculum and director, law and economics program,

12 University of Chicago Law School, where he has taught

13 since 1972.

14 He has also been the Peter and Kirstin Senior

15 Fellow at the Hoover Institution since 2000.

16 He served as editor of the Journal of Law and

17 Economics from 1991 to 2000.

18 Richard has written on a wide range of legal and

19 interdisciplinary subjects, including the recent book on

20 antitrust called "Consent Decrees and Practice" that

21 John just mentioned.

22 Richard, welcome.

23 MR. EPSTEIN: Thank you.

24 You see that John and I have very different

25 styles. And in fact, if I had talked to John before I

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1 wrote the stuff on the AT&T decree, it would have been a

2 much longer book because I would have had to go through

3 all of these situations.

4 Let me see if I can talk a little bit about

5 this, and I'm going to I think start with a point that

6 John ended on, which is the relationship between your

7 confidence in the substantive law and your ability to

8 design remedies on the other.

9 Before I actually came back to look at antitrust

10 laws in some detail, I had sort of forgotten there was a

11 Section 2 and always thought the only thing a sensible

12 antitrust law could do was to try to regulate horizontal

13 behavior by controlling such cases as cartels and

14 divisions of markets, and then as the more difficult

15 task to figure out what should happen with respect to

16 mergers.

17 The reason why the first task is relatively easy

18 and the second task is more moderately difficult is in

19 the first case, you are generally but not always

20 confident that the efficiency gains are very small from

21 horizontal collusive arrangements but the restrictive

22 practices are large.

23 Then as you start going over to the merger

24 areas, you are never quite sure what the relative

25 magnitudes are going to be. So you have a lot of

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1 problems to worry about.

2 Now, when you come to Section 2, after I figured

3 out what this was all about, you realize that there the

4 worm may have completely turned and that virtually every

5 practice which is going to be attacked under Section 2

6 will be the kind of practice which will have some

7 substantial efficiency gain.

8 So you will have to go into a question of

9 whether or not its restrictive component is going to be

10 large enough so as to justify losing that particular

11 gain in question.

12 If your basic intuition is that the magnitudes

13 are going to be roughly of equal proportion at best and

14 you know that the administrative solutions are going to

15 be far more difficult than in the other areas, there is

16 a part of me -- it is not the part of me which I

17 actually believe in 100 percent -- which says maybe we

18 should call the whole thing off and the way in which we

19 solve the problem of remedies under Section 2 is to get

20 rid of liability under Section 2 of the Sherman Act so

21 you don't have anything to worry about at all.

22 I have become reluctantly persuaded that there

23 are a number of cases in which the strategies of

24 foreclosure by contract and otherwise may have some

25 modicum of success.

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1 I guess I backed off that provision and I now

2 believe an ideal operation of either the FTC or the FCC

3 or the DOJ might be able to bring some positive good to

4 this area, even though I think to some extent it is a

5 long shot.

6 In doing this, I should say that I have worked

7 both with Microsoft, although not on the antitrust case

8 here but on other matters, and certainly I worked with

9 John Thorne with respect to the various things having to

10 do with the implementation of the 1996 Act.

11 And indeed, I think I gave him the single worst

12 advice he ever received in the history of mankind when I

13 told him that the statute was actually drafted, this '96

14 Act, in an intelligent fashion.

15 The lesson I learned from that is it wasn't the

16 statute is so difficult. It is one of the things you

17 worry about is the constant drift between a statute

18 which seems to have a game plan that is moderately

19 coherent and administrative implementation and

20 interpretation of it, which can easily run awry.

21 So the whole question of drift within

22 administrative agencies is to me one of the single

23 biggest problems you have with legislative reform.

24 Where you start off, the various questions, and

25 how it is that you manage to keep the relative balance

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1 on the remedial side direct to the administrative issue

2 to the judicial enforcement is to me a very major

3 problem.

4 In dealing with this, what I did -- and this was

5 an inspired thing that Microsoft asked me to do -- is

6 write a history of some of the consent decrees that

7 actually emerged from the various sorts of litigation

8 under Section 2.

9 The first case was a Section 1 case which I

10 talked about, which had to do with the meatpackers case.

11 Though it was a Section 1 case, all the mistakes

12 came in Section 2 guise. What I mean by that is you had

13 there a situation in which there was evident collusion

14 among the packers with respect to the distribution of

15 their goods, but the remedies decided to impose on each

16 of the companies restrictions on what they could do

17 unilaterally in those markets in which they had no

18 monopoly to begin with.

19 Essentially what happened when the thing was

20 subject to litigation is Justice Cardozo was a good

21 common lawyer and said "you make a bed of nails by

22 contract with the Justice Department, you expect to be

23 stung and burned every time you try to roll over on this

24 bed of nails, and I'm not going to let you out of it."

25 So you have this weird situation where the

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1 government continues, in many cases for 30 or 40 years,

2 to insist upon the enforcement of provisions that are in

3 the contract without making any independent evaluation

4 of why it is that they have the slightest bit of good

5 they can confer on anybody.

6 The first lesson one learns about consent

7 decrees is that shorter is better, 40 years is too long,

8 open-ended is simply inexcusable. Once you get over

9 three or five years out, it is almost sure you are going

10 to be making a mistake.

11 What you want to do is to recognize that

12 Shakespeare was right when he said that brevity is the

13 soul of wit. You don't want these things to run on.

14 The explanation was given the movement of

15 companies and technologies are almost always

16 unanticipated.

17 The packers case and Swift and Company actually

18 had its final litigation in the 1960s and had to do with

19 an acquisition of the Greyhound Bus Company.

20 So you can see that the continuity across these

21 cases was in fact something which simply could not be

22 sustained.

23 As you start to move on -- I will not talk about

24 all the cases. But let me talk about one which I think

25 is perhaps the poster child of inept management with

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1 respect to unilateral practices, although, again, it is

2 not quite a unilateral practice case, and that has to do

3 with the United Shoe Machinery case.

4 This is a transaction which began with the

5 merger of United Shoe in 1899. To the extent it is a

6 merger case, of course it is not a pure unilateral

7 practices case.

8 The logic behind this merger was in fact one of

9 immense economic advantage in that shoe making was an

10 extremely complicated process and that you had separate

11 companies, each of whom owned patents which controlled

12 separate stages in the processes.

13 And if you tried to negotiate piecemeal

14 transactions amongst them, what you did is you ran into

15 a classic version of the double, triple, quadruple

16 marginalization problem.

17 When you all the companies, essentially what you

18 did is you created a patent pool which allowed somebody

19 to smoothly price the entire process from soup to nuts.

20 What was interesting is that the antitrust

21 sophistication circa 1910 was probably greater than the

22 antitrust sophistication circa 1960 on this matter, and

23 the Supreme Court let this thing go, understanding

24 exactly what was happening, even though it would not

25 have used language like "double marginalization" or any

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1 of the terms we use today.

2 What happened is after the merger took place,

3 the government just would not let go. This was part of

4 Woodrow Wilson's exuberant progressivement.

5 What you then do is you try to attack various

6 kinds of contractual restrictions that are imposed upon

7 the various lessees of United Shoe Machinery's

8 equipment, most of which had some degree of exclusivity

9 associated with them.

10 To take a simple kind of provision, if it turns

11 you want to use one of our particular machines, you have

12 to use all of our particular machines, and you have to

13 use them for certain periods of length.

