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Business Testimony


2 and
17 9:30 A.M. TO 4:00 P.M.
23 Reported and Transcribed by:


5 Morning Session:
7 Attorney, Policy Studies,
8 Federal Trade Commission
9 and
11 Attorney Advisor, Legal Policy Section
12 Antitrust Division, Department of Justice
13 and
15 Deputy General Counsel for Policy Studies
16 Federal Trade Commission
21 Morning Session:
22 David Balto
23 Patrick Sheller
24 Ron Stern


5 Afternoon Session:
7 Attorney Advisor, Legal Policy Section
8 Antitrust Division, Department of Justice
9 and
11 Assistant General Counsel for Policy Studies
12 Federal Trade Commission
17 Afternoon Session:
18 Sean Heather
19 Bruce Sewell
20 Bruce Wark


2 FEBRUARY 13, 2007
3 MR. TARONJI: Good morning.
4 I'm Jim Taronji from the Federal Trade
5 Commission. I'm one of the moderators for
6 this morning's session. I'm joined this
7 morning by Bill Cohen, Deputy General Counsel
8 for Policy Studies at the Federal Trade
9 Commission. Our other co-moderator today is
10 Joe Matelis from the Antitrust Division of
11 the U.S. Department of Justice.
12 Before we start today, let me
13 cover a few housekeeping matters. As a
14 courtesy to our speakers, please turn off
15 your cell phones, Blackberries, and other
16 devices, or put them on vibrate. And I will
17 do that myself.
18 Finally, we request that the
19 audience not ask any questions or make
20 comments during the hearings. Thank you.
21 Before introducing our
22 speakers, I would like to first thank the
23 University of Chicago Graduate School of
24 Business for hosting these joint FTC/DOJ
25 hearings to solicit business testimony on


1 single-firm conduct under Section 2 of the
2 Sherman Act. In particular, I would like to
3 thank Dean Ted Snyder and the staff of
4 the Gleacher Center for offering us their
5 facilities and for making the necessary
6 arrangements for us to hold these
7 hearings.
8 And finally, I would like to
9 thank my FTC and DOJ colleagues as well as
10 the FTC's Midwest regional office who have
11 worked very hard to put together these
12 hearings in the Windy City, in the cold Windy
13 City.
14 We are honored to have
15 assembled a distinguished group of panelists
16 from a number of companies and associations
17 that have agreed to offer their testimony in
18 connection with these hearings. These
19 panelists will provide their perspectives on
20 how companies operate within the complex area
21 of Sherman Section 2 jurisprudence,
22 including for some companies how they
23 navigate not only the U.S. application of
24 antitrust laws to single-firm conduct, but
25 that of the diverse antitrust regimes around


1 the world.
2 Our panelists this morning
3 are David Balto for the Generic
4 Pharmaceutical Association, Patrick Sheller
5 from Kodak, and Ron Stern from G.E.
6 Our format this morning will
7 be as follows. Each speaker will make a 20-
8 to 25-minute presentation. We will then take
9 a 15-minute break. After the break, we will
10 reconvene and have a moderated discussion
11 with our panelists.
12 These hearings in Chicago are
13 an important component of the joint FTC and
14 Antitrust Division hearings on single-firm
15 conduct under Section 2 of the Sherman Act.
16 They are designed to identify areas where
17 single-firm conduct is causing competitive
18 harm, areas where antitrust enforcement may
19 be chilling desirable activity, and areas
20 where additional guidance would be most
21 valuable.
22 FTC chairman, Deborah Majoras
23 made it clear at the opening session of these
24 hearings that she wanted to hear from
25 businesses, either through their executives


1 or their legal advisers. As Chairman Majoras
2 said, and I'll paraphrase, we want these
3 panels to discuss business conduct from the
4 market perspective from the ground up. That
5 is, examine why and when firms engage in it,
6 how they do it, and what effect it produces
7 for the firm, for other firms, customers and
8 competitors and for consumers. We want these
9 discussions to include knowledgeable business
10 people or their legal advisers.
11 Over these last eight months
12 we have held hearings on specific types of
13 business conduct, such as predatory pricing,
14 refusals to deal, bundled and loyalty
15 discounts, tying arrangements, exclusive
16 dealing, and misleading and deceptive
17 conduct.
18 Some of these panels have
19 included business executives or their legal
20 advisers. In addition, we've covered some
21 general areas, such as business strategy,
22 business history, and economic empirical
23 studies.
24 The sessions today are
25 designed to further FTC Chairman Majoras's


1 goal to obtain as much insight and real-world
2 experience as possible from business
3 representatives.
4 This is the second set of
5 hearings that have specifically been devoted
6 to obtaining testimony from company
7 representatives and associations. The first
8 set of business testimony hearings were in
9 Berkeley, California on January 30th, 2007.
10 We look forward to hearing
11 the panelists' comments and to the
12 round-table discussion. I want to thank all
13 of them for agreeing to participate in
14 today's hearings. We know that it takes a
15 lot of time to prepare for these hearings.
16 So again, thank you for your time and
17 efforts.
18 I would now like to turn it
19 over to my colleague and co-moderator Joe
20 Matelis from the Antitrust Division for any
21 remarks he would like to make. Joe.
22 MR. MATELIS: Thank you, Jim.
23 The Department of Justice's Antitrust
24 Division is very pleased to participate in
25 today's hearing. In the single-firm conduct


1 hearings we have held to date, we have
2 benefitted from the insights of many
3 highly-skilled antitrust attorneys and
4 economists.
5 Today's hearing, as well as
6 the sessions held last month in Berkeley,
7 California, grew out of the belief that we
8 could also learn much about single-firm
9 conduct from businesses. Our panelists today
10 are the people who help devise and implement
11 business plans, aware that their firm's
12 unilateral conduct may be challenged in
13 private or government litigation and by
14 foreign competition authorities. Their
15 companies are also directly affected by the
16 conduct of other firms.
17 Whether you've had occasion
18 to view Section 2 of the Sherman Act as a
19 sword directed at the heart of your business
20 or as a shield protecting you from
21 anticompetitive conduct of others, we look
22 forward to hearing from you today.
23 On behalf of the Antitrust
24 Division, I would also like to take this
25 opportunity to thank the Gleacher Center and


1 the University of Chicago Graduate School of
2 Business for hosting these hearings. Also on
3 behalf of the Division, I'd like to thank
4 David, Patrick, and Ron for volunteering your
5 time today. We know that these hearings take
6 a lot of effort, especially when traveling to
7 Chicago in February. And we're very grateful
8 for a valuable public service that you're
9 rendering. Finally, I'd also like to thank
10 Jim and Bill and their colleagues at the
11 Federal Trade Commission for all their hard
12 work organizing today's hearing. Thanks.
13 MR. TARONJI: Thank you, Joe.
14 Our first speaker this
15 morning is David Balto. David Balto has
16 practiced antitrust law for over 20 years,
17 both at the Federal Trade Commission and the
18 Antitrust Division. At the FTC he was the
19 attorney adviser to Chairman Pitofsky and
20 assistant director for policy and evaluation
21 in the Bureau of Competition. He helped
22 guide many of the FTC's pharmaceutical and
23 health care enforcement efforts, including
24 challenging patent settlement agreements.
25 David has written extensively


1 on antitrust and health care competition and
2 is the vice chair of the ABA Antitrust
3 Section Federal Civil Enforcement Committee.
4 He graduated from Northeastern University
5 School of Law and the University of
6 Minnesota. And David is speaking today on
7 behalf of the Generic Pharmaceutical
8 Association. David.
9 MR. BALTO: Thank you, Joe.
10 I want to express my privilege for -- to
11 come here and testify in these hearings. And
12 I want to mention on that that my remarks
13 today are my own and don't necessarily
14 reflect the remarks -- should not necessarily
15 be attributed to the Generic Pharmaceutical
16 Association or any of its members.
17 Let me set out the outlines
18 of my testimony. I want to start off with
19 one indisputable fact, hopefully indisputable
20 fact, the importance of generic competition
21 in the market.
22 I'm then going to try to
23 talk about how pharmaceutical markets are
24 different than other types of markets and why
25 that should make a difference in the analysis


1 of single-firm conduct.
2 I'm then going to talk about
3 two forms of anticompetitive conduct by
4 branded pharmaceutical companies and how
5 those forms of conduct should be analyzed,
6 and then perhaps close with some suggestions.
7 Let me begin with the indisputable.
8 Generic competition benefits
9 every consumer in the United States. Generic
10 drugs sell for about 70 percent less than
11 branded drugs. They account for 56 percent
12 of all prescriptions and less than 13 percent
13 of all pharmaceutical expenditures.
14 The last time TEO studied
15 this issue in 1994 they found that generic
16 drugs saved consumers between 8 and $10
17 billion a year at a time when generic
18 substitution was vastly lower than it is
19 today.
20 Antitrust enforcement in the
21 generic drug industry is essential. Let me
22 put this into context. Today you can walk
23 out of this hearing room and go to your
24 local pharmacy and buy a generic form of
25 Remeron, Relafen, Buspar, Taxol, Augmentin,


1 Paxil, Coumadin, and Platinol. For each of
2 these drugs, the branded pharmaceutical firm,
3 a dominant firm attempted to extend its
4 monopoly through some form of alleged
5 exclusionary conduct.
6 In some cases they filed sham
7 petitions before the FDA. In some cases they
8 engaged in sham litigation. In other cases
9 they engaged in inequitable conduct before
10 the Patent and Trademark Office.
11 All together, these drugs
12 accounted for more that $10 billion of
13 purchases by U.S. consumers. And because of
14 enforcement actions taken by the Federal
15 Trade Commission, the state attorneys
16 general, and private antitrust attorneys,
17 these actions were stopped. And today's
18 consumers save billions of dollars because of
19 those enforcement actions.
20 Policing exclusionary conduct
21 by branded pharmaceutical companies could not
22 be a greater priority. In the next four
23 years, over $60 billion of branded
24 pharmaceuticals will go off patent.
25 Unfortunately, the pharmaceutical industry


1 offers many opportunities for dominant
2 branded firms to manipulate a highly complex
3 regulatory system to secure monopoly profits,
4 not through superior foresight, industry, and
5 innovations, but by finding loopholes to
6 delay competition.
7 Now, let's start off with why
8 pharmaceuticals are different. Now, my
9 colleagues on the panel today are going to
10 talk about the need for simple rules.
11 They're going to talk about the need for
12 going and creating bright-line tests so it
13 will be easier for their business people to
14 do what they're supposed to do, compete in
15 the marketplace. As an antitrust
16 practitioner, I can appreciate their
17 perspective.
18 However, I think that the
19 Commission and the Antitrust Division should
20 be extremely cautious about simple rules for
21 dominant firms. As Justice Scalia has
22 observed, the conduct of a dominant firm is
23 viewed through a special lens. Behavior that
24 might otherwise not be of concern under the
25 antitrust laws can take on exclusionary


1 connotations when practiced by the
2 monopolist.
3 Now, I think there are four
4 factors in the pharmaceutical industry that
5 should make people cautious about bright-line
6 rules in this industry. First,
7 pharmaceuticals are heavily regulated; and as
8 my testimony sets forward, this provides a
9 remarkable number of opportunities for
10 engaging in what's been called by the FTC
11 cheap exclusion.
12 Second, who is the buyer?
13 Now, knowing who the buyer is is critical to
14 defining markets and determining market power
15 and also oftentimes to determine whether or
16 not certain parties have standing. But in
17 the pharmaceutical industry is the ultimate
18 buyer the consumer, the insurance company,
19 the pharmaceutical benefit manager, the
20 physician who prescribes the drugs, or a
21 combination of all of these?
22 Third, pharmaceuticals have
23 high fixed costs but very low average
24 variable costs. And so when my colleagues
25 today go and talk about bright-line rules for


1 predatory pricing, those might not apply that
2 well in a setting with that kind of cost
3 structure.
4 Then finally, forms of
5 distribution are complex. Pharmaceuticals
6 are distributed through all these numerous
7 different intermediaries, and not all
8 distribution mechanisms are the same. Maybe
9 in the questioning period we'll go and talk
10 about distribution exclusivity cases where I
11 can address some of these ideas.
12 Now, I want to talk today
13 about two form -- fortunately through a
14 combination of the FTC's and State Attorneys
15 General enforcement actions, the FTC's
16 advocacy to Congress, Congressional
17 legislation, many of the recipe -- the recipe
18 book for anticompetitive conduct by dominant
19 pharmaceutical companies has basically been
20 thrown out. But like all good cooks, the
21 pharmaceutical companies have come up with
22 new forms of anticompetitive conduct, and I
23 wanted to talk about two of them today to
24 illustrate the importance of a couple things,
25 the importance of antitrust enforcement, the