14 All these clauses, at least if you take the view

15 of the modern law, essentially engage in the sin known

16 as foreclosure, which means by virtue of the fact that

17 you now control something at one stage of the market,

18 you will preclude competition from taking place at

19 something either upstream or downstream from the thing

20 that you control.

21 The lesson I think one has to learn from this is

22 extremely important, and it actually carries over I

23 think very well to the Microsoft cases.

24 What happens is the government managed after

25 some great deliberation to win these cases, and all of

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1 these offending clauses in the first round of litigation

2 were removed.

3 So now the question is what's going to happen in

4 the marketplace. And the answer in this particular case

5 was absolutely nothing.

6 It turned out that there may have been a 2

7 percent or a 5 percent difference, but that there were

8 huge efficiency advantages associated with being able to

9 get all of your equipment from a single supplier such

10 that if any part of the stream went down, you would know

11 whom to turn to for repair, and that vertical

12 integration was prized by customers, who did not love

13 the thought of trying to mix and match 27 different

14 pieces from 14 different companies, knowing that the

15 interconnections would never be quite right and having

16 each company say that the other fellow had done it

17 wrong.

18 If it is a 15 percent monopoly premium you are

19 paying for piece of mind, it is money well spent in the

20 eyes of many people.

21 What happens is that the clauses themselves

22 turned out to have very little value with respect to the

23 way in which United Shoe continued to operate its

24 business.

25 There is a very important lesson to be learned

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1 from this, which is if you keep the clauses in place and

2 start to fight over them, all of a sudden somebody will

3 actually believe you know something about the way in

4 which your business runs, and by making such a big deal

5 of it as a defendant, all you do is you create the

6 impression that they have greater causal efficacy than

7 in fact they do in the marketplace.

8 So I have a piece of free advice to all clients

9 of mine or nonclients of mine, which is that any time

10 somebody wants to attack one of your contractual

11 provisions on the grounds that it creates market power,

12 exclusion foreclosure, whatever it is, you just

13 surrender, pull the damn thing out and let business go

14 on exactly the same way as it did before.

15 Here I think I disagree a little bit with Frank

16 Fisher with respect to the question about how potent

17 were the various exclusionary provisions Microsoft that

18 had with respect to the kind of things that go on his

19 desktop and so forth.

20 I thought Microsoft made a horrific set of

21 mistakes in terms of the way in which it handled the

22 early stages of the litigation, by hanging on to these

23 clauses as if everything depended upon them.

24 When in fact once they were removed, it turned

25 out that the modifications that were made with respect

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1to Microsoft Explorer probably had much more to do with

2 the decline of Netscape than any kind of contractual

3 provisions that you have.

4 So what you say in effect is this. If you keep

5 the contractual injunction in place in these sorts of

6 situations, everybody is now going to impute high

7 restrictive, low efficiency value with respect to the

8 particular practice in question, and you won't have a

9 laboratory experiment which will allow you to sort these

10 things out.

11 If my intuitions about end-to-end services are

12 correct -- and I think those intuitions are right as

13 much in the United Shoe case as they are in the

14 Microsoft case and vice versa -- what you want to do is

15 pull the plug on the restriction and then simply rely on

16 the efficiency with respect to the products that you

17 want.

18 As it turns out, I think in this world, monopoly

19 is not necessarily an ideal situation, but it is

20 certainly one which is not necessarily less preferable

21 than other situations in which you have coordination

22 problems to replace it.

23 To use the very fancy language some people use

24 today, when you start having to put together equipment

25 from multiple players, it is kind of like a self-imposed

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1 anticommons problem. You have this guy here, that guy

2 there, everybody is getting in everybody else's way.

3 And it may well be that empirically the commons

4 problem, taking everything from a single supplier, even

5 if it is able to expand its control by virtue of the

6 network it has, is a better solution for you than

7 anything else.

8 So now, having said all this, how do we start to

9 think about these questions of design?

10 I will not take too much more time because I

11 think the discussion is important. But I want to say a

12 couple things about John Thorne's remarks.

13 It is not that I disagree with him, but

14 strangely enough, I don't think that John actually

15 talked about the single worst features associated with

16 the decree which were the original structural choices

17 that were made with respect to.

18 If you go back, the FCC was not the world's most

19 nimble agency in the '60s and '70. But by the

20 mid-1970s, after the MCI case and so forth, it did begin

21 to tinker with the prospect that the way in which you

22 try to handle the common carrier system as a common

23 carrier issue was to mandate various kinds of

24 interconnections between the central system and anybody

25 else who wanted to get on.

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1 What happened is if you had kind of a trunk

2 line, other people could hook on and start to add their

3 service. And the theory would be that the function of

4 the legal system would be to make sure that any rival

5 competitor could reach any customer on the AT&T system,

6 and if you could start on the AT&T system, you could

7 reach anybody from a rival competitor.

8 Of course, if you had two rival competitors in

9 different places, then you would have to be able to go

10 from rival A through AT&T, if need be, back to rival B.

11 So that what happens is that the way in which

12 you expanded competition under these things is to

13 mandate intersection.

14 The question is how do you do it. If I

15 understand the situation correctly, what you simply do

16 is ensure compatibility, just as you would in the

17 Microsoft case, and you don't worry very much about

18 pricing issues.

19 The brute fact of the matter is early on if you

20 were tiny in the AT&T system as B, you are getting a

21 subsidy by virtue of the interconnection.

22 What is nice about this subsidy is that it

23 shrinks with time, because as you become larger now, it

24 turns out access to your customers by the main carrier

25 is more valuable than it was to begin with, and after a

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1 while you get yourself into a nice equilibrium.

2 In my view, if they had done that first in the

3 1982 decree and if they had basically blown up all of

4 the unbundled network pricing elements associated with

5 the 1996 Act, you would have been able to see a fairly

6 coherent expansion of what has happened.

7 The thing that I wanted to stress about this is

8 when you are talking about these network industries, of

9 which I think both the computing and I think the

10 telecommunications industries qualify -- but United Shoe

11 does not -- what you want to do in effect is to make

12 sure that interconnections can be obtained at the lowest

13 possible cost and to do nothing else thereafter.

14 It is not that you are going to get yourself

15 into a perfect solution.

16 But I think if there is anything that I learned

17 from the AT&T decree is this constant, mindless, numbing

18 rhetoric about how it is when you force people to sell

19 things to other people at prices that administrators

20 will now determine, incorrectly as a matter of force and

21 effect, that we have somehow removed ourselves closer to

22 a competitive system.

23 The truth about the matter is John I think was

24 right when he alluded to the fact that the rate cap

25 system was a pretty sensible way in which to run that

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1 business, because what rate caps essentially did is you

2 didn't try to use cost-plus pricing, but you took into

3 account the fact that generally speaking, there are

4 always going to be greater efficiencies in telecom.

5 So if you just lower in real terms the rates by

6 2 or 3 percent a year and do nothing else, they will get

7 a little monopoly profits, you will get a lot of

8 administrative savings, and there will be a huge amount

9 of administration underneath the kind of caps that take

10 place.

11 So that kind of mix on remedies is I think

12 exactly what you are after.

13 Here is the way in which I start to think about

14 Section 2 in a word, is that I think basically damages

15 are not particularly important one way or another when

16 you are bringing these government suits, which is why

17 they have not been brought.

18 I think the invalidation of certain kinds of

19 contractual provisions is certainly appropriate and

20 relatively easy to implement, and my advice to both

21 firms is that you basically pull them out of the

22 agreement so that you don't have to fight that battle

23 under adverse terms.

24 And most of the structural remedies are a case

25 of too much at too high a cost. And in general, I can

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1 think of no cases that succeeded on this.

2 I would guess that it was in the trillions of

3 dollars over the last 25 years that we could attribute

4 to bad remedial design in telecommunications, a really

5 very big and substantial number.

6 United Shoe was a small little case. But

7 remember, when they finally got frustrated at the

8 inability to make the contractual restrictions change

9 the behaviors in markets, they broke up the firm, and it

10 sort of went belly up.

11 I think one has to remember that. I'm a lawyer.

12 I don't start with existence theorems about how the

13 government can improve things by picking the optimal

14 choice.

15 I'm a guy who believes that you start with a

16 breach and realize it is substantial, and unless you can

17 find a clean kill, the best thing to do is to stay your

18 hand.

19 Thank you.

20 (Applause.)

21 MR. ELIASBERG: Thank you, Richard.

22 Before we get into the moderated discussion, why

23 don't we go down the panel here and see if any of the

24 speakers would like to take a moment or two to comment

25 on what the other speakers have said.

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1 So with the request that it just be a minute or

2 two, Franklin, let me start with you. Any thoughts?

3 DR. FISHER: Yes. I can't resist it.

4 MR. ELIASBERG: Try to speak into the

5 microphone, please, for the court reporter.

6 DR. FISHER: Sure.

7 I can't resist it. I think the dictum that

8 every practice under Section 2 has large efficiency

9 gains is wrong.

10 I think it is correct -- that every practice

11 under Section 2 is likely to be defended as having large

12 efficiency gains is not the same thing.

13 MR. ELIASBERG: Okay.

14 Dietrich, anything?

15 MR. KLEEMANN: Maybe to John's remark about the

16 remedies, actual remedies.

17 I remember you said maybe in a Section 2 cases,

18 behavior, yes. However, it is not too clear.

19 I want to add something which is I would say any

20 intervention of the state in terms of structural

21 remedies is an intervention into the right of property.

22 If you see a merger case, there the parties,

23 they change themselves, the market such so you can say

24 if they do this in an anticompetitive way, it might not

25 so much be covered by their right of property to do

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1 this, and you can't intervene against such operation.

2 By contrast, in that case, nobody changes the

3 market structure in the same sense. Simply they use a

4 given market structure to achieve some anticompetitive

5 goals.

6 And for me, it is not so obvious that you can

7 intervene in such a situation easily into the property

8 rights of a party which is always some kind of action as

9 if you would an expropriation.

10 On the other hand, you can say commercial

11 property is certainly not to be used in an absolutely

12 free way.

13 It is subject to some fundamental applications.

14 And these fundamental applications certainly include the

15 respect of the basic rules for market economy.

16 And if you heard these basic rules in a very

17 clear, blatant way, it might be justified to intervene

18 into the property rights. But I repeat it probably is

19 in legal terms as opposed to merger control a last

20 resort.

21 Therefore, the hurdle is much higher.

22 MR. ELIASBERG: Thank you.

23 Andy, any thoughts?

24 DR. JOSKOW: Just one thing. I think there is

25 some consensus about what we are saying with regard to

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1 structure versus conduct.

2 What I hear what I think is happening is what we

3 are saying about remedies is actually tying it back to

4 what one might say about what is a real good liability

5 case.

6 If we are saying that, well, you can probably

7 make something out of cases where we can limit or remove

8 certain contractual provisions, at least to foreclosure

9 and reductions of competition, in some cases I think we

10 are in the types of legitimate cases we may be talking

11 about.

12 I think that is important too.

13 MR. ELIASBERG: Thank you.

14 John, any thoughts?

15 MR. THORNE: Can I ask a question instead of

16 making a comment?

17 MR. ELIASBERG: Well, you may ask, yes.

18 MR. THORNE: This is a question for Dietrich.

19 In your remarks, you talked about access

20 remedies as being one of the primary ways you resolve

21 mergers.

22 Then the first issue you listed under the topic

23 of access grants is setting the terms for the access

24 grants, price and other terms.

25 I wondered, you have a large body of mergers

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1 where you have insisted on access grants. How do you

2 deal with the effect of that requirement on investment,

3 investment either by the firm where the requirement is

4 placed, which might want to invest less in stuff it has

5 to give away on regulated terms or incentives of the

6 demanders for access who might not build as much of

7 their own stuff if they can borrow it for free from

8 others?

9 MR. KLEEMANN: First of all, I think I have to

10 say access remedies are the most important behavior

11 remedies, certainly not in general the most important,

12 which are still clear-cut remedies such as divestiture.

13 However, there are situations, in particular in

14 industries where you have essential facilities and where

15 there is the high risk of foreclosure combining

16 essential facilities vertically with players where you

17 have to find a way out.

18 It is certainly true an eternal argument of all

19 incumbents in the possession of platforms or networks

20 that if you interfere with their strategies, you stifle

21 any kind of new investment.

22 Take only the current debate in Germany or in

23 Europe about the demands of the German Telecom to get

24 for their super quick DSL network, fiber network, an

25 exception from the generally regulated rule. Otherwise,

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1 as I said, they would not invest.

2 In my view, this can, however, not be an excuse

3 to do something, to simply accept that one guy is going

4 to foreclose a market at the outset with all the severe

5 consequences for the future development.

6 Having said this, if you go to impose such an

7 access remedy, you have, however, to be fair.

8 I just mentioned in my short statement our

9 solution in the Telepiu case, where we started with the

10 certain bases, a price which is feasible, including a

11 certain margin for them and also some benchmarking with

12 other similar situations, other markets.

13 I think this is a realistic approach, and I

14 don't think that Telepiu's investment over the last

15 three or five years has been harmed by this.

16 Having said this, of course you should do all

17 this in a careful way and not going to impose easily

18 without carefully examination of this kind of

19 commitment.

20 But to confuse and generally to renounce this

21 kind of commitment, even in blunt cases of market

22 foreclosure, I would say would be a general kind of

23 resignation in this area.

24 And I saw in some statements if you are caught,

25 if it is communicated as it is, and I found this kind of

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1 resignation, in particular, given the importance of

2 these kind of markets that have these remedies is not

3 acceptable.

4 MR. ELIASBERG: Richard, do you have a comment?

5 MR. EPSTEIN: I have a couple comments.

6 One, I think with respect to the whole problem

7 about Section 2, I think there are some of these

8 practices which are inefficient. I think they have

9 small efficiency gains and small inefficiencies.

10 One of the things that is most striking about

11 many of these contractual restrictions is they did a

12 little foreclosure and they did a little good. And

13 getting rid of the provisions didn't change things very

14 much.

15 One of the things you always worry about when

16 people knock down contractual terms is if you leave

17 freedom of price, so whatever you couldn't get in the

18 contract term you may well get in the price term.

19 So it is not at all clear you made some major

20 sort of social advancement with respect to these things.

21 With respect to what was just said about the

22 European approach on the remedy side, it is probably

23 something more that David can speak to than I.

24 But the striking differences between the EU

25 remedies with respect to the Microsoft and the American

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1 remedies are very dramatic. What happens is there are

2 two dangers here, and I think he has only alluded to

3 one.

4 The first danger is, of course, that monopoly

5 foreclosure will take place.