1 importance of a balanced rule of reason
2 analysis in looking at exclusionary conduct
3 and staying away from per se bright-line
4 rules. And those two types of conduct are
5 product line extensions and abuse of the
6 regulatory process.
7 Now, let me explain product
8 line extensions. As in any other area, there
9 are changes in products. We all try to
10 improve our products. One of the key things
11 to remember here is that for a generic firm
12 to enter, it is essential for there to be a
13 branded firm that is listed and been approved
14 by the Food and Drug Administration. And the
15 way this process almost invariably works is
16 that the generic firm goes and copies a
17 branded drug. The branded drug goes off
18 patent or the generic firm prevails in patent
19 litigation, and then the generic firm enters.
20 But sometimes the product
21 line extensions can have anticompetitive
22 effects. The FTC recognized this in the
23 merger of Cima and Cephalon. Cephalon made a
24 branded drug that was used to treat pain when
25 you underwent cancer treatments. It was


1 acquiring Cima which was developing an
2 alternative product. The FTC uncovered in
3 the course of its investigation that part of
4 the reason for the acquisition was a
5 product-switching plan by Cephalon. They
6 planned, once they acquired Cima, to go and
7 take the Cephalon product out of the market,
8 to delist it. And in fact, that would have
9 prevented generic firms from being able to
10 enter the market for this drug.
11 In order to resolve the
12 competitive concerns posed by this merger,
13 the FTC required Cephalon to sponsor generic
14 entry on the form of that drug that it
15 manufactured.
16 Now, if you were to read one
17 case in the area of pharmaceutical antitrust,
18 I suggest you read the case of Abbott versus
19 Teva. Now, this case will remind you of the
20 cartoon in Peanuts where Linus keeps coming
21 up to try to kick the football. And every
22 time Linus goes and tries to kick the
23 football, Lucy picks up the football, and he
24 misses it and falls flat on his back.
25 There's a drug called Tricor


1 which is used to lower cholesterol. It's am
2 almost billion dollar drug. Impax and Teva
3 were developing a generic alternative. Each
4 time they were poised to enter, the branded
5 pharmaceutical manufacturer made some small
6 change to the product, thus preventing them
7 from being able to enter. The last change
8 was changing the product from a capsule
9 version to a tablet version. The tablet
10 version was supposedly superior because it
11 didn't have to be taken with food.
12 But Abbott didn't just change
13 the product. After the tablet formulation
14 was approved, it stopped selling the Tricor
15 capsules. It bought up all the excess Tricor
16 capsules. And then there's this important
17 register. It's called the National Drug Data
18 File. And the only way you can get a
19 generic drug into the market is if it's
20 listed in the NDDF. And what Abbott did is
21 it listed -- changed the code for Tricor
22 capsules in the National Drug Data File to
23 obsolete.
24 Anyway, so let's go to the
25 litigation. Abbott and Teva sued, along with


1 a group of buyers of drugs. And the
2 defendants basically say, you know, this is a
3 product improvement. There is no role for
4 antitrust here. There is a per se legal
5 rule. In order to demonstrate a violation,
6 they would have to show that quote: The
7 innovator knew before introducing the
8 improvement into the market that it was
9 absolutely no better than the prior version,
10 and that the only purpose of the innovation
11 was to eliminate the complementary product of
12 a rival. That was the standard articulated
13 by Abbott.
14 And you know, there was case
15 law that supported Abbott's position, though
16 not in the pharmaceutical industry. Now,
17 rather than adopting the rule of a per se
18 legality, the Court went back to the test
19 articulated by the D.C. Circuit in Microsoft
20 which suggests a rule of reason balancing
21 test. And it said the per se rule as
22 proposed by the defendants presupposes an
23 open market where the merits of any new
24 product can be tested by unfettered consumer
25 choice. But here, consumers were not


1 presented with a choice between the products.
2 Instead, they eliminated that choice by
3 removing the old formulations of the
4 products.
5 Now, I know my colleagues on
6 the panel, their hair is about to stand up
7 at this point because what this Court has
8 basically suggested is that there is a duty
9 to deal. That a dominant firm in some sense
10 has some kind of obligation, a duty to deal,
11 with its rivals. How could that be? Well,
12 let's see what the Court said.
13 It said, A co-monopolist is
14 not free to take certain actions that a
15 company in a competitive or even
16 oligopolistic market may take because there
17 is no market restraint on a monopolist's
18 behavior, harkening back to Justice Scalia's
19 idea that I mentioned before.
20 So in this case where the
21 dominant firm went beyond a simple product
22 innovation, but also created obstacles for
23 the other firms to effectively enter the
24 market, that was a violation.
25 Now, there's a similar case


1 in the E.U. and in Canada involving Astra Zeneca,
2 the drug Lobec. In this case violations were
3 found in both of those jurisdictions. In
4 that case what happened was as the patents on
5 the drug were expiring, Astra Zeneca filed
6 for additional patents, but these were
7 patents that really weren't used on improving
8 the drug. These were just additional patents
9 to create the additional obstacles. And
10 again, antitrust violations were found.
11 The most interesting case
12 here is a case that was just filed in the
13 past year or so, and it involves the very
14 well-known conversion of the drug Prilosec to
15 Nexium as Prilosec was losing its patent
16 protection. This again involved Astra
17 Zeneca. This is something like a $4
18 billion-a-year drug.
19 In the alleged
20 anticompetitive conduct it was said, up to 18
21 months before Astra Zeneca was about to lose
22 exclusivity it stopped promoting the drug,
23 and instead, started to make negative claims
24 about the drug. Now, I don't know about you
25 or me, but I just don't know when people


1 start making negative claims about their
2 drugs.
3 More important than just
4 creating Nexium, they also effectively
5 withdrew Prilosec from the market, so it was
6 impossible for managed care organizations to
7 go and sort of continue to contract for
8 Prilosec.
9 And so when generic Prilosec
10 was about to arise, there was no possibility
11 for it to substitute for branded Prilosec.
12 And one of the most
13 interesting issues and maybe something worth
14 discussing later on is the fact, as alleged,
15 that Nexium was no improvement on Prilosec.
16 Let's go on to the issue of
17 petitioning and litigation. You know, one of
18 the most important achievements of the
19 Federal Trade Commission has been the focus
20 on sham petitioning and the use of regulatory
21 processes to create competitive harm.
22 Probably the case in which they've brought
23 the most consumer benefits was the Unocal
24 case in which it attacked sham petitioning by
25 Unocal before the California Resources Board


1 that costs consumers in California over $500
2 million annually.
3 Sham petitioning is a serious
4 problem. As the FTC's recent staff report on
5 the Noerr-Pennington Doctrine observed: One
6 of the most effective ways for parties to
7 acquire or maintain market power is through
8 the abuse of governmental processes. The
9 cost of the party engaging in such abuse is
10 typically minimal, while the anticompetitive
11 effects resulting from such abuse are often
12 significant and durable.
13 Anticompetitive conduct
14 through regulatory abuse can be especially
15 pernicious if, God forbid, Kodak or GE were
16 to engage in any kind of abusive conduct.
17 If they exploited their dominant power, it
18 would be short lived. Why? Because there are
19 numerous firms poised to go and battle them
20 for that role of king of the hill. But when
21 your job as king of the hill was gained
22 through abuse of the regulatory process, no
23 natural force can displace you. That's why
24 abuse of the regulatory systems is so
25 pernicious.


1 This is especially the case
2 in the pharmaceutical industry. The cases I
3 identified at the beginning of my testimony
4 were cases which were largely based on abuse
5 of the regulatory system.
6 Almost 30 years ago, Judge
7 Bork observed that predation by abuse of
8 governmental procedures, including
9 administrative and judicial processes,
10 presents an increasingly dangerous threat to
11 competition.
12 No statement could be more on
13 point for the anticompetitive conduct in the
14 pharmaceutical industry and the practice of
15 so-called citizen petitions. The FDA, like
16 many regulatory agencies, offers the
17 opportunity for citizens to petition them to
18 raise questions about safety and efficacy and
19 other issues. And that process is obviously
20 well intentioned, but it's abused to an
21 increasingly significant extent.
22 What happens is again, when a
23 generic company is poised to enter the
24 market, the brand company will file a
25 frivolous petition on the eve of FDA


1 approval. That may be despite the fact that
2 the FDA may have granted a tentative
3 approval, that maybe despite the fact that
4 similar petitions have already been filed.
5 The brand strategy is just simply delay the
6 generic drug from the market. And you can
7 imagine when you're talking about drugs in
8 which the amount of profits amount to 10 to
9 $20 million a day, this could be a very
10 attractive opportunity.
11 The FDA citizen petition
12 process provides significant opportunities for
13 deception. There are no requirements for
14 proof of the accusations made in the
15 petition. No requirements for certification
16 of the accuracy of the information. There
17 are no penalties for inaccurate or improper
18 filings. There are no limits on the number
19 of filings that may be filed. Some petitions
20 contain little or no evidence or rely on
21 obsolete, irrelevant, or erroneous
22 information.
23 The FDA has even noted the
24 fact that they've seen several examples of
25 citizen petitions seemingly designed to delay


1 the approval of generic approval.
2 So let's look at the numbers.
3 You know, if I wanted to make it to Wrigley
4 Field this spring, if I wanted to join the
5 Cubs for spring training, I'd want to have a
6 pretty good batting average. Otherwise, they
7 wouldn't look at me.
8 What's the batting average on
9 citizen petitions? Since the Medicare
10 Monitorization Act was passed in 2003, there
11 have been 45 citizen petitions filed
12 challenging the conduct trying to delay the
13 entry of generic drugs. 45. 21 of these
14 have been resolved. One has been resolved in
15 the favor of the petitioner. One. 20 have
16 been denied.
17 Now, if I'm batting at .05
18 percent, I'm not going to get much of a
19 try-out at Wrigley Field this spring. None
20 of the last-minute -- many of these petitions
21 were filed within the four-month period prior
22 -- half of them were filed in the four-month
23 prior period to the entry of the drug. Did
24 any of those succeed? None. Not one.
25 Well, how much do they delay


1 things? Those late-filed petitions delayed
2 things an average of ten months. And in one
3 case, the amount of delay cost consumers an
4 estimated $7 million a year.
5 Is this a small problem?
6 No. According to the statistics of the FDA,
7 there's been a 50 percent increase in the
8 number of citizen petitions they have
9 received. And there are about 170 citizen
10 petitions pending compared to only 90 in
11 1999.
12 Now, one of the most
13 illuminating observations of the FTC report
14 on the Noerr-Pennington Doctrine was its
15 observation about how serial sham litigation
16 conduct should be analyzed. I think the FTC
17 should go and apply the ideas that it has
18 and the expertise it's developed, both in
19 that report and in its enforcement action in
20 Unocal to give a very serious look at the
21 citizen petition process. Let me conclude.
22 Antitrust plays a vital role
23 in maintaining rivalry as the lone star of
24 the marketplace. Competition is critically
25 important where many of the factors


1 identified earlier can forestall competition.
2 The FTC, State Attorneys
3 General, and private antitrust lawyers have
4 played an important role in protecting
5 pharmaceutical markets from artificial
6 barriers to competition, and I hope these
7 hearings keep Section 2 as a robust statute
8 so that it can continue to be used to
9 protect the interest of consumers and
10 competitors in this vital market. Thank you.
11 (Applause)
12 MR. TARONJI: Thank you,
13 David. Our next speaker is Patrick Sheller.
14 Patrick is the chief compliance officer for
15 Eastman Kodak Company. In that capacity he
16 is responsible for Kodak's code of conduct
17 and internal investigations.
18 Prior to his current
19 assignment, Patrick held a variety of
20 business positions and was Kodak's chief
21 antitrust counsel and also was involved in
22 legal matters in Europe.
23 Prior to Kodak he was in
24 private practice with a law firm that is now
25 known as McKenna, Long & Aldridge, and is a


1 former Federal Trade Commission attorney,
2 having worked in the Bureau of Competition
3 and as attorney adviser to Chairman Daniel
4 Oliver. He is a graduate of St. Lawrence
5 University and the Albany Law School at Union
6 University. Patrick.
7 MR. SHELLER: I want to
8 thank the Department of Justice and the FTC
9 for the opportunity to speak to you today.
10 It's an important time in antitrust
11 law for our economy, and it's a particularly
12 important time for Kodak. I suspect one
13 of the reasons we were invited to participate
14 in these hearings is Kodak's well documented
15 experience with the Section 2 enforcement
16 which began in 1921 when an investigation by
17 the Department of Justice was settled through
18 a consent decree which prohibited Kodak, among
19 other things, from selling a fighting
20 brand of consumer film, also known as
21 private-label film.
22 In 1954 we settled an
23 investigation with the Department of Justice.
24 This matter involved alleged tying of consumer
25 color negative film with photo processing


1 services. Under this consent decree we
2 were prohibited from selling these two
3 items under a single price.
4 In 1979 our luck turned a
5 bit. We benefitted from a primarily favorable
6 ruling by the Second Circuit in the Berkey
7 Photo case where one of our competitors
8 challenged Kodak's introduction of the 110
9 photographic system that included a camera,
10 specially formatted film, and a new photo
11 processing service.
12 One of the key rulings in
13 that case was that a monopolist has no
14 obligation to predisclose new products to a
15 competitor. And, to the extent that a
16 monopolist engages in truthful advertising,
17 that conduct does not offend Section 2.
18 In 1991 our luck turned in
19 the other direction again with the Supreme
20 Court's decision in the ITS v. Kodak
21 case. This was an action brought by
22 independent service organizations that were
23 competing against Kodak in the service of
24 photocopiers and micrographics units. It
25 was in the ITS case that the court established


1 the so-called single-brand derivative
2 aftermarket; the notion being that once a
3 customer chooses to purchase an expensive
4 item of capital equipment, they're now locked
5 into that particular brand or manufacturer.
6 Whether or not that manufacturer has
7 market power in the primary market for
8 photocopiers, for example, was determined to
9 be irrelevant to the Supreme Court. The ITS
10 case went back to the trial court on remand,
11 and I'll speak more to the trial in a minute.
12 In 1994 Kodak challenged some
13 aspects of the 1921 and 1954 consent decrees.
14 We were successful in overturning the private
15 label restriction and the prohibition on
16 linking film with photo finishing sales,
17 primarily because we were able to demonstrate
18 to the District Court and to the Second Circuit
19 that market conditions had changed
20 significantly.
21 By 1994, Kodak was
22 competing on a global basis with a number of
23 foreign suppliers as opposed to the market
24 conditions that existed when these consent
25 decrees were entered into.