6 The other danger is while subsidization through

7 expropriation of the transactions, where you no price

8 term associated with them for the divestiture of

9 intellectual property or patents of some kind or another

10 or prices that are well below the cost and, in fact, one

11 of the problems about John's industry which I think

12 shows this is if you go back to the history of telereg

13 pricing, what those guys managed to dream up in the FCC

14 was they gave you a very small rate and said they would

15 be depreciating it on you.

16 Since they gave you a small rate base, they gave

17 you a very low rate of return. The standard history of

18 regulated industries on pricing is if you give people a

19 large rate base, taking very little risk and they get a

20 smaller rate of return, and if give them a higher rate,

21 what they did under telereg was to give them a small

22 base and a low rate, which had really very after adverse

23 consequences.

24 The Supreme Court, they would not attack this as

25 either a statutory construction matter nor in the end as

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1 a takings and regulatory kind of takings issue.

2 MR. ELIASBERG: Thank you, Richard.

3 Why don't we go to the moderated discussion.

4 And with this we will not only have our panelists, but

5 David Heiner has graciously agreed to also participate.

6 Let's take a look first at slide 4.

7 And I will go ahead and just read this into the

8 record.

9 "Finding the right remedy for antitrust

10 violations is never easy, and we have never been

11 particularly good at it."

12 And that comes from Herbert Hovenkamp's "The

13 Antitrust Enterprise."

14 Would I be correct in assuming that there is no

15 disagreement with that among any of the panelists?

16 MR. EPSTEIN: Actually, there is some. One of

17 the reasons why there is some disagreement is I think

18 Herbert got the remedies wrong.

19 He was really very harsh on the Microsoft

20 remedy. I think, for example, he wildly overrated the

21 technical efficiency of the OS 2 system and created the

22 error that I think constantly happens, which is to

23 assume whenever there is a restricted practice which we

24 have now struck down, it was that practice rather than

25 the inherent merits of the product which led to the

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1 loss.

2 I thought of all the Microsoft exhibits I read

3 the one that was really devastating on that point was

4 the one prepared by Kevin Murphy which went through the

5 question of why it was all the other systems had failed,

6 given very powerful and detailed explanations based on

7 structure architecture and design.

8 Yes, I think we aren't particularly good at it.

9 It is not the case that the author of the quote is

10 necessarily immune from the criticism.

11 MR. HEINER: I could pick up on that a little

12 bit and specifically comment on the remedy that

13 Professor Fisher pointed out that Professor Hovenkamp

14 proposed in the Microsoft case.

15 First off, I would agree with the quote and I

16 would agree with the thrust of Professor Fisher's

17 presentation that remedies are certainly hard in Section

18 2 cases.

19 I have personally found that to be the case with

20 respect to the Microsoft issues that I have been dealing

21 with for many years.

22 My sense of the situation is that to some extent

23 it may be that remedies are so hard in Section 2 cases

24 because quite often the underlying structure is in fact

25 efficient and perhaps even the conduct is efficient as

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1 to which there has been liability determined.

2 But when you get to the remedy phase, you maybe

3 begin to have second thoughts about some of that.

4 That is sorted of pointed up by Professor

5 Fisher's application about the applications barrier to

6 entry in the Microsoft case.

7 The applications barrier to entry is a

8 reflection of natural economic forces, as the professor

9 said.

10 It reflects the value of compatibility to

11 consumers. They want to get a PC that is the same as

12 other PCs, it runs the same applications.

13 Many of the remedies that were proposed through

14 the years went to try to attack the applications barrier

15 to entry and thereby break compatibility.

16 People turned away from those remedies quite

17 properly because they didn't want to give up that

18 benefit. I think that was very much the case with the

19 remedy number 5 that we saw from Professor Hovenkamp.

20 The idea there was that Microsoft should be

21 obliged to conduct an auction of the Windows source

22 code, the crown jewels of the company essentially, to

23 end licensees who would then go out and offer Windows in

24 competition with one another.

25 What would have happened in that case is that

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1 the value of Windows and the price would have

2 essentially tended toward zero.

3 Any time you have two or three or more firms

4 with the exact same information good with a zero

5 marginal cost, they will tend to compete the cost down

6 to zero.

7 The effect would have been quite dramatic in

8 terms of taking away the value of what is really one of

9 the most valuable products of all time.

10 The three firms, to try to break out of that,

11 would have sought to differentiate their products.

12 They would have competed with one another to add

13 different features and thereby break compatibility.

14 That would not have been maintained, and customers would

15 have lost the benefit of that.

16 That I think is why the Division did not go down

17 that path. But I do think it illustrates the broader

18 point about many times the remedies may point up that

19 the existing situation is efficient.

20 MR. ELIASBERG: Frank, did you want to make a

21 comment on that?

22 DR. FISHER: Well, I don't agree with that.

23 MR. HEINER: I know.

24 DR. FISHER: I agree that the successor firms

25 under that remedy would try to differentiate themselves

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1 and try to improve their products in various ways.

2 All of them would have a great big incentive of

3 remaining compatible with the existing stock of

4 programs. I think it is unlikely they would try to

5 differentiate themselves in ways that would break

6 compatibility.

7 MR. EPSTEIN: I think the difficulty with that

8 logic is the only way they could avoid breaking down

9 compatibility is to meet with one another.

10 What you would have is a contract combination in

11 restraint of trade. It would have to take place because

12 the gains, as Frank says, from coordination are so

13 great.

14 But it can only take place underneath some sort

15 of government supervision to make sure that while those

16 folks are sitting in the room to figure out compatible

17 features they don't manage to figure themselves out on

18 compatible prices.

19 In addition to that, as everybody is trying to

20 develop products to make sure that they can make the

21 compatibility, everybody has to slow down with respect

22 to what they are doing to make sure the compatibilities

23 will survive.

24 My own view about it is so long as you allow for

25 some degree of competition on top of the operating

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1 system that was designed under the Kollar-Kotelly

2 decree, that's all that you can expect.

3 I will say this, since he was my former student.

4 When Doug Ginsberg actually evaluated this particular

5 portion in the state case which Hovenkamp helped to

6 author, he did not give a Chevron deference kind of

7 answer which said we don't know what is going on there,

8 when are not smart enough to figure all this out, if she

9 thinking it is right, we are just going to let it fly.

10 He said well done. This was in fact very much

11 considered on the part of the Justice Department.

12 Frank's position lost. And frankly, well done.

13 DR. FISHER: Frank doesn't agree with that

14 either.

15 MR. EPSTEIN: I'm stunned to hear.

16 DR. FISHER: The compatibility I was talking

17 about -- we may be using the term a little bit

18 differently -- was remaining compatible so that any

19 program that ran on Windows at the time that this

20 occurred would continue to run on the operating systems

21 as they developed at the other company.

22 I was not referring to a situation in which they

23 had to remain compatible with each other other than

24 that.

25 MR. EPSTEIN: I did misunderstand you.

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1 But having that understanding, it seems to me

2 that software designers who were now going to have to be

3 compatible with foreign-compatible systems are going to

4 have incentives that are less than ideal.

5 This is a case in which the monopoly platform

6 has an advantage and it is shown by virtue of the fact

7 that you can design something for a market where you

8 will get 10X as opposed to 2.5.

9 That's why it is that Macintosh, although it is

10 finally moving up there, is always essentially first we

11 do the Microsoft system and two years later you come out

12 with it.

13 What is the difference in the number of programs

14 for one system as opposed to the other?

15 MR. HEINER: It is large.

16 MR. EPSTEIN: 10, six, whatever it is.

17 That's one of the things you start to give up in

18 this game. There are no free lunches here.

19 DR. FISHER: It is true, and I thought I said

20 so, that it is probable that eventually anyway the

21 natural effects will take over and one of these things

22 will become very large again.

23 That's perfectly true. That's a defect. You

24 can't prevent that.

25 MR. EPSTEIN: So the frictions aren't worth

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1 running.

2 MR. HEINER: Let's turn to that different point,

3 which is the natural tendency of the market to move on

4 in high-tech industries.

5 It is kind of interesting to see now in 2007, is

6 there a huge excitement when Microsoft comes out with

7 Windows Vista, the latest version, are people running to

8 get Vista to run Vista applications?

9 And the answer unfortunately for Microsoft seems

10 to be not as much as we might like.

11 Where is the excitement today in terms of

12 applications? It is all Internet-based services. So it

13 is the YouTubes of the world and My Space and Friendster

14 and Flicker and Yahoo and Google and all that. That

15 runs across any browser on any operating system.

16 Here is another case where technology does move

17 on, market forces tend to take care of themselves. I

18 don't know what will come in 2010 and 2012.

19 Microsoft will be offering its own

20 Internet-based services increasingly in the years to

21 come.

22 But it does feel like already the discussion we

23 had in the late '90s is moving on.

24 MR. ELIASBERG: With that in mind, looking back

25 again at the statement by Hovenkamp and putting aside

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1 that people who live in glass houses should not throw

2 stones, Richard's point, I would ask particularly of

3 Frank and Richard, any Section 2 cases come to mind,

4 government Section 2 cases where the remedy was right,

5 where the agency got the remedy right?

6 MR. EPSTEIN: Microsoft.

7 MR. ELIASBERG: Frank?

8 DR. FISHER: None. I'm not suggesting it was an

9 easy task either.

10 MR. ELIASBERG: Not one case?

11 When you said no, you mean no to Microsoft or no

12 case at all?

13 DR. FISHER: I don't agree with it for

14 Microsoft, and I cannot think of any case in which it

15 has been really very well done.

16 That is partly because -- three reasons why.

17 One, I'm probably not familiar as I sit here with all

18 the cases. I think that is probably true.

19 Two, it is a very difficult problem.

20 Three, until fairly recently, my impression is

21 if you go back historically that the record of the

22 amount of thought put into this in Section 2 cases is

23 rather poor.

24 MR. ELIASBERG: Okay.

25 MR. THORNE: Let me amplify the number of

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1 Section 2 cases that might have come out correctly.

2 The Seventh Circuit decision written by Judge

3 Cudahee in MCI versus AT&T drew a distinction.

4 They articulated a broad essential facilities

5 doctrine that probably does not exist in American law.

6 They drew a distinction between kinds of

7 circuits that AT&T was voluntarily selling to others.

8 When MCI came up to the windows and said "can I have

9 some of those too, please," AT&T said "no."

10 That was a violation. So that piece of it was

11 decided by the court as a violation. And the remedy was

12 you must provide to MCI what you voluntarily sell to

13 others on the same terms.

14 There was another piece where MCI came to the

15 window and said I haven't built my long distance lines

16 to San Francisco, will you give me big chunks of your

17 long distance network, and Judge Cudahee said no, we are

18 not going to give that to you. That's an asset. If you

19 want to compete for it, you have to build yourself.

20 His decision and the remedy which is if you are

21 voluntarily offering something, don't discriminate

22 against rivals, that was a pretty simple one and I think

23 correct.

24 MR. EPSTEIN: That fits with my program, which

25 is nondiscrimination is another way of saying

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1 interchange which is something you mandate.

2 It is kind of a common carrier remedy. The

3 reason you do it through the antitrust situation as

4 opposed to the FCC is since they voluntarily priced it

5 so you didn't have to have a ratemaking hearing going on

6 in order to deal with that issue.

7 So that you got the real advantages of

8 essentially both halves.

9 MR. THORNE: If you are worried about investment

10 deterrents, when a firm voluntarily sets the terms, you

11 don't worry about it and you say do for others what you

12 do for others.

13 MR. EPSTEIN: To me that has always been the

14 pattern and the great mistake in the 1996 act which was

15 amplified by the administrative rules was the horrific

16 pricing with respect to the unbundled network elements.

17 That was done through legislation and then

18 through pricing at the administrative level.

19 The basic position I would take and it applies

20 to the Microsoft remedy in Europe is transferring

21 assets, no, facilitating interconnections, yes, where

22 you would like to be.

23 MR. ELIASBERG: Andy?

24 DR. JOSKOW: I'm not sure zero is the right

25 answer on the government's effectiveness.

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1 I don't know effectiveness, but on what were

2 appropriate remedies.

3 I mentioned the Dentsply case which was about

4 false teeth. That was a Section 2 case. It seems to me

5 certainly the exclusive dealing contracts were the place

6 to look in that case because the jury is still out on

7 what happened.

8 Visa and MasterCard, which is really a Section 1

9 case but like a Section 2 case, if there is a finding of

10 liability, the rule about allowing banks to issue cards,

11 presumably American Express cards, seemed to be where to

12 look.

13 You can argue about whether those contracts were

14 efficient, and the argument had been strong they should

15 have won the case. Once there is liability, it seems

16 like those remedies are the place to look.

17 That is consistent with what we have been saying

18 in these kind of very stark contractual cases. If there

19 is anyplace where there was a remedy, it would be in

20 those cases.

21 MR. EPSTEIN: Visa is a client. What can I tell

22 you?

23 I didn't work on this case. The Walmart case

24 which talked about the illegal tie-in between the

25 various debit and credit cards as opposed to the pin

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1 debit, this is another illustration.

2 There is $3 billion paid out. They removed the

3 restrictions, and eight people decided to abandon the

4 thing, or a number like that. You can check with the

5 Visa people.

6 The change in actual on-the-ground behavior by

7 virtue of removal of the tie was nonexistent. Keeping

8 this tie is yet another version of a suicide pact that

9 many large corporations do. They overestimate the value

10 of the restraint to their business.

11 If you are sitting there and you have a bunch of

12 customers, a thousand coming in, even only 5 percent of

13 them use whatever you think to be the elicit tying

14 thing. You don't want to chase away 5 percent of your

15 business.

16 Dennis Carlton gave his most sophisticated

17 testimony and great class action stuff. In the end, it

18 is like as Rick Blaine said, it is not worth a hill of

19 beans in this crazy world.

20 DR. FISHER: Just one thing about that.

21 I am in fact the Jane Berkowitz Carlton and

22 Dennis Carlton --

23 MR. EPSTEIN: Dennis is an old and dear friend.

24 DR. FISHER: He is an old and dear friend of

25 mine too. He may in fact have given a great deal of

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1 fine testimony, but it was only at the class action

2 side.

3 The guy who gave the testimony in the Walmart

4 suit generally was me.

5 MR. EPSTEIN: I stand corrected. I thought you

6 guys did a terrific job of lawyering.

7 It is interesting, this is another point which

8 we didn't talk too much about.

9 Essentially network industries tend to be

10 two-sided industries, and they don't have any unique

11 pricing equilibrium.

12 Trying to drive everybody down to marginal costs

13 gives you all the same problems that you had with the

14 marginal cost controversy and the bridge which Viccerey

15 talked about in the 1940s.