1 Finally, in 1996 the
2 Ninth Circuit heard Kodak's appeal
3 of the jury verdict in the ITS case. The
4 jury found that we had engaged in an unlawful
5 refusal to deal by refusing to provide
6 patented and copyrighted parts and copyrighted
7 diagnostic software and manuals to ISO's.
8 The key ruling in that case,
9 for purposes of my remarks today, was
10 that an IP owner faces restrictions on its
11 ability to refuse to deal with ISOs by refusing
12 to license its IP.
13 The Ninth Circuit picked up
14 on the First Circuit's decision in the Data
15 General case in holding that there is a
16 presumption in favor of an IP owner, that
17 it has a legitimate business justification
18 for refusing to deal with a rival. But that
19 presumption can be overcome by evidence that
20 the IP owner had an anticompetitive intent. The
21 9th circuit's ruling essentially opens the door
22 to ISO's to come up with evidence in the form of
23 internal documents showing that the IP owner
24 was trying to keep out competition through
25 its decision to refuse to deal.


1 Now, the history of Kodak's
2 experience with Section 2 parallels in many
3 ways the evolution of our company, our
4 technology, and our business model.
5 Beginning in the 1880's and through the
6 70's, the focus of our business was on
7 consumables. We primarily sold film
8 products, paper products, and chemicals.
9 We engaged in the sort of razor/razor blade
10 model of selling cameras in order to generate
11 more film sales.
12 The company began to
13 diversify its portfolio in the late 60's to
14 1970's, and we began to offer more expensive
15 items of capital equipment such as
16 photocopiers, micrographics equipment, and
17 graphic arts equipment. And in this sense
18 our business model began to change to
19 offering hardware plus aftermarket service.
20 It was in this context that the ITS case
21 arose.
22 We are now in the process of
23 a monumental shift in the business model of
24 our company as we try to become a digital
25 company as opposed to an analog technology player.


1 The focus of our business going forward is
2 going to be on selling solutions. Solution
3 selling is very common in the digital world
4 where companies will bundle a portfolio of
5 offerings that include hardware, software,
6 consumables, consulting services, and
7 aftermarket service into a single price to
8 sell to customers who demand an end-to-end
9 solution.
10 Our sales focus going forward
11 will be on digital products such as photo
12 printer kiosks, image centers. We announced
13 last week the introduction of a new line of
14 consumer ink-jet printers, which means Kodak will
15 now be competing in a new market. We will also
16 offer Digital cameras, media ink, and so forth.
17 Elements of the old
18 business models still remain at Kodak. We
19 will continue to sell film. But our focus
20 will be on solution sales, and there will be
21 be a real emphasis within the company on the
22 ability to sell in this environment.
23 We face a number of
24 challenges as we try to participate in the
25 digital world. Some critical success


1 factors to our new digital model are, first
2 of all, that we rapidly innovate and
3 develop new technology to commercialize
4 new products. Digital companies constantly
5 introduce new versions of their products.
6 We have to keep pace in this fast-moving
7 environment. And in that sense, intellectual
8 property has become increasingly important to
9 Kodak.
10 We need to be able to
11 protect our research and development
12 investments, wherever possible, through patents
13 and copyrights, and we need to be able to
14 protect these assets in a way that doesn't
15 offend the antitrust laws.
16 One of our key strategies
17 going forward is to monetize our intellectual
18 properties. Kodak has, for the last
19 several years, entered into numerous
20 licensing agreements with other digital
21 players in the industry, and we need to be
22 able to go about that licensing activity
23 without fear of antitrust concerns, as
24 I'll talk about in a few minutes.
25 And finally, as I mentioned,


1 solution selling is critical to our success
2 in the digital world. A good example is
3 our graphic communications business which
4 sells graphic solutions to printing firms.
5 These solutions include software, work-flow
6 software, hardware, consumables, consulting
7 services, and aftermarket service.
8 So what are some of the
9 Section 2 impediments to our success in this
10 new digital world? First of all, we
11 would encourage the antitrust agencies and
12 the courts to recognize the importance of
13 market changes. As we saw with our attempt
14 to overturn the 1921 and 1954 consent
15 decrees, we were forced to litigate with the
16 Department of Justice over the issue of
17 whether Kodak was competing in a worldwide
18 market versus a domestic market.
19 And to the extent that
20 further challenges arise to our practices in
21 the film environment, we would encourage the
22 agencies and the courts to recognize the
23 substantial influence of digital technologies
24 on markets that were previously dominated
25 by film.


1 As we saw literally overnight
2 earlier in this decade, our film business
3 began to decline dramatically in the year
4 2001. We initially thought it was a result
5 of reduced demand following the 9/11 attacks,
6 but the market never came back. It was because
7 many customers had decided to convert from film
8 to digital. And many customers that make this
9 conversion never come back to film.
10 Another impediment to our
11 success in the digital world relates to the
12 antitrust line between tying and bundling. This
13 line is becoming increasingly blurred as a
14 result of the LePage's and other decisions, which
15 I'll speak to more in a few minutes.
16 Finally, obstacles to our
17 ability to monetize our intellectual property
18 investments exist in the form of cases like the
19 Ninth Circuit's decision in the ITS case and
20 precedents in the European Union such as
21 the McGill case and the INS Health case where
22 the Commission required compulsory licensing
23 licensing by intellectual property owners.
24 Let me first turn to the
25 LePage's decision and the uncertainty that


1 case has left companies like Kodak with. While
2 the Third Circuit had an opportunity to
3 clarify the application of Section 2 in the
4 area of bundled discounts, in our view it
5 squandered that opportunity by deciding the
6 case on its narrow set of facts. The court
7 ruled said that 3M's practice of bundling its
8 branded Scotch tape with both private-label
9 3M tape and with other 3M products caused
10 injury to its competitor, LePage's, and
11 therefore offended Section 2.
12 The only parameters that
13 we are able to draw from the LePage's decision
14 in terms of an alleged monopolist's ability
15 to engage in pricing activities are, first of
16 all, that single-product volume discounts are
17 permissible. The court made that clear. But
18 what's at risk following the 3M/LePage's
19 decision, are discounts linking products
20 across multiple markets where an alleged
21 dominant product is involved, and also
22 discounts linking a dominant product
23 with others across a single product
24 line, such as the linking branded and
25 private-label tape. We are left with


1 no coherent standard with which to
2 evaluate bundled pricing under the
3 LePage's decision.
4 We would submit there were
5 better alternative paths that the Third
6 Circuit could have taken in evaluating the
7 case against 3M. The Eighth Circuit's
8 decision in Concord Boat applied the Brooke
9 Group decision by the Supreme Court to find
10 that as long as single-product discounts are
11 above cost, they should not be considered
12 exclusionary under Section 2.
13 It would have also been helpful
14 if the court had given some thought to the
15 Ortho Diagnostic's Systems case by the Southern
16 District of New York where the court articulated
17 its analysis of the alleged bundling by asking
18 whether an equally efficient competitor to the
19 monopolist could profitably match the bundled
20 price the in the market. That would have
21 been an arguably more rational test to apply.
22 While we could previously
23 rely on the very clear distinction between
24 tying on the one hand where a monopolist
25 tries to force the purchase of a second


1 non-monopoly product, we now have to deal with a
2 precedent that articulates no coherent standard
3 such that bundled discounts now come under scrutiny.
4 As I said before, bundling is very important to our
5 ability to offer solution sales.
6 Turning to the issue of IP
7 rights, as I mentioned, a very importantbr>
8 strategy of Kodak going forward is our ability
9 to monetize our IP portfolio. The Ninth
10 Circuit's decision in the ITS case has had a
11 a chilling effect on that activity. There thebr>
12 Court held that although there is a presumption in
13 favor of an IP owner's right to refuse to license
14 a competitor, that presumption can be overcome by
15 evidence of bad intent. And that evidence can
16 take the form of internal company documents.
17 We think that the Federal Circuit,
18 which considered very similar facts in the Xerox v.
19 CSU case got the issue right when it held that in
20 the absence of tying, fraud or sham litigation,
21 it's not appropriate to inquire into the IP owner's
22 subjective motivations for asserting a statutory right
23 to exclude. The Xerox court held that the same
24 rationale would apply to asserting copyright
25 protection as the basis for a refusal to deal.


1 As a result, we have a
2 clear split among the circuits that has
3 created a great deal of uncertainty on the
4 part of the IP owners and companies that
5 provide aftermarket service.
6 Where does the uncertainty
7 in these two areas leave Kodak and other
8 companies? First, if we're successful with our
9 digital strategy, and we're able to achieve a
10 leading market position in some of the new
11 digital markets where we participate, our ability
12 to offer competitive bundled pricing could be
13 constrained by the LePage's decision. As I
14 said, bundled pricing is really the essence
15 of solution selling.
16 Second, notwithstanding a
17 lack of market power in the primary equipment
18 markets in which we compete, we still face
19 potential challenges by ISO's that can allege that
20 Kodak dominates a single brand aftermarket
21 for a particular line of equipment. Such ISOs
22 will try to require us to license or sell our
23 valuable intellectual property.
24 Let me offer a few examples
25 of the dilemmas these ambiguities can create,


1 and these are hypothetical examples. First,
2 sell a line of photo kiosks that you may have
3 seen at a number of retailers. A question
4 arises as to whether Kodak can offer retailers
5 bundled discounts on the kiosks, our paper
6 that runs through these kiosks and the
7 aftermarket service. Could we also include
8 digital cameras in that bundle when we sell
9 to retailers? Could Kodak refuse to license
10 our valuable diagnostic software on these
11 photo kiosks to an ISO that wishes to compete
12 with us?
13 Turning to our intellectual
14 property strategy. We are in the process of
15 entering into licensing agreements with a
16 number of companies that we believe have
17 infringed our patent portfolio in the digital
18 camera area. The question arises whether,
19 in approaching a particular company we
20 believe violates our patents, can we refuse
21 to license the companies' rights in our patents
22 simply because they are competitors. And does
23 that situation get any worse because we've got
24 an internal document suggesting that a reason
25 for refusing the license was to gain an upper


1 hand in the marketplace.
2 Could we, in licensing to
3 other digital camera sellers, bundle Kodak
4 software that allows customers to view their
5 images on a PC?
6 We offer an on-line photo
7 service where you can upload your photos and
8 order prints or order prints on different items
9 like T-shirts and coffee mugs. This is called
10 the Kodak Easy Share Gallery. The question arises
11 whether in the event we were to gain a leading
12 market position with our Kodak Photo Gallery,
13 we could say to our customers who agree to
14 store a fixed number of images on our site
15 that they will get a discount on their
16 prints?
17 And finally with respect to
18 our graphics business, which I mentioned is
19 very much focused trying to meet the end to
20 end work-flow demands of our customers, are
21 there antitrust concerns with our selling
22 graphic communications equipment, software,
23 consumables, consulting services, and
24 aftermarket services as a bundle? Should it
25 make a difference that our customers demand


1 such solution sales?
2 These are some of the issues
3 that we grapple with in light of the
4 uncertainty under Section 2 that I've
5 outlined, and I'll look forward to further
6 discussion on these and other issues when we
7 get to the questioning period.
8 (Applause)
9 MR. TARONJI: Thank you,
10 Patrick. Our next speaker is Ron Stern.
11 Ron is the vice president and senior
12 competition counsel for the General Electric
13 Company. Ron received his AB from Brown
14 University and his law degree from Harvard.
15 He clerked for Judge Harold
16 Leventhal of the U.S. Court of Appeals for
17 the D.C. Circuit and for Justice Potter
18 Stewart of the U.S. Supreme Court. He was
19 in private practice with Hughes, Hubbard &
20 Reid and was a partner with Arnold & Porter.
21 In addition, he was the
22 special assistant to the Assistant Attorney
23 General for the Criminal Division of the U.S.
24 Department of Justice. Ron.
25 MR. STERN: I'd like to


1 begin by thanking the Antitrust Division and
2 the Federal Trust Commission for holding
3 these hearings and for providing me and
4 others with the opportunity to address
5 important issues relating to the application
6 of the antitrust laws to single-firm conduct.
7 In particular, I would like
8 to thank the staff at both agencies who have
9 organized these hearings and put in the hard
10 work required to make them a success.
11 I also want to make clear at
12 the outset that the views and opinions that I
13 am providing today and that are in the
14 written slides are my own personal views and
15 not those of the General Electric Company or
16 of other General Electric officials.
17 Let me begin with an
18 overview. I want to agree with the heads
19 of the two agencies that are hosting these
20 hearings, the Assistant Attorney General and
21 the Chairman of the Federal Trade Commission,
22 that it is important to have clear,
23 administrable, and objective rules. This is
24 a key requirement, something that's really at
25 the heart of these hearings.