16 These are very hard things to work out. That

17 was just another case in which the tie-in arguments were

18 very eloquent but the actual change occurred after the

19 lawsuit was finished.

20 MR. ELIASBERG: Perhaps hold that thought.

21 Before we go on, did you have any questions,

22 Dan?

23 With that respect, why don't we have slide

24 number 8.

25 The slide reads "Conduct remedies are more

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1 effective than structural remedies in Section 2 cases."

2 Dietrich, I will let you off the hook on this

3 one because we understand from you and Per that indeed

4 under your regulation, 2001 regulation, there is a

5 presumption in favor of civil remedies.

6 So you sort of have it mandated to you. But I

7 would like to start out with getting the reaction of the

8 other panelists.

9 Yes or no, is it more accurate or not that

10 conduct remedies are more effective than structural

11 remedies in Section 2?

12 MR. EPSTEIN: It is an ambiguous question.

13 Certainly they are if effective means does it

14 make as great or a smaller change. It makes a much

15 greater change to use a structural remedy than a conduct

16 remedy.

17 But if effectiveness means do you get more

18 social surplus from the remedy, which is more Draconian,

19 I think, in most cases, the answer is not.

20 So what you want is a remedy which is less

21 intrusive because it does modest harm and almost no bad,

22 as opposed to one which is like to create harm because

23 it is effected with the wrong sign attached to it.

24 MR. ELIASBERG: In your thinking, usually

25 conduct remedies will do less harm?

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1 MR. EPSTEIN: And a little bit of good. My

2 basic schtick on that is usually the underlying business

3 doesn't change that much.

4 That's not an argument for keeping it. In my

5 book, I advocated unilateral surrender, which I said

6 that rather than even get yourself into trouble and

7 having all these learned economists, why would you want

8 to invite trouble from Dennis? What you do is pull the

9 damn thing out, and it turns out you keep 90 percent of

10 your business.

11 MR. ELIASBERG: On that score, Frank, given the

12 chair that you hold and also the positions that I

13 understood you to be making in your presentation, what

14 are your views on this, particularly with respect to

15 what you said about Microsoft?

16 DR. FISHER: I agree with the first half of what

17 Richard said. I'm not sure about the second half.

18 Conduct remedies are easier to get. They are

19 easier -- they are not as likely to do serious harm. I

20 agree with that.

21 They can be awfully difficult to supervise

22 effectively.

23 The part I don't necessarily agree with is they

24 basically have no effect.

25 I think structural -- there are not a whole lot

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1 of cases with really big structural remedies, and I

2 think rightly so.

3 MR. ELIASBERG: Anybody else?

4 MR. KLEEMANN: One problem in this respect.

5 If we are talking about behavioral remedies and

6 structural remedies, it seems that there is a clear

7 distinction between those in practice.

8 There are remedies which are just at the fall

9 line. Just to give you an example, we had the case

10 where we had a monopolist in France for energy who

11 bought up a large German competitor and they would

12 remove a potential competitor.

13 We had to look at the situation. The structural

14 remedies, we cannot force EDF to sell four or five

15 French nuclear power plants. Therefore, we had to see

16 for a different way to open up the French market and to

17 create the market.

18 As a rule of thumb, to have a market, you need

19 an ability of one sort of the nature of customers.

20 And, therefore, we asked EDF to auction on a

21 regular basis 6000 megawatt capacity in so-called

22 virtual power plants.

23 At least for five years it is going on. This

24 facilitated significantly the creation of the market in

25 France in terms of protecting this.

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1 You would see the first sign since we are able

2 because we asked them to behave in a certain way, you

3 would define as access to energy, gasoline comes through

4 too.

5 But we couldn't change the sector of the market

6 completely. I would be cautious to put too much

7 emphasis on difference too.

8 MR. THORNE: I agree with Richard that the

9 question is ambiguous and it depends on what kind of

10 conduct you are prohibiting or requiring.

11 The dimension on which remedies get really bad

12 is the time dimension. It is not like wine that gets

13 better if you save it.

14 Conduct remedies you enforce over long periods

15 of time. Structural remedies, you do them and then the

16 market and the firms, they get on with life.

17 Bad things that are part of a structural remedy

18 get cured in the market adjusting. Conduct remedies can

19 skew things over a long period and have much more

20 harmful effects.

21 MR. ELIASBERG: If you have a structural remedy,

22 you would be saying it is important not to have

23 something where there is a conduct remedy preventable,

24 for example, like a line of business.

25 MR. THORNE: Bill Baxter had a very good idea

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1 when he came to the Antitrust Division. There were all

2 these -- he had a program of let's root them out and

3 vacate them.

4 They way outlived their lifetime. Anything that

5 takes very long to happen is probably a bad idea.

6 DR. JOSKOW: This reads like an empirical

7 question. The problem is under the second clause,

8 structural remedies, we really don't have many examples

9 to look at.

10 I do agree with the instinct that people have

11 with regard to substantial costs and through structural

12 remedies.

13 The conduct remedies, on the other hand, you

14 can't think of conduct remedies that don't require the

15 kind of line of business intervention. You can think of

16 conduct remedies that are structural in the sense that

17 you are in or out.

18 So in that sense, in those cases they could be

19 effective.

20 MR. EPSTEIN: I would draw a distinction on the

21 conduct remedies. I think things like the early decrees

22 from United Shoe. It says these foreclosure clauses

23 will never be used again in a lease, and they lasted for

24 30, 50 years.

25 I think when the conduct remedies start to say

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1 you have to provide a mix of services at certain kinds

2 of prices --

3 MR. THORNE: Let's license all patents at

4 reasonable royalties.

5 MR. EPSTEIN: Which is in many of these decrees,

6 which is a suicide pact.

7 There is a pretty good empirical reason to

8 believe if you take compulsory licenses, ideally if you

9 had to only issue compulsory licenses, you couldn't

10 practice the patent, you would want the income stream to

11 equal exactly on net what you would get if you practiced

12 the patent before, and that would leave you indifferent.

13 The theory would be if the government paid a

14 lump sum, you get the marginal cost at the back end.

15 I'm not aware of any instance associated with

16 any compulsory licensing scheme where that condition has

17 been met. Almost invariably what happens is the

18 licenses come very cheap in many industries or in

19 certain industries like the copyright stuff, the radio

20 cases, things where they have different reasons, many of

21 the licenses, the increases are so high they drive half

22 the stations out of business.

23 This is a situation where in some industries you

24 are systematically low and others you are systematically

25 high. So you don't want to be systematically in that

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1 business.

2 MR. DUCORE: To what extent do people think that

3 the efficacy of a conduct remedy would vary or would

4 depend on the kind of violation, for example, an

5 exclusive dealing violation versus a predation

6 violation?

7 MR. EPSTEIN: In exclusive dealing, you could

8 prohibit the foreclosure clauses. The ASCAP decree, the

9 first time out of the box they said you cannot license

10 one of these things where you have to take it for the

11 whole time of the station as opposed to the amount of

12 time that's being dedicated to music.

13 Over the next 70 years of that decree, nobody

14 ever argued about that provision.

15 I think with the exclusionary, you have some

16 fairly good fixes.

17 But in predation, I wouldn't know what it is.

18 Do not sell it below cost in an industry where cost

19 declines at 22 percent a year this year and 42 percent

20 next year?

21 It is so incoherent to me it seems to me what

22 you have done in the name of a conduct remedy what you

23 have done is you have a ratemaking procedure done

24 through some sort of special master.

25 MR. DUCORE: We have broken up the slide. The

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1 next slide would be structural remedy.

2 I think we can talk about whichever slide is up

3 there. My next question is along the lines of similar

4 to what kind of conduct violation.

5 Does it make a difference in your views, in your

6 thinking about a structural versus a conduct remedy

7 whether the violation itself is a monopoly acquisition

8 violation versus a monopoly maintenance violation?

9 MR. EPSTEIN: By conduct? I know what it means.

10 You are not talking about mergers in the acquisition

11 side?

12 MR. DUCORE: No. But if the conduct led to the

13 monopoly that didn't exist previously, does that make

14 more of a case for a structural remedy?

15 MR. EPSTEIN: I can't think of any reason. Can

16 you? I think most of us -- we are willing to surrender

17 on both cases.

18 DR. JOSKOW: You still have to think about in

19 the business sense what the market would have looked

20 like.

21 I don't think we have any idea. That puts aside

22 the practical issues we discussed with regard to

23 structural remedy.

24 MR. DUCORE: Does it make a difference whether

25 in the trial, assuming there has been a trial, that

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1 there is no evidence -- that the evidence shows that

2 there was no necessarily efficiency basis for the

3 monopoly, the monopoly was caused by the conduct? Does

4 that reduce your concern about fixing a structure?

5 MR. EPSTEIN: I think somebody, Frank or

6 somebody mentioned reversability is an extremely

7 important consideration in these things.

8 In fast-moving technological industries, you

9 can't reverse the 2006 in 2007. Given the pace in which

10 these cases run, you are typically talking years' delay.

11 I think the effort to try and get yourself back

12 to the old situation and sort of engineer forward from

13 that to where you would have been in the absence of is

14 just hopeless.

15 DR. FISHER: I agree with that. I don't want

16 you to think I'm totally negative.

17 MR. EPSTEIN: We agree on 85 percent.

18 DR. FISHER: Yes, but it is not the same 85

19 percent.

20 MR. EPSTEIN: It has to be.

21 DR. JOSKOW: The same 60 percent.

22 DR. FISHER: Anyhow, I agree with all of that.

23 The pure way the question was posed supposes

24 that the monopoly is solely the fruit of conduct that

25 has no efficiency consequences. And presumably you

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1 could take that to mean that if you prohibited the

2 conduct, the monopoly would cease to exist.

3 I think that's very rare. But if that is true,

4 that would be the case with prohibiting conduct.

5 The question I think may presuppose that

6 reversability is possible.

7 MR. ELIASBERG: I want to be sure I understand.

8 For example, in United Shoe, to take a case that

9 is a little more neutral to everyone, the situation may

10 well be that the contracts involved added to monopoly

11 power, added to a larger market share. But absent it,

12 there would still be, if you will, a monopoly.

13 So is everyone saying the same thing, that is to

14 say, that in a situation like that, a structural remedy

15 would be inappropriate?

16 MR. EPSTEIN: It would create the vertical

17 difficulties that the merger managed to overcome.

18 Remember that was a situation where you had guys

19 lining patents up. The last thing you want to do is

20 destroy the efficiencies.

21 So you got rid of the clauses, and it turned out

22 it made relatively little difference. And then the

23 government had another breakup, and that made a lot of

24 difference and didn't help anybody.

25 By that time, foreign competition was real in

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1 the United States. And now the major American

2 competitor is no longer.

3 I have to go in two minutes to catch a plane.

4 Can I make one little kind of observation?

5 On the intellectual property stuff --

6 MR. ELIASBERG: Which was the next slide.

7 MR. EPSTEIN: It is property. There is some

8 Supreme Court or Court of Claims case that somehow the

9 takings clause doesn't protect issued patents out there

10 which I think is most dangerous stuff.

11 The systematic attack on intellectual property

12 is often misguided. If it is not, you reform the

13 intellectual property law, change fair use. The last

14 thing you want to do is either bolster or weaken a

15 patent in the context of an antitrust dispute.

16 That's why I don't like the EU approach with

17 respect to Microsoft. In its original version, it said

18 all trade secrets shall go into the public domain.

19 It is not only in Europe. It is worldwide. The

20 last decree was awfully generous in allowing the

21 competitors to take the stuff from Microsoft and use it

22 to build rival networks.

23 I know you have gone ape over the case. It

24 can't be because you think it is the same as the

25 American decree.

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1 MR. HEINER: I touched on this a little bit this

2 morning before you got here.

3 MR. EPSTEIN: You did go ape.

4 MR. HEINER: The proposition -- I think you

5 might as well put up the next slide on IP. The

6 proposition was --

7 MR. ELIASBERG: Slide 9.

8 MR. HEINER: -- should IP be treated the same as

9 other kinds of property.

10 What we are concerned about now under the

11 European approach is will IP be treated as property at

12 all.

13 That's the fundamental question, because this is

14 a case where we have a few dozen patents at issue and a

15 decision or a statement of objections recently by the

16 Commission that seems to suggest, although it is hard to

17 tell, that maybe those patents aren't worth much at all

18 and that the trade secrets are really not to be valued

19 at all and the same for the copyright, for that matter.

20 So for us, the first line of defense is just

21 should IP be treated as property, period.

22 MR. EPSTEIN: Thank you all. I have to run to

23 catch a plane.

24 MR. ELIASBERG: Let me sort of ask a follow-up

25 question that repeats a bit what David and Richard were

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1 going into.

2 In a Section 2 case, when should compulsory

3 licensing be considered? No takers on this?

4 DR. FISHER: I will give it a try. I'm doing

5 this on my feet. I'm sitting down.

6 One could imagine a case in which a patent has

7 been grossly misused and misused in such a way as to

8 preserve a monopoly.

9 One way to get around that is to say, okay,

10 let's stop the misuse. Another way to get around it is

11 possibly the only way to reverse that might be to have

12 compulsory licensing.

13 That's the best I can do with it. I'm not

14 really certain.

15 MR. ELIASBERG: I am going to put you on the

16 spot, Andy, in your position with NERA.

17 Sometimes you have to quickly make an assessment

18 and a statement. What are your views on that?

19 DR. JOSKOW: I agree with Frank.

20 MR. THORNE: There was an actual experiment run

21 in the 1956 Bell decree which required at that point the

22 premier American research facility, Bell Labs, to

23 license on reasonable terms all its patents and,

24 secondarily, not to practice them itself except to the

25 extent they were used in providing accounting for a

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1 telephone service.

2 So the AT&T company was not allowed to sell

3 computers to people even though they invented them,

4 lasers or transistors or any of the gear they naturally

5 would have done if they used their own patents.

6 They could license them. I don't know if that

7 was good or bad. It was a very large experiment run on

8 a very large generator of IP.

9 MR. ELIASBERG: Let me ask you, John, if you

10 know, in that decree, was the compulsory licensing

11 royalty-free or not?

12 MR. THORNE: To a small number of favored

13 providers, they were royalty free. For most people who

14 would want to use the patents, they were on reasonable

15 terms.

16 I think in the almost 30 years that that decree

17 was in effect, I think there were maybe two disputes

18 brought to a magistrate in the District Court.

19 Otherwise, they appear to have been without dispute and

20 they were cheap and nondiscriminatory.

21 MR. ELIASBERG: Sort of a follow-up question for

22 anybody on the panel. And Dietrich, I'm also looking

23 toward you on this one.