1 It's important for business
2 to avoid chilling procompetitive conduct.
3 It's also important for consumers. It's
4 important to help avoid inadvertent
5 violations and disputes and investigations
6 that end up wasting company time and
7 resources as well as the time and resources
8 of the agencies.
9 And finally, it's important
10 to reduce the cost of developing and
11 implementing business plans to foster
12 competition in the marketplace.
13 Now increasingly, as the
14 economy globalizes, it's not sufficient that
15 the U.S. rules are clear. The rules adopted
16 by other jurisdictions will, of course, affect
17 U.S. commerce. And I do not believe that it
18 is surprising or coincidental that the United
19 States, European Commission, and the
20 International Competition Network, an
21 organization formed by, I believe, more than
22 100 competition authorities around the world,
23 are all addressing the issue of competition
24 standards for single-firm conduct at this
25 time.


1 In a global economy this is
2 a global issue, not just a United States
3 issue; and that's important, particularly for
4 companies such as mine, that operate in a
5 number of global markets.
6 What I'd like to do today is
7 walk through from a counseling perspective
8 which is a perspective, I see every day,
9 and look at areas that could be clarified in
10 Section 2.
11 First, the issue is what kind
12 of rule governs. Is your conduct unilateral,
13 single-firm conduct, or is it multi-firm
14 conduct? Is it something that Section 1 governs
15 or Article 81 in Europe?
16 Or is it something that
17 Section 2 governs as single-firm conduct or
18 Article 82 in Europe?
19 The next issue is whether
20 there is a threshold solution or a threshold
21 screen that makes you comfortable that the
22 conduct doesn't violate the law? And one
23 important screen under the U.S. law is the
24 requirement of monopoly power.
25 If you can be sure that your


1 company isn't in that kind of position, it
2 doesn't control market prices, then you don't
3 have to worry about the nature of the conduct
4 and whether the conduct meets or doesn't meet
5 any of the different rules that have been
6 talked about during these hearings and are
7 being discussed today.
8 If the threshold isn't met,
9 then you have to look at the conduct and
10 decide whether the conduct is exclusionary or
11 not. And oftentimes what you're looking for
12 are clear rules that will guide you to allow
13 you to tell your client that they can safely
14 pursue X type of conduct because that's in a
15 safe harbor or that's clearly not a problem.
16 And then why are we going
17 through this entire exercise? Well, we're
18 going through the exercise basically because
19 there are risks and costs if you end up in a
20 gray area that someone thinks violates the
21 requirements.
22 There is the potential for
23 government enforcement actions and
24 investigations, and in the U.S. for private
25 treble damage action. And there are a host


1 of potential consequences, from injunctive
2 relief to fines, not in the U.S., but in
3 some jurisdictions, to treble damage awards,
4 legal fees, and the like.
5 So what I'd like to do is
6 continue to walk through the issues. One
7 issue that reinforces the concern that I'd
8 just like to touch upon is the fact that
9 jury instructions in the Section 2 area are
10 often particularly problematic. I've just
11 set some examples up on the screen, but
12 basically they involve very general types of
13 words. Is the conduct wrongful? Did one
14 buy more logs than were necessary or pay a
15 higher price than was necessary? Did the
16 firm engage in competition on the merits?
17 Whatever, again, a jury believes that means.
18 All of these things reinforce
19 the risk, particularly in the U.S.
20 environment, of treble damages and attorneys'
21 fees and large litigation costs. You
22 basically want to counsel to be in a safe zone
23 to avoid having to worry about jury
24 instructions.
25 So then back to the


1 beginning. Do you know whether you're in the
2 single-firm conduct area? We obviously have
3 the Copperweld decision and clear law that if
4 you're a company and you're dealing with a
5 wholly-owned subsidiary, you're one entity,
6 and you know that you can't violate Sherman Act
7 Section 1 by having an agreement in restraint of
8 trade because you don't have two parties. You
9 just have one.
10 The problem is under
11 Copperweld the application is unclear. The
12 law in the lower courts is divided as to
13 where the line is when you're dealing with
14 non-wholly-owned subsidiaries.
15 And one important thing that
16 the government could do is reinstate the
17 guidance that existed in 1988 with the
18 antitrust enforcement guidelines for
19 international operations. I've included
20 that in the slides.
21 And the clear guidance that
22 was given then, I think, would be important
23 to reinstate it, is that whenever you have
24 more than 50 percent of the voting securities
25 of a company owned by its parent or its


1 sister company, that whole family of
2 companies is one economic entity and is
3 subject only to Section 2, the single-firm
4 conduct section, and not Section 1. That's
5 one area in which I think clarity could be
6 added.
7 Now, if we move beyond, the
8 next issue is trying to identify whether your
9 company in the particular situation that
10 you're facing is subject to Section 2. And
11 the first element of Section 2 is having
12 monopoly power. The second element relates to
13 the conduct. Is there a willful acquisition
14 or maintenance of that power which is often
15 referred to as engaging in exclusionary
16 conduct.
17 Now, under United States law
18 there is a pretty helpful screen. You have
19 to have the power to control market price.
20 And in bidding markets, it's clear that if
21 there are other credible competitors, you
22 generally don't have the power to control
23 market prices, even if you have a very large
24 share.
25 The case law gives some very


1 helpful general rules of thumb. If you have
2 more than a 70 percent share, you have to
3 look at all of the other factors, but you at
4 least know that you're in a danger zone.
5 If you have less than a 50
6 percent share under the U.S. case law, it's
7 very unlikely that you have to worry about
8 whether your conduct could be categorized as
9 exclusionary.
10 Some people point to the fact
11 that attempted monopolization can occur at a
12 lower market share threshold, but you have
13 the very important counseling hook in the
14 element of attempted monopolization which is
15 the requirement of a dangerous probability of
16 achieving monopoly power, which brings you
17 right back to the monopoly power test.
18 So the key is, and I think
19 that's been very helpful, even for successful
20 firms, and certainly my company has a number
21 of successful businesses, that most
22 successful firms simply do not meet the
23 monopoly power test under U.S. law. And that
24 is helpful in counseling. But there are two
25 important howevers that I want to talk


1 about.
2 The first is the issue that's
3 been discussed that Patrick talked about, the
4 treatment of aftermarkets. And the second
5 are non-U.S. issues, that there are lower
6 dominance thresholds outside the U.S. And
7 indeed, there is the curious concept of
8 collective dominance, at least curious to a
9 U.S. antitrust lawyer outside the U.S., so
10 let me turn to those.
11 First I'd like to turn to
12 aftermarkets. As Patrick mentioned, this
13 comes from the Kodak case. There the
14 Supreme Court held that there was the
15 potential, not that it was always the case,
16 but the potential for there to be a single
17 brand parts and service market, even where
18 the company had a modest percentage and had
19 no monopoly power in the interband equipment
20 market. Here, Kodak had less than 25
21 percent, clearly in the safe harbor of the
22 interband photocopier market. Photocopiers
23 are often referred to as Xerox machines, not
24 Kodak machines. That's for a reason. They
25 didn't have market power. But they had a


1 very large share of an intrabrand parts and
2 service market for Kodak copiers.
3 Now, post-Kodak, there have
4 been a number of court cases interpreting
5 Kodak, and they have limited Kodak's
6 application in most circuits to a situation
7 in which there has been a change of policy
8 with respect to aftermarket sales of parts or
9 service. That however has not been uniform.
10 The Ninth Circuit is sort of an outlier.
11 All in all, what this does,
12 I believe, is create very significant
13 problems. All suppliers of capital goods are
14 exposed today to the notion of having to
15 worry about whether or not they fall under
16 Section 2 when they deal with parts and
17 services for the products that they sell.
18 And somewhat ironically, if
19 you have a modest market share, you're one of
20 the also-rans in the interbrand equipment
21 market, you may have a higher share of your
22 single-brand parts and service market for the
23 very simple reason that third parties tend to
24 focus on the most successful installed base
25 products to develop non-OEM parts and non-OEM


1 services.
2 So the competitor with ten
3 percent in the interbrand equipment market
4 may be more likely to have a monopoly sharebr>
5 of a single-brand aftermarket than the
6 leading firm in the interbrand equipment
7 market.
8 So this is a problem and
9 it's a problem because it chills conduct. If
10 you're going to counsel, what it does is it
11 really counsels you to adopt restrictive
12 approaches from the outset and not change
13 them. Because if you do that, you really
14 don't have to worry about having a problem inbr>
15 this area.
16 I think the outcome is an
17 incorrect one. It has been heavily
18 criticized by a number of esteemed
19 economists, many of which have either been
20 former heads of the economic part of the
21 antitrust division or the current head.
22 Professor Carlton, Professor Shapiro,
23 Professor Klein, and Professor Hovenkamp have
24 all criticized the Kodak decision with respect
25 to aftermarkets and suggested that it is


1 unnecessary and unsound.
2 And the Department of Justice
3 thought it was unsound in its amicus brief in
4 Kodak.
5 So I think what should be
6 clarified here is this notion of single-brand
7 aftermarkets. That concept from Kodak
8 should be overturned. The government should
9 give guidance, and should file amicus
10 briefs in courts to try to clarify
11 the law in this area.
12 The same thing should happen
13 in Europe. I have referenced comments by the
14 International Chamber of Commerce that are on
15 the DG Competition website with respect to
16 the Article 82 discussion paper which give
17 further reasons why there shouldn't be
18 single-brand aftermarkets.
19 Let's then turn to the issue
20 of monopoly power outside of the U.S. Here,
21 the International Competition Network has a
22 unilateral conduct working group, and it has
23 a draft report in-progress for its next
24 convention in Moscow. And what it has
25 found by surveying competition authorities


1 around the world is that generally, the
2 presumption of dominance, which is essentially
3 the non-U.S. equivalent of monopoly power, is
4 set at a 33 percent to 50 percent level.
5 Now, that's below what is essentially the
6 U.S. safe harbor level.
7 And what it does, of course,
8 in a global marketplace is tend to expose a
9 much larger number of leading firms to the
10 potential that you have to worry about
11 whether your conduct is going to be
12 characterized in these regimes as abusive, or
13 if you use the United States approach, as
14 exclusionary.
15 Now, there's one good thing.
16 There's also a trend towards taking a
17 behavioral approach, which is looking at the
18 ability to set market prices, the same
19 approach taken under Section 2 in the U.S.,
20 rather than a purely structural presumption
21 based on market shares.
22 I'd like to turn to another
23 problem that I think is one that should be
24 addressed. It's not a huge problem today,
25 but it's the concept of collective dominance.


1 The European Commission Article 82 discussion
2 paper talks about the fact that there can be
3 collective dominance simply in a
4 oligopolistic situation. You don't have to
5 have an agreement with your competitors as
6 long as a small number of firms control a
7 large combined share of the marketplace.
8 Then they can act in a way that supposedly
9 would abuse their collective dominant
10 position.
11 My sense is that this has
12 never been applied, as far as I know, but it
13 raises a real counseling concern. What are
14 you supposed to do if your rival raises
15 price? If all the other rivals in an
16 oligopoly do what they often do, and that is
17 match the price increase, have you then
18 committed and abouse of collective dominance?
19 If you have a policy of
20 having exclusive distributors and other
21 firms follow that policy because it's
22 efficient, have you violated collective
23 dominance? It's very hard to figure out how
24 to counsel. This is something that again,
25 isn't a real-world problem today, but I think


1 should be one that is nipped in the bud so
2 it doesn't become a real-world problem
3 tomorrow.
4 And then secondly, there's a
5 separate issue in the draft anti-monopoly law
6 in China in which a firm that isn't a
7 leading firm, and that's true of course in
8 the collective dominant situation. If you're
9 not the leading firm in the marketplace,
10 generally you don't have to worry about
11 unilateral conduct.
12 But if either an oligopoly
13 situation presents a problem or under the
14 draft law in China, if two firms have
15 two-thirds of the market or three firms have
16 three quarters of the market, and you're the
17 second-ranked firm or the third-ranked firm in
18 that situation, as long as you have more than a
19 10 percent share, it appears that all of the
20 firms are treated as dominant and subject to
21 the listed abuses.
22 This law hasn't been adopted.
23 It hasn't been interpreted. It's not clearbr>
24 what this means, but it's out there and it
25 poses a potential risk that it seems to me


1 the U.S. authorities ought to address and I
2 know in fact are addressing.
3 Let me turn to some of the
4 issues of conduct. The first one I'd like
5 to talk about are refusals to deal. And it
6 seems to me that this is an area in which
7 there is a real opportunity for clarity.
8 My colleague Mark Whitener
9 testified in the July 18 hearings on refusal
10 to deal and covered this at some length, I just
11 want to hit the high points. I'll refer you
12 to his testimony.
13 Basically, the law appears to
14 have evolved that an unconditional refusal to
15 deal, and from that I distinguish one that is
16 conditioned on taking a second product, which
17 is often referred to as tying, or a
18 conditional refusal to deal which says you
19 will deal with me, and you won't buy from
20 anyone else, usually called exclusive
21 dealing. Those things ought to be dealt
22 with, in my view an exclusive dealing or
23 tying. But if it's simply an
24 unconditional refusal to deal, I decline to
25 sell you the product, in those sorts of


1 situations it seems to me there should be a
2 per se lawful rule.
3 Now what the case law has
4 evolved in the Trinko decision is a notion
5 that the Aspen Skiing case is the outer
6 limits. And the Aspen Skiing case involved
7 a refusal to continue to deal after there
8 had been a voluntary cooperation with the
9 plaintiff.
10 And the problem that that
11 approach creates is obviously it causes people
12 to be incentivized not to deal in the first
13 place. The concern would be if that's the law,
14 you would never have had the all-mountain pass
15 in Aspen in the first place because the party
16 with the three mountains would have known not
17 to enter into the cooperation because it
18 could have been accused of violating Section
19 2 should it have wanted to reverse course
20 later.
21 This creates perverse
22 incentives, and there is of course the
23 entractible problem of remedies. Courts
24 simply aren't set up to deal with the
25 situation of how does one decide what the


1 terms should be, what the pricing should be.
2 This is another reason why if there's a
3 problem in this area, there should be
4 legislation and essentially a utility
5 commission set up. The antitrust laws and
6 the court shouldn't be handling this.
7 The same thing, I think, is
8 true of the essential facilities doctrine,
9 which is just another way of dealing with
10 unilateral refusals to deal. That doctrine
11 has been questioned by the Supreme Court, but
12 it seems to me the law could be clarified in
13 this area because the Court simply didn't
14 address it.
15 Let me then turn to another
16 area that's already been talked about a lot
17 today, and that is the area of bundled
18 discounts. It seems to me that although in
19 the afternoon session I know we're going to
20 hear a bit to the contrary, that unlike
21 predatory pricing, where there's some pretty
22 good and clear guidance about not pricing
23 below a measure of cost and the need for
24 recoupment, that in the bundled discounts, the
25 mixed bundling area, at the moment there is a


1 real need for clarity.
2 So what I want to do is
3 start with just asking some questions and
4 suggesting some responses that might create
5 clarity. The first one is can we identify
6 types of market situations where there just
7 isn't likely to be a problem.
8 And I highlight one of them,
9 Professor Barry Nalebuff, someone who has
10 written extensively about bundling,
11 suggested that in certain circumstances, at
12 least from an economic theory point of view,
13 it could create issues. But he's been very
14 clear that that only really happens in a market
15 situation in which the seller sets one price
16 for all buyers of the product. And it
17 doesn't happen in a situation in which there
18 is bidding on an individual customer basis or
19 negotiation on an individual customer basis.
20 If in fact that's a valid
21 distinction, having that kind of
22 clarification would be very important. It
23 certainly would be important for my client,
24 which generally engages in negotiated sales of
25 products rather than consumer products where


1 you often set one price for>
2 Then another area is simply
3 do most of these cases really involve a
4 situation in which what is being alleged is
5 you have a company with monopoly power in
6 Market A that is bundling in order to try to
7 create power or effect a separate Market B.
8 If that's the case, then it
9 seems to me that an attempted monopolization
10 claim involving that second market is what is
11 really involved, and you have to look at
12 whether there is going to be a dangerous
13 probability of achieving monopoly power in
14 that second market. And others who have
15 testified have noted the importance of
16 showing not only a disadvantage to a
17 particular rival in Product B or the
18 competitive product, but also a realistic
19 threat of creating monopoly power in that
20 second product.
21 Now, after those threshold
22 issues, I guess one of the other questions is
23 what framework do you use to analyze these
24 bundled discounts or mixed bundling. And one
25 suggestion I guess I would like to throw out


1 for discussion is that these cases should
2 generally fall into one of two categories.
3 They ought to either be analyzed as tying, or
4 they should be analyzed as predatory>
5 Again, Professor Nalebuff had talked about an
6 example in his testimony in which he said
7 well, predatory pricing really doesn't apply
8 in some of these kinds of scenarios because
9 there can be no-cost bundling. And his
10 hypothetical was one in which you took the
11 monopoly product and you raised the price of
12 the monopoly product well above the monopoly
13 price, and then you bundled using the
14 monopoly price as the price of the monopoly
15 good in the bundle, and then you priced in
16 the competitive product.
17 And he said in that
18 circumstance, well, no one would actually
19 take the monopoly product separately. Well,
20 at least from my legal standpoint, most
21 courts would treat that situation in which
22 the second product wasn't economically
23 available as a tying situation, in which you
24 were simply not selling the monopoly product
25 unless you also bought the other product in


1 the bundle. And in that situation,
2 particularly where you're involved with a
3 second market, you should be able to deal
4 with the screen of attempted monopolization.
5 You also of course can solve the problem by
6 making sure that the separate price is a
7 realistic price so that you avoid tying.
8 It seems to me then the
9 other cases are situations in which you
10 really are giving a discount off of the
11 monopoly price in an attempt to assist in the
12 sale of the competitive product.
13 And that sort of situation,
14 if that's what's really going on, you do have
15 discounting or loss on what you could
16 otherwise sell the monopoly product for. In
17 that sort of situation then the issue should
18 be a predatory pricing analysis.
19 Now one approach that
20 sometimes is taken is to look at -- and it's
21 been advocated, I believe, by Professor
22 Muris in an earlier hearing -- the price
23 of the bundle and compare it to the cost
24 of the bundle. In some situations that
25 may be an appropriate and realistic


1 approach.
2 Some criticism of that I
3 think by Professor Hovenkamp is a stylized
4 situation in which you have a monopoly
5 product with a large monopoly margin.
6 And if I simply took that margin and
7 didn't bundle it, but simply took those
8 profits and used it to discount the price of
9 the competitive product, I might clearly be
10 pricing the competitive product below my cost
11 for that product.
12 And I think the question is
13 why should the bundle situation be treated
14 any differently than the straight predatory
15 pricing discount on Product B.
16 In that stylized situation in
17 Product B, Professor Hovenkamp advocates in the
18 Ortho approach of attributing all of the bundles --
19 all of the discounts to the competitive product,
20 and if that's still above cost, I think provides
21 a helpful screen and safe harbor. That's one
22 area where there should clearly be
23 clarification.
24 But I think Professor Muris
25 pointed out several important qualifications.


1 It's a highly stylized situation in which
2 there is no competitor. There is an absolute
3 monopolist, and there is no one else selling
4 Product A.
5 When there are fringe sellers
6 of Product A, those fringe sellers can help
7 undermine the bundled price for the package.
8 There may also be situations
9 in which there is a bundle with two
10 competitive products, and it may be that the
11 plaintiff can only sell one of those, but
12 some other party can sell the second
13 competitive product. They can team together
14 and provide their own bundled discount. Or
15 particularly, when you've got sophisticated
16 customers, the customers can search the
17 marketplace and provide their own added ala
18 carte bundles. They will look at the price
19 of Competitive Offer X and Competitive Offer
20 Y and compare it to the bundle.
21 So this notion that it's a
22 problem if you ascribe all of the discount to
23 the price of the single competitive product
24 that perhaps the plaintiff or the complainant
25 is selling, I think is -- again, it's an


1 over-dramatic case. It shouldn't be a problem
2 if in doing that the resulting price would be
3 below cost. It shouldsimply be a safe harbor
4 if you're not below cost.
5 And then of course in these
6 situations since there's a loss, you really
7 ought to be able to look at recoupment. You
8 have to really look at that just like you do
9 in predatory pricing.
10 If you're losing money by
11 subsidizing the sale essentially of the
12 competitive product, how are you going to
13 make that back? And if you're not going to
14 force people to exit and if you're not going
15 to be able to later raise price in that
16 second market, the B market, the competitive
17 market, then there's not a prospect for
18 recoupment. And just because you have multiple
19 products, it shouldn't be treated any
20 different than Brooke Group, and you
21 shouldn't have a violation.
22 Real quick, I just wanted to
23 raise some questions about the 3M LePage's
24 case that Patrick talked about. In that
25 case, the case was litigated on the


1 assumption that there was only one market
2 involved, a market for transparent tape.
3 If in fact it had been
4 litigated on the assumption that there were
5 two markets, a market for branded tape and a
6 separate market for generic or unbranded
7 tape, then would there have been a
8 violation? Remember, the record showed
9 that the plaintiff, LePage's, still had
10 two thirds of the generic type sales.
11 Would there have been a dangerous
12 probability of success of achieving monopoly
13 power in that second market?
14 And if it's only one market,
15 I think one has to go back and look at
16 Professor Muris's suggestion that you look at
17 the cost of the bundle. Remember it's all
18 the same market. It's just two different
19 products in that market. And if the cost of
20 the bundle in that one market is above --
21 excuse me -- the price of that bundle is
22 above the cost of the bundle, should that be
23 a safe harbor in the single-market situation?
24 And then separately, if it's
25 all one market, would the same result have


1 been achievable just by discounting the
2 branded tape that was clearly sold at a large
3 margin above cost. But if we're assuming
4 it's one market and you've lowered the price
5 of the branded tape, presumably that would
6 have applied the same pressure to LePage's the
7 generic tape. Yet that clearly would have been
8 appropriate under Brooke Group. You're not
9 required to charge the monopoly price. As
10 long as you're just giving discounts on a
11 single product, that would be lawful. Would
12 that have had the same effect in LePage's?
13 And then I think finally, an
14 important part of this discussion -- and I
15 think it goes broader than that case. This
16 case is an example -- is what is achieved by
17 the rule. What would have been accomplished?
18 Would it have led to less discounting by 3M?
19 How do you deal with situations in which you
20 have leading or successful firms that you
21 want to compete on price?
22 If the only rule is that you
23 must discount on a product-by-product basis,
24 that may result essentially in less price
25 competition and may harm consumers because,


1 as people have speculated, 3M probably was
2 attempting not to reduce the price of its
3 successful branded tape, but trying to find a
4 way to incentivize customers to buy more
5 rather essentially than to switch their
6 purchases from branded tape to the 3M
7 generic tape.
8 If in fact you have rules
9 that limit the flexibility for leading firms,
10 you have to look at what the economic
11 consequences are going to be in the
12 marketplace and for consumers.
13 I think this highlights
14 one of the key areas. The hardest areas,
15 I believe, are situations in which
16 you've got a firm that meets the monopoly
17 power situation, and it engages in conduct
18 that someone wants to characterize
19 potentially as exclusionary. Is that simply
20 enough? What kind of impact is necessary or
21 harm to competition is necessary? Is a
22 scintilla enough, or does it have to be
23 actually a significant harm to competition,
24 or are you simply into a balancing test of
25 what is the benefit versus what is the harm?


1 Now, very quickly I'd like us
2 to cover one more point, which is on
3 exclusive dealing, another area that could be
4 clarified, and it does come up in the
5 counseling context often. And that is a
6 situation in which there would be exclusive
7 dealing, which in a variety of contexts might
8 be viewed as exclusionary conduct, but the
9 exclusive dealing is at the behest of the
10 customer. The customer comes and says, I
11 think the best way to get the best price and
12 the best terms from my suppliers is to hold a
13 winner-take-all competition. So I'll invite
14 everyone in and say, I'm going to buy all of
15 my needs for the next three years from the
16 party that gives me the best offer. And
17 in that situation, I don't believe that even
18 if you're the leading firm and even if you
19 have monopoly power there should be a problem
20 in competing and winning that kind of
21 contract.
22 And it seems to me that kind
23 of clarification will assist in counseling
24 and will assist customers in getting the best
25 deal they can in the marketplace, which is


1 what the antitrust laws are designed to
2 promote.
3 So in conclusion, I want to
4 reinforce where I began. Clear administrable
5 and objective rules are extremely important,
6 and I hope they are the output of these
7 hearings.
8 I made several modest
9 suggestions about ways in which the rules
10 could be clarified. The first would be to
11 clarify Copperweld so that you know when
12 you're engaged in single-firm conduct.
13 Whenever you've got more than a 50 percent
14 share of the voting securities, the parent
15 and all of those subsidiary corporations
16 should be one company.
17 Secondly, the aftermarket
18 exception, the monopoly power rule. The
19 notion that there are single intrabrand parts
20 and service markets creates lots of
21 counseling problems and lots of issues, I
22 think, for consumers and competition. I
23 think that ought to be overruled. And I
24 think that the DOJ and the FTC should
25 advocate that.


1 I think all unconditional
2 unilateral refusals to deal should be treated
3 as per lawful, whether they involve
4 intellectual property or not. That should be
5 clarified. That should be advocated to the
6 courts. That should be advocated in
7 international settings.
8 There are a number of ways I
9 suggested in which the treatment of bundled
10 discounts could be clarified. And finally,
11 this idea of customer-initiated exclusive, I
12 think a very simple, straightforward,
13 helpful, practical clarification.
14 Then I just want to
15 underscore I think it's very important that
16 we take the step of clarifying the U.S. law
17 both at the Agency level for their
18 enforcement discretion to go the next step
19 which both agencies have done an excellent
20 job of moving the agenda in the courts
21 through amicus brief process and getting a
22 number of key clarifications. I hope there
23 are more at this term with the cases that
24 are pending.
25 And then finally, continuing


1 to be active in bilateral discussions with
2 other competition authorities and being a
3 leader in the international competition
4 network. Thank you.
5 (Applause)
6 MR. TARONJI: Thank you, Ron.
7 We're going to take a 15-minute break and be
8 back here at 11:15.
9 (Break taken)
10 MR. TARONJI: Well, thank
11 you. The first thing I would like to do is
12 offer each of the presenters an opportunity
13 to comment on what they've heard from the
14 other panelists. Let me start in order.
15 David.
16 MR. BALTO: You know, it's
17 hard for me to comment on the terrific
18 presentations of these two speakers. You
19 know, generic -- let me make a simple point.
20 Generic drug companies are almost never
21 dominant. We're in like the most intensely
22 competitive market. In any generic drug
23 category you're certainly going to have five,
24 six, seven competitors. Prices quickly
25 computed down to marginal costs. So the


1 headaches my colleagues have to live with I
2 don't really have to deal with.
3 I do have a little concern
4 about one suggestion that Ron made, however.
5 The idea that we should have a safe harbor
6 for customer-instigated exclusive dealing. I
7 just know from my experience in the
8 enforcement agencies, you know, you'd always
9 walk in there, and oh, you would have
10 anticompetitive conduct investigations. And
11 the parties would say, oh, customers really
12 wanted this.
13 Well, you know, when you
14 actually sat down and were able to go and
15 interview the customers you found out that,
16 you know, they wanted it only because their
17 arm was being twisted in a significant
18 fashion.
19 And also sometimes the
20 interests of customers aren't really in
21 confluence with the interests of consumers.
22 And I think one of the kinds of practices
23 that a lot of the previous speakers at these
24 hearings have identified, some of the kinds
25 of practices they've identified are


1 situations where basically a dominant firm
2 agrees to share its monopoly profits with its
3 customers in order to keep rivals at bay.
4 And you know, believe me, the customers like
5 those situations, but I think those
6 situations still can be harmful to consumers.
7 MR. TARONJI: Patrick.
8 MR. SHELLER: Really the only
9 comment I'd like to make is one of gratitude
10 to Ron. I suggested a number of problems
11 that we at Kodak are facing because of some
12 of the ambiguities in the law relative to
13 bundling and also the law relative to
14 aftermarkets. And I thought Ron made some
15 very viable suggestions that could help maybe
16 clear up some of those ambiguities. So thank
17 you, Ron.
18 MR. TARONJI: Ron, your turn.
19 MR. STERN: Well, thank you,
20 Patrick. Let me comment just briefly on
21 David's presentation. I'm not particularly
22 familiar with the pharmaceutical area,
23 although as an antitrust lawyer these days
24 you have to end up having some familiarity
25 because there's so much activity in the


1 pharmaceutical area.
2 It just struck me that it
3 was a situation in which perhaps it called
4 out for regulatory reform to address many of
5 the issues that David was talking about
6 rather than having the antitrust laws and
7 the court bear the entire burden in this
8 area.
9 It is one in which, of
10 course, there are large expenditures made and
11 large amounts of money at risk when the
12 patent protections go off. And obviously
13 that causes people to look for opportunities
14 to continue to make the profits during the
15 protected time period. And again, regulatory
16 reforms may be a better solution.
17 With respect to his sham
18 petitioning point, it seems to me again this
19 is an area simply in which clear rules would
20 be important. I don't think anyone would
21 deny the importance of First Amendment
22 petitioning or the basic soundness of the
23 Noerr-Pennington Doctrine.
24 So if there is going to be
25 greater emphasis placed on some sort of


1 exception to that exemption, then it seems to
2 me it needs to be a clear one so that people
3 can counsel and take advantage of the
4 governmental processes and the First
5 Amendment in an appropriate way and keep
6 one's clients out of a situation in which
7 they expose themselves to government
8 investigations and treble damages lawsuits.
9 And to his other point, if I
10 could take a moment on the customer-driven or
11 customer-initiated exclusives, I take his
12 point that there can be seller-initiated
13 customer demand, and that's a fact issue.
14 But it's sometimes very clear if a customer
15 puts out an RFP and there haven't been any
16 private discussions, that it's customer
17 initiated and that's the way this will
18 happen, I believe in a number of contexts.
19 And if in fact you can -- you know, a seller
20 tries to undermine the process by promoting
21 or encouraging or incentivizing the customer
22 to make such a request, you know, I think
23 that can be addressed and dealt with.
24 MR. TARONJI: I'm going to
25 start off with some general questions, then


1 we'll move to some of the conduct-specific
2 questions that we talked about. And I'd like
3 to talk about counseling.
4 As a person who has given
5 antitrust advice on the type of business
6 conduct your company can or cannot engage in,
7 have you found that there are specific types
8 of conduct where the state of jurisprudence
9 is such that your legal advice is either one,
10 particularly easy to give and apply; or two,
11 particularly difficult to give and apply?
12 Let me start with you Ron, and then I'll go
13 with Patrick.
14 MR. STERN: Great. I'll be
15 brief because that's mostly what I talked
16 about.
17 It seems to me in the U.S.
18 it's not difficult to apply the monopoly
19 power threshold element these days. At least
20 I haven't found it inordinately difficult.
21 In tying, it's pretty easy to counsel as to
22 when you are or are not engaged in tying.
23 You have some other issues, if you are
24 engaged in tying, to evaluate whether the
25 conduct is exclusionary or not. And as I


1 mentioned in predatory pricing, I think
2 there's some pretty clear guidance.
3 The difficult areas are the
4 ones I mentioned regarding bundled discounts,
5 refusals to deal, and the thorny problem of
6 aftermarkets. So that would be my list.
7 MR. TARONJI: Okay. Patrick.
8 MR. SHELLER: I would echo
9 what Ron said. You know, we don't seem to
10 have too much difficulty indentifying the
11 market monopoly power threshold, in the
12 U.S. anyways. That becomes more of a
13 challenge when we counsel clients outside
14 the U.S.
15 Tying, as I said in my
16 remarks, used to be an easier area in which
17 to advise. But now, as I said, I think the
18 line between tying and bundling is blurred
19 because of the LePage's case. So today we have a
20 have a lesser degree of confidence in couseling
21 on tying arrangements.
22 Exclusive dealing, predatorybr>
23 pricing, I think the standards in those areas
24 are fairly well established by the courts and
25 by the agencies.


1 The other area where we
2 find challenges under Section 2 are the
3 catch-all "other exclusionary" practices
4 where you can have problems. There are
5 cases like Conwood where the conduct was
6 so egregious that you don't have too much
7 trouble advising the client not to, e.g.
8 tear down a competitor's store
9 displays.
10 But what other sorts of
11 aggressive marketplace conduct that doesn't
12 fall into the categories that we've just
13 listed could offend Section 2? I think
14 in many of these areas the law is either
15 undeveloped or not developed to the extent
16 where you can confidently advise. I mean, for
17 example, how do you advise a client that has
18 a relatively high market share with regard to
19 how many of its competitor's employees they
20 could hire? And that's an issue that has
21 been litigated to some extent, but I thinkbr>
22 the lines are very unclear in that
23 area.
24 MR. TARONJI: Okay. Great.
25 And David, feel free to jump in whenever you


1 want to.
2 How do businesses such as
3 yours respond to variations among different
4 countries' competition laws with regard to
5 single-firm conduct? Specifically, do
6 international businesses decentralize decision
7 making on business conduct to adapt to a
8 foreign jurisdiction's competition laws?
9 Patrick, from Kodak's
10 standpoint as a chief compliance officer and
11 ensuring that Kodak is complying with allbr>
12 laws in all jurisdictions where you operate,
13 how do you make those decisions where the
14 standards may very well be different from one
15 jurisdiction to the next?
16 MR. SHELLER: Well, we're
17 definitely in the decentralized model.
18 We have in-house counsel in most of the
19 major markets around the world. So we
20 rely very heavily on their advice.
21 However, there are
22 circumstances where a business client
23 may at the worldwide level bebr>
24 considering a program that, at least based
25 on our limited knowledge of the


1 standards overseas, might pose problems,
2 although they wouldn't in the U.S.
3 So we do have a bit of
4 centralized thinking in the international
5 area. I was fortunate enough to have spent
6 four years in Europe working as an in-house
7 lawyer for Kodak, so I was able to pick up
8 some of the thinking in competition law area.
9 And I have a pretty good sense of what might
10 offend the European Commission laws. But
11 beyond that, we really, as I said,
12 do rely on our oversees colleagues.
13 MR. TARONJI: And Ron, I
14 assume General Electric is organized much
15 along the same lines?
16 MR. STERN: Well, General
17 Electric is decentralized. As people know,
18 there are multiple General Electric
19 businesses, each with their own CEO and own
20 legal department. But there is sort of
21 global assistance in the competition area,
22 which is sort of what I and a small group of
23 my colleagues do.
24 And I would say that this
25 question is a good one, and for G.E. it


1 varies. There are a number of businesses
2 we're in that are truly global businesses
3 where you really need to counsel on a global
4 basis rather than individualize.
5 The customers may be in
6 different jurisdictions, but it's probably a
7 global market, and you really can't go
8 through the time and effort to try to figure
9 out about extra-territorial application of
10 the various laws.
11 So you try to counsel to
12 sort of an international standard, always I
13 think being concerned about the U.S. being
14 necessary, because of the unique treble
15 damage exposure and litigation costs in the
16 U.S. But not sufficient, because you really
17 want to make sure that you're meeting any
18 more restrictive requirements in other areas.
19 If we had it, which we do,
20 businesses that operate much more locally,
21 and their conduct clearly is only going to
22 affect a particular jurisdiction, you can be
23 confident of that, then you can get more
24 localized advice about the actions that will
25 just affect that jurisdiction with a key


1 caveat, and I think this is important for
2 everyone to recognize. Certainly, General
3 Electric, and I expect many companies'
4 business executives and even mid-tier
5 employees move from country to country.
6 Organizations change so that an organization
7 that used to operate only in countries A and
8 B the next day operates in countries A, B,
9 C, and D. You don't have time when you're
10 counseling to readjust everyone's headset
11 when you don't know when they move.
12 So I think it's quite
13 important in fact to avoid issues and to
14 sensitize people to counsel to a norm because
15 it's simply not efficient and it's dangerous
16 in the long run to try to sort of say there's
17 no competition law in country X or no enforcement,
18 and so we can do as we please, even though
19 we know in a neighboring jurisdiction where
20 generally that conduct is likely to provoke
21 investigations or litigation.
22 MR. TARONJI: In looking at
23 whether you can come up with a uniform
24 standard for counseling purposes, do you trybr>
25 to determine what is the most restrictive


1 provision out there and counsel toward that,
2 or do you go back and again look at the
3 specific situation and look at it country to
4 country and advise accordingly?
5 MR. STERN: I think in
6 general you do both. You try to make sure
7 that you come up with something that's
8 simple. The idea of clear and understandable
9 rules is important because you have to be
10 able to give clear and understandable advice.
11 If you're giving advice that's too
12 complicated to business people, you have to
13 realize that there's a large risk that the
14 execution will not be in conformity with the
15 advice. And if that's a problem, then you've
16 created a problem for the client.
17 So it seems to me that in
18 these sorts of situations, you really are
19 looking for some sort of uniform standard.
20 And if in fact there is a more restrictive
21 approach taken by an important jurisdiction,
22 one that is likely to have either private
23 enforcement or government enforcement, even
24 by way of investigation, then you try to find
25 a way in which you're going to be in some


1 sort of comfortable, clear, safe harbor zone.
2 And only if that creates real problems with
3 achieving what you think is a legitimate
4 business objective, are you able to spend the
5 extra time and effort to see if you can
6 design something that's more complicated.
7 So I think the concern that
8 I was trying to express about the need to
9 address this globally is that U.S. legal
10 clarity at least in a number of areas, could be
11 overridden by a lack of clarity or by overlybr>
12 restrictive rules outside the U.S. and the
13 harm could come to U.S. consumers as well as
14 those in other areas.
15 MR. MATELIS: Do you have
16 anything to add, Patrick?
17 MR. SHELLER: We also take a
18 slightly different approach which is to start
19 with analyzing proposed plans under the U.S.
20 standard. And assuming that we can give the
21 green light from a U.S. antitrust
22 perspective, then the next step would
23 would be to look at whether there are
24 nuances under European law that might
25 create a problem. Then we'd seek advice


1 from our European counsel on those
2 particular aspects.
3 And you know, increasingly
4 now we'll look at some of the bigger markets
5 and their antitrust enforcement. Ron spoke a
6 little bit about the anti-monopoly law in
7 China. We'll be keeping a close eye on
8 developments there. And as that unfolds, it
9 will be an important area that we'll focus on
10 in our antitrust counseling.
11 But as the starting point,
12 we typically begin with the U.S. standards.
13 MR. MATELIS: I have a
14 question about clear rules. Ron and Patrick,
15 in your remarks you both stressed the
16 virtues, from your perspective, of clear
17 rules in the Section 2 context.
18 David, in your remarks you
19 sounded a provocative cautionary note that
20 maybe clear rules have some drawbacks. And
21 I'd just like to get all of your perspectives
22 again on a very basic question. What are
23 the pros and cons that policy makers and
24 courts should be thinking about when
25 articulating rules? Maybe we could start/td>


1 with you, David.
2 MR. BALTO: I actually was
3 interested in Ron's presentation. I thought
4 the questions he posed were really good ones.
5 But I sat there looking at the issues that
6 Ron was posing and I said, now, what exactly
7 is the rule in some of these situations that
8 Ron wants that's going to make his life so
9 much easier in counseling people?
10 And I think that to the
11 extent that it's a rule that's going to make
12 Ron's life simple, Ron's life -- you know,
13 Ron will be able to sleep at night because
14 he knows he can give a clear message to the
15 business person, and the business person can
16 follow it in a relatively straightforward
17 fashion, you know, I'm not sure that that's
18 really going to happen. In many of these
19 situations, I think that if there is -- there
20 is potential for anticompetitive conduct.
21 You know, you can look at
22 the full range of things that Microsoft did
23 that the Justice Department properly attacked
24 in their lawsuit against them. And if you
25 looked at them in segregation, you might be


1 able to determine that there would be a clear
2 rule that would suggest this kind of conduct
3 might seem to be legal. But if you put all
4 of the types of conduct together, you could
5 see why the conduct was really problematic.
6 So I'm a little hesitant
7 about clear rules. And for my perspective, I
8 mean the clear rule, everybody in the world
9 -- you read the hearing transcripts for these
10 hearings, the clear rule everybody loves is
11 Brooke Group and predatory pricing.
12 And one of the most important
13 points I want to make is in industries such
14 as pharmaceuticals, going and talking about
15 whether something is below your variable cost
16 is a meaningless concept because all the
17 costs are up front. So I don't think that
18 rule -- that rule bears too great a risk of
19 under-enforcement, which ultimately will harm
20 consumers.
21 MR. SHELLER: Well, as I
22 indicated in my remarks, we would certainly
23 favor clear rules in the Section 2 area for
24 a couple reasons. One is that it does
25 make the in-house counsel's job easier. They


1 can draw brighter lines for the client.
2 Second, I think it's
3 important because it helps to make the
4 antitrust laws appear more serious to
5 business clients. If a business client is
6 told that there's no real clear legal
7 standard in the area where you're proposing a
8 particular marketing plan, but here's some of
9 the factors that we might consider,
10 their reaction is likely to be: we might
11 as well take the risk then. And so I think
12 setting out clear rules helps business people
13 to follow the antitrust laws.
14 I would, however, note a
15 caution that safe harbors in the form of
16 guidelines can be can be helpful, but
17 they can also in some ways be unhelpful.
18 And I'll give as an example the European
19 block exemption on technology transfers
20 and some of the safe harbors that are built
21 into that exemption relating to market share.
22 The market share thresholds that the
23 Commission uses are very low so that almost
24 any transaction you would consider in the IP
25 area is going to be outside of the


1 thresholds. It's not helpful to set a
2 threshold that low. It's too conservative.
3 The Commission does provide
4 some other factors and guidelines that
5 companies should consider. But I think it
6 sort of undermines the benefit of providing
7 guidelines when you set thresholds that are
8 too low.
9 MR. STERN: Just comment
10 briefly. I do think clear rules are
11 important. I don't think there's a one size
12 fits all rule, to respond to a point I think
13 David made. I don't think it's a situation
14 in which you need to have one principle
15 that you use across all of the types of
16 exclusionary conduct in Section 2.
17 I think it is important
18 obviously that the clear rules also be
19 thoughtful, or they can do more harm than
20 good. And I think what you're really looking
21 for are principles that you can apply,
22 understand, counsel to, and have some sort of
23 confidence that the business can execute to
24 them and that the courts and the enforcement
25 agencies can predict -- you can predict how


1 they're going to apply them. And that's
2 really what I think we're searching for.
3 And I think as my talk
4 indicated, I'm happy to have them addressed in
5 little half steps that do things that seem
6 perhaps unimportant to some but are important
7 in the real world. I think those steps are
8 important and should be taken and not taken
9 for granted.
10 And secondly, I agree very
11 much with Patrick's point. People need to
12 look at guidance that's meaningful. Safe
13 harbors that do nothing to clarify the
14 situation because they only exist in
15 situations in which you never anywhere have
16 monopoly power are useless. It doesn't
17 really help you. But meaningful safe harbors
18 and ones that are understood not to define
19 the line between legal and illegal, but to
20 simply define and clarify what is clearly
21 legal and not questionable are very
22 important.
23 MR. COHEN: Let me just
24 return to David because you've for a second
25 time referred to your thought that relying on


1 average variable cost just doesn't work in
2 the pharmaceutical industry as a test of
3 predation. Do you have an alternative to
4 that? And would any of these alternatives
5 guide a firm with a large market share in
6 determining what conduct it can engage in
7 that increases its revenues in ways that have
8 nothing to do with excluding competitors?
9 MR. BALTO: Well, I think
10 the answer to the second part of your
11 question is no. I'm more concerned about
12 possibly -- about our properly identifying
13 anticompetitive conduct and stopping it. And
14 the counseling question I'm going to sort of
15 leave to the side.
16 I look forward -- as to the
17 first question, are there other standards, I
18 look forward to the presentation that the
19 representative of American Airlines is going
20 to bring about the Justice Department case
21 this afternoon.
22 I think some of that same
23 problem of high fixed costs, low variable
24 costs were grappled with by the Justice
25 Department in that case. I think because of


1 that there is increasingly interesting
2 economic literature that uses -- that talks
3 about the use of predation, the use of
4 above-cost price -- of certain pricing
5 strategies to create a reputation for
6 predation and how that kind of predation can
7 be anticompetitive. And you know, I think
8 that's something that I know the courts and
9 the agencies need to explore further.
10 MR. STERN: Can I just
11 comment just for a second?
12 MR. TARONJI: Go ahead.
13 MR. STERN: I'm sure the
14 economists who have participated in these
15 hearings or will participate in later
16 hearings or comment at the two hearings will
17 know much better than I do.
18 But it seems to me at least
19 it's a bit simple to say because variable
20 costs are low and fixed costs are high that
21 that standard doesn't work. It seems to me
22 in that context what it really means is that
23 there's very little likelihood of exit
24 because people are committed in the market
25 and they've sunk their costs. And in that


1 situation it's not clear how you end up with
2 recoupment or whether you really have a
3 problem.
4 And I don't purport to have
5 the answer, but it seems to me it's a bit
6 too facile to simply suggest that because
7 average variable costs are low that the
8 standard shouldn't be used.
9 MR. BALTO: Let me just
10 mention an area that I've written on and that
11 the FTC is currently studying. That's the
12 issue of authorized generics, which I
13 deliberately kept out of my testimony because
14 there's a fair amount written about this.
15 An authorized generic is an
16 arrangement between a branded pharmaceutical
17 company that they enter into with another
18 generic company to promote the entry of a
19 second generic just prior to or immediatelybr>
20 with the entry of the legitimate generic
21 company. In other words, it's mother one of
22 those situations where the generic is placed
23 into the market it plans to -- you know, it
24 plans to enter. And under the FDA
25 regulations there's is six-month period of


1 exclusivity, which is the vast majority of
2 the profits that a generic company makes when
3 it enters into a generic market. And I've
4 written about how this sort of strategy of,
5 you know, making a deal with still another
6 generic company to enter at the time of the
7 legitimate generic's entry can be a strategy
8 of predation. All the pricing is above cost.
9 I think the pricing is meaningless.
10 But what's important about it
11 is that what you're doing there is sending a
12 signal to the generic firm that it's -- you
13 know, if you plan to enter my market, you
14 can expect the rug to be pulled out from
15 under you, and you're not going to get the
16 reward you're expecting to get.
17 And I think it's much more
18 interesting to look at it from a certain
19 strategic perspective.
20 MR. TARONJI: As you know,
21 antitrust lawyers and judges are battling
22 over how much weight to give to business
23 documents, from strategic plans to e-mails
24 and sales and marketing personnel.
25 What consideration should


1 antitrust enforcers and courts give to intent
2 documents in assessing a firm's conduct?
3 MR. SHELLER: I'll start out
4 with that. My view is that business intent
5 documents have a role in attempted
6 monopolization cases, and that is primarily
7 it. There are ways in which you might use
8 business documents in monopolization cases.
9 But I think they need to be considered in
10 terms of who wrote them.
11 Often plaintiffs' lawyers,
12 and to some extent the agencies, will rely
13 on a bad document that might have been
14 written by someone at a lower level in the
15 organization. And it's really a statement of
16 opinion.
17 Obviously it's not something
18 we as in-house antitrust counsel want to see
19 from our clients. And we advise them not to
20 write in that sort of manner. But you have
21 to ask the question whether those views that
22 are stated by a sales representative or a
23 sales manager represent the views of the
24 company.
25 On the other hand, if you


1 have clear statements being issued in
2 internal documents by a corporate officer,
3 for example, or the head of a business, then
4 obviously that document ought to be given
5 more weight and might be of more value in a
6 Section 2 case. But again, I think documents
7 play the most important role in attempt
8 cases.
9 MR. STERN: And I'd just
10 add very quickly that it seems to me that
11 objective standards are better than
12 subjective ones. It's too easy in a large
13 organization to find the snippet in a
14 document and try to make that mean
15 something more than it does, not in
16 context.
17 And what the law wants
18 people to do in business is to compete
19 aggressively and attempt to win in the
20 marketplace. And that can be expressed in
21 a way certainly if a lawyer writes it so
22 that everyone would think it doesn't pose
23 an intent problem. And that same kind of
24 intent or motivation can be expressed
25 in a way that someone might make more


1 out of it than I think they should.
2 MR. COHEN: Would your
3 suggestion to look at, in the exclusive
4 dealing context, whether the policy is
5 customer driven or driven by other internal
6 motives take you into the area of looking at
7 intent documents?
8 MR. STERN: I don't think
9 so. I think they might get you into the
10 area that David talked about of seeing who
11 actually initiated it. If the customer put
12 out the RFP that I mentioned seeking a bid
13 for all of their demand for three years, if
14 in fact there were documents that showed that
15 this was the initial idea and that they were
16 essentially compensated for deciding to do
17 that by the lead provider in the marketplace,
18 that's, I think, the kind of situation David
19 was talking about. And I don't think that's
20 an intent issue. It's really: Was this the
21 customer's initiated approach or was this
22 essentially a supplier- initiated approach?
23 It doesn't have to do with whether the intent
24 for the exclusive was pro-competitive or
25 anticompetitive.


1 But it does, to be clear and
2 sort of to finish the thought, the general
3 notion is that a customer will not go out
4 and seek, you know, this kind of
5 winner-take-all situation unless the customer
6 thinks it's going to benefit by it.
7 In general, since the law is
8 trying to promote customer welfare, the
9 customer presumably would think it had enough
10 competition and that by putting its demand
11 out to this kind of winner-take-all bid that
12 it wasn't changing the structure of the
13 marketplace to its long-term detriment.
14 MR. TARONJI: Well, I want
15 to make sure that with the remaining time we
16 have the opportunity to cover some of the
17 substantive conduct issues. And let me go to
18 bundle discounts.
19 Does market share provide a
20 useful screening mechanism for assessing
21 loyalty discounts? And then I've got some
22 subsets, so let me ask all of them and then
23 you can comment on all of them.
24 Could we state a useful safe
25 harbor based on market share; and if so, what


1 should that share be?
2 MR. SHELLER: Let me address
3 the question on loyalty discounts, which I
4 distinguish from bundling in some respects. I
5 think loyalty discounts can be an issue under
6 Section 2 if they're really equivalent to
7 exclusive dealing. If a customer is
8 given a significant discount if they buy 100
9 percent of their needs from the dominant
10 supplier, then I would agree with the view
11 that the European Commission takes: that
12 this is tantamount to an exclusive dealing
13 arrangement.
14 Therefore, market
15 share thresholds could be important.
16 100 percent exclusivity is obviously a good
17 indication that you've got exclusive dealing.
18 Whereas, if the supplier through a loyalty
19 discount tied up say 70 percent of the market
20 or 60 percent of the market, then you're less
21 likely to have competitive harm. There would
22 still be opportunities for rivals to place
23 their products with that particular customer
24 as well as other customers.
25 MR. STERN: I guess my


1 reaction is that the term loyalty discounts
2 encompasses so many different kinds of
3 pricing practices and so many different
4 situations that I would be hesitant to
5 provide one market share test to address it.
6 You know, just -- Patrick had mentioned the
7 European Commission. In their Article 82
8 discussion paper they, I think, appropriately
9 draw a distinction between a situation in
10 which the different competitors, the
11 suppliers can essentially compete to supply
12 the entire demand of the customer or the
13 entire demand in the marketplace versus a
14 situation in which, I think as they express
15 it, the customer must carry a certain
16 percentage of the leading firm's products.
17 That's more of a distribution kind of a
18 situation. Those two are sort of night
19 and day different. And you would think in a
20 loyalty discount situation, you would want to
21 be treating them very differently.
22 To Patrick's point, you know,
23 are they equivalent of exclusive dealing, or
24 are they essentially just competing for the
25 opportunity and competing aggressively and


1 above cost, in which case the loyalty
2 discount wouldn't be a problem.
3 For these hearings,
4 I went back and read some cases I'd read
5 before the Concord Boat case. And in
6 that situation it seemed important to
7 the Court, and I think validly so, thatc
8 a number of customers had decided that
9 they could switch all of their demand away
10 from Brunswick, who was the leading engine
11 supplier, to their rivals depending on
12 what kind of deal they got. In that kind of
13 situation, you know, having a loyalty or a
14 market-share-based discount was just one way
15 of competing, which is what the Court
16 determined, and it was above cost. So that
17 would be my long-winded answer which is it
18 depends.
19 MR. TARONJI: David, in your
20 presentation you suggested that the generic
21 pharmaceutical industry is different, and so
22 the standards, rules, guidance should
23 take into effect that the pharmaceutical
24 industry is different. How should the
25 enforcement agencies take that into account?


1 MR. BALTO: Well, you know,
2 it's interesting if we really got into a long
3 discussion of these -- you know, these
4 different types of arrangements like tying,
5 bundling, loyalty discounts, so on, some of
6 the key cases involved pharmaceuticals and
7 medical devices. Smith Klein versus Eli
8 Lilly which involves, you know, a special
9 pricing program to sort of compel people to
10 purchase three drugs instead of two drugs.
11 Ortho versus Abbott, which involves, you
12 know, sort of market share discounts and so
13 on and so forth.
14 I think -- I'm not sure that
15 in this area the rules need to be that
16 different. I think it's just it's easier in
17 this setting involving pharmaceuticals to
18 identify the existence of an inelastic class
19 of customers. And you know, most of the
20 literature in this area suggests that it's
21 necessary to have some set of inelastic
22 customers.
23 But I'm still waiting for
24 Patrick and Ron to give me the market share
25 threshold that makes it a safe harbor.


1 MR. STERN: Well, I go back
2 to the comments I made in my presentation.
3 Oftentimes, if we are really talking about
4 what is the market share of the party that's
5 engaged in the conduct, you can go back to
6 the monopoly power test and those thresholds
7 and to the attempt threshold and the other
8 aspects, as opposed though if we're asking at
9 what level of market share can you set a
10 market share-based discount. That, I think,
11 is hard to say if you don't know what the
12 context of the particular market is.c
13 MR. BALTO: Can I pose a
14 question for Patrick then? One thing I think is
15 really interesting when you look at jurisprudence
16 in this area is that the courts use this very
17 hard threshold on Section 1 cases, you know,
18 when it looks at bundling or market share
19 discounts. And you know, you look at the
20 lower court's decision in Microsoft.
21 But when it comes to Section
22 2 they become more touchy feely and seem to
23 be willing to project the potential for
24 competitive problems even at lower market
25 shares. And that's basically what happens in


1 Densply and Microsoft and in LePage's.
2 You know, from a business's
3 perspective, how do you sort of look at that?
4 MR. STERN: Well, I'll step
5 up to that one. It seems to me it was the
6 comment I was trying to make when I was
7 asking some questions about 3M LePage's.
8 I think the most difficult
9 area to counsel in, just because I think the
10 law isn't very clear and helpful, and the
11 jury instructions aren't very helpful is a
12 situation in which you are clearly in a
13 category where you have monopoly power. You
14 meet that threshold. You're taking conduct
15 that either involves exclusive dealing or
16 some other type of conduct that the law can
17 characterize as being exclusionary, and then
18 the question, as I think I mentioned is,
19 well, what sort of impact does that have to
20 have?
21 And I think in the Section 2
22 context your comment is correct. We don't
23 have as much guidance. There is some notion
24 that -- which I think shouldn't be the case,
25 that if you're a leading firm, you have to


1 act differently in some sort of way. That
2 notion is reflected in the European community
3 law with respect to some special
4 responsibility, and some of the older case
5 law affirms they're deemed to be dominant.
6 I think in this situation,
7 one of the areas that the hearings could
8 benefit everyone is grappling with the issue,
9 particularly in the area of pricing, which I
10 think everyone is focused on of guidance and
11 rules that make sense for firms that are
12 leading firms, that you want to compete
13 aggressively in the marketplaces in which
14 they are leading firms because that is
15 overall beneficial. But if in fact anything
16 that might be characterized as too aggressive
17 or characterized as exclusionary can be
18 subjected to treble damages and a big
19 monopolization investigation, all you're going
20 to do is get people to pull their punches to
21 the ultimate harm of consumers and
22 competition.
23 I think it's the same problem
24 as I tried to illustrate with rules that turn
25 on whether you've started to deal with


1 someone or not, because they give you
2 perverse incentives at the end of the
3 day.
4 MR. SHELLER: I think the
5 market share test has limited value. I mean,
6 it's a good starting point in which to advise
7 clients. But what I tend to look at more
8 often are other factors like whether this
9 particular business has the ability to
10 control prices in the market.
11 I'm thinking about a
12 specific example of a business that I've
13 advised at Kodak which is considered to have
14 a high market share for a particular segment.
15 But I know from experience in working with
16 the business, that if they were to raise
17 their prices by five percent, we'd see
18 an influx of customers turning to competing
19 suppliers. So in that sense I don't think
20 the market share that's attributed to that
21 business is a valuable indicator of market
22 power.
23 And the other thing is the
24 point that I made in my remarks which is
25 that although you may have businesses in


1 Kodak's world which are beginning to
2 lose share to other technologies, you've
3 got to take those technologies into
4 consideration in determining whether you've
5 got a Section 2 case or not and whether
6 those technologies ought to be included in
7 the market.
8 MR. STERN: And just to add
9 to Patrick's point, because I think it does a
10 good job of illustrating one of the earlier
11 questions about clear rules. I think it's --
12 the clear rule about the ability to control
13 market prices, that may not sound as clear,
14 but I think antitrust lawyers and clients can
15 work off of that kind of rule versus one
16 that had some hard and fast market share
17 threshold as if that were a clear rule.
18 First, I think it's not a
19 thoughtful one, as I mentioned, to have a hard
20 and fast market share threshold. And
21 secondly, it gives, I think, a false sense of
22 clarity because it's all, of course, how you
23 define the market and how you define the
25 Having a clear principle


1 about one's ability to control market prices,
2 it seems to me, is one you can apply in a
3 market context and give -- be fairly
4 comfortable about giving advice. And that's
5 why I think it's important in the globalbr>
6 context that people move more towards this
7 kind of behavioral approach rather than a
8 structural approach.
9 MR. TARONJI: Let me end on
10 one question dealing with misleading and
11 deceptive conduct.
12 Do you agree that if tortious
13 conduct can be the subject of other causes of
14 action or regulated under other regimes such
15 as Food and Drug Administration, it should
16 also be the subject of antitrust causes of
17 action? I figured David had a strong feeling
18 about that one.
19 MR. BALTO: Yeah, absolutely.
20 If something independently violates the
21 antitrust laws, that's fine. We should
22 realize that -- I appreciate Ron's comments
23 about my testimony. The regulatory process
24 moves -- that these may be regulatory
25 problems. The regulatory process moves


1 slowly and amending it is very difficult.
2 Antitrust enforcement plays a
3 vital role in sort of telling people where
4 there are problem areas. And part of -- you
5 know, what I'd like to do is show you -- you
6 know, part of what we do is -- what people
7 do as enforcers is raise attention to things.
8 There's a recent court
9 decision involving the drug DBABP which is
10 used by tens of thousands of consumers, and
11 there was a sham petitioning claim. And the
12 sham petitioning claim was dismissed with
13 seven words. That's all the district court
14 judge said about the sham petitioning claim.
15 You know, part of this is
16 having enforcement agencies pay attention to
17 these types of issues, I think, affects
18 behavior of the businesses involved and
19 reduces the likelihood that they engage in
20 deceptive and sham conduct.
21 MR. SHELLER: I would be
22 very reluctant to apply a rule where the
23 alleged predatory conduct, if it meets
24 the standard of some state law violation,
25 ought to be the basis of a Section 2


1 claim.
2 One single violation of
3 a state law, let's take tortious interference
4 or theft of a trade secret as examples,
5 does not amount to a Section 2 violation
6 when coupled with monopoly share.
7 Now, if you had a pattern of
8 conduct occurring with respect to several
9 customers or in several geographic
10 markets, again Conwood being an example, then
11 yes, you could have a Section 2 situation.
12 But I'd be very reluctant to endorse the
13 notion that a single violation of state law
14 can be the predicate act for a Section 2
15 case.
16 MR. TARONJI: Okay. Any
17 other questions? Great. Well again, I want
18 to thank all of our panelists for their
19 interesting -- I'm sorry.
20 MR. BALTO: Could I just
21 end with a final comment --
22 MR. TARONJI: Go ahead.
23 MR. BALTO: -- because I'm
24 pushy.
25 I just wanted to talk about


1 the devices for the agencies as they look at
2 Section 2 enforcement. And I think this is
3 a point that all three of us would agree on.
4 The role of the agencies in
5 filing amicus briefs, not just before the
6 Supreme Court, but in lower courts, in
7 district court cases is tremendously
8 important. The reason why millions of
9 consumers now can buy generic Buspar is
10 because the Agency, the FTC filed a brief
11 before the district court judge explaining by
12 the sham conduct that Bristol-Myers was
13 engaging in was not immune under the
14 Noerr-Pennington Doctorine. They went down
15 to the district court.
16 I think those types of cases
17 are tremendously important. There are tons of
18 headaches that these people have in trying to
19 interpret LePage's. You should go look at
20 what's going on in the district courts.
21 LePage's type cases are currently being
22 litigated. And look for opportunities to
23 provide clarity in that setting so that when
24 the district court judges reach decisions on
25 these difficult LePage cases they're informed


1 by sound economic and legal principles.
2 MR. TARONJI: Any of you
3 want to have a final word?
4 MR. SHELLER: I would
5 like to endorse David's remarks and just add
6 the following. The agencies, and I'm
7 going to again focus