24 When is it appropriate to have a royalty-free

25 license in a Section 2 case? Not just compulsory but

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1 royalty-free.

2 MR. KLEEMANN: If I can take a position, it is

3 with respect to the merger practice. It is not an issue

4 there so much.

5 The issue for us is a merger, for instance,

6 where one company takes over assets to which essential

7 patents relate, and essential patents are those which

8 cannot be circumvented by producing a certain product.

9 That means if a competitor gets these kind of

10 essential patents, there is a high risk that he could

11 exclude all his competitors as a consequence, and there

12 either we would have a case at all and there are cases

13 where we had this danger and the merger was abandoned

14 afterwards. Or we would at least ask in large instances

15 on the fee to spend basis, which is by the way in many

16 industries the standard.

17 In particular, if you have the standard-setting

18 bodies, they are all working on the lease rent terms.

19 That would be the type of case for us.

20 MR. ELIASBERG: It is usually not -- Frank, Andy

21 and John, anyone care to address this?

22 DR. FISHER: The only merit I can see in a

23 royalty-free licensing as opposed to compulsory

24 licensing at reasonable royalties is it prevents

25 argument about what the reasonable royalties are.

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1 Apart from that, it seems to me that there isn't

2 any case for that. That seems to be simply an

3 expropriation of intellectual property.

4 I'm unable to think of a situation in which

5 that's the only way to remedy the problem.

6 MR. ELIASBERG: Okay. Andy or John?

7 DR. JOSKOW: It does seem like one can always

8 think about that in a competitive market, but for the

9 monopoly, there was some competitive prices, competitive

10 royalty that one can imagine is out there so that it is

11 hard to imagine that one would want to therefore impose

12 zero royalties.

13 Even in the merger cases, when there is

14 licensing required, what is required is paid up licenses

15 with no ongoing royalties often. But it has to do with

16 more of the ongoing interaction between the two firms.

17 But even in cases like that, you want some kind

18 of compensation for the product.

19 MR. THORNE: As a believer in the principle that

20 you learn something about whether there is a violation

21 from whether there's a remedy, I can't imagine a

22 violation that requires that as a remedy.

23 MR. DUCORE: Again, a consensus that a zero

24 royalty is never appropriate.

25 MR. THORNE: The consensus is nobody can think

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1 of a violation where that would be the right remedy.

2 MR. DUCORE: Is it sort of a philosophical

3 concern that there must be value to the intellectual

4 property or is it a concern that we haven't come across

5 a fact pattern that demonstrates that but for the

6 illegal conduct, the intellectual property holder would

7 have had nothing of value to hold out to customers?

8 DR. FISHER: Had that been the case, it was

9 pretty farfetched. What is happening is there would

10 have been competing patents.

11 But the defendant has managed somehow to make

12 competing patents unprofitable or to absorb or it bought

13 up all the competing patents as we established the

14 monopoly and, therefore, has been able to charge a high

15 price for the patents.

16 The monopoly offense, the effect is to acquire

17 the patent monopoly.

18 Arguably you could say it would be worth very

19 little if they had done that. I can't think of an

20 actual case.

21 DR. JOSKOW: The patents competed in the market,

22 right?

23 DR. FISHER: They didn't because every time

24 somebody filed for a patent, these guys came along and

25 bought it up.

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1 I don't know of any case like that.

2 MR. DUCORE: What about a situation where,

3 assuming the facts exist to show this, you could show

4 that but for the violation, technology would have gone

5 along in a direction that didn't infringe patents?

6 In other words, you have some kind of failure to

7 disclose and lock in and things of that nature, so that

8 by the time -- it was a fact issue clearly.

9 But the thrust of the violation is that the

10 technology practitioners would not have locked

11 themselves into this technology and then had liability

12 to the patentholders.

13 DR. FISHER: I'm not going to say anymore.

14 DR. JOSKOW: We think we know what case you are

15 talking about.

16 MR. ELIASBERG: There are no comments on that

17 one. Actually, I would -- can we have slide 6, please.

18 This is a quote from Microsoft 3. "Relief

19 should be tailored to fit the wrong creating the

20 occasion for the remedy."

21 I think all of you have talked or made allusions

22 to the different types of, different kinds of Section 2

23 violations.

24 I just wanted to go back to this.

25 Vis-a-vis conduct versus structure, this whole

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1 notion of conduct versus structure, not to repeat what

2 people have said about the virtue of conduct in general

3 or the virtue of structure in general or all that, but

4 thinking of the frequent types or classifications of

5 Section 2 conduct, predatory pricing, predatory business

6 bidding, refusal to deal, bundled discounts, are there

7 any where it seems cry out for a conduct decree or any

8 that seems to on the other hand cry out for an approach

9 where structural relief would be more appropriate?

10 DR. FISHER: Can I comment on the quote?

11 MR. ELIASBERG: Yes.

12 DR. FISHER: That is one of the appropriate

13 objectives of if you want a remedy to satisfy. I would

14 be happier if it had said relief should be tailored to

15 fit the consequences of the wrong creating the occasion

16 for the remedy.

17 I don't think it is enough -- this is putting

18 the genie back in the bottle again. I don't think it is

19 enough to say we are going to tailor something that if

20 1947 ever comes around again, this wouldn't happen.

21 If you could figure it out, what you want to do

22 is restore competition. That doesn't necessarily go

23 with this.

24 MR. ELIASBERG: Anything else?

25 DR. JOSKOW: What is the wrong? Is it the

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1 monopoly or is it the conduct?

2 It seems like it is hard to determine how much

3 of a monopoly is because of the behavior. So it seems

4 that this is really talking about the incremental

5 effects of the behavior. If that's what it is talking

6 about.

7 DR. FISHER: I think it assumes Judge

8 Ginsburg -- I don't think that's what he meant. I agree

9 that's what he ought to have meant.

10 MR. THORNE: One difference you haven't focused

11 on is the difference between relief that is ordered

12 after an adjudication of a violation versus a consent

13 decree, which is a little bit like a plea bargain, where

14 the defendant is facing breaking up into eight or nine

15 or 10 or 12 pieces.

16 Instead, I will accept the other conditions that

17 you want and then the sentence reads as relief should

18 not go beyond addressing the violations that were being

19 proved in the case that got started prior to the

20 settlement as opposed to you have a willing defendant

21 and you have thought of a lot of other good things the

22 defendant could do to improve the markets and you would

23 like to impose a lot of those things too and the

24 defendant seems willing to agree to them.

25 MR. KLEEMANN: Maybe I would subscribe totally

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1 to this merger control. Everything is about to avoid

2 the risk of anticompetitive interpretation and not about

3 the consequence.

4 It is a risk situation. I wonder whether this

5 could be typical in abuse cases where you are not

6 creating the structural change but with a certain

7 behavior which has consequences.

8 MR. ELIASBERG: Well, I think we have run out of

9 time. And I would request that the audience join me in

10 a round of applause thanking our panel.

11 (Applause.)

12 (Whereupon, at 4:30 p.m., the hearing was

13 concluded.)

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1 C E R T I F I C A T I O N O F R E P O R T E R

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4 I HEREBY CERTIFY that the transcript contained

5 herein is a full and accurate transcript of the notes

6 taken by me at the hearing on the above cause before the

7 FEDERAL TRADE COMMISSION to the best of my knowledge and

8 belief.

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DATED: APRIL 2, 2007

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__________________________

13

BRENDA SMONSKEY

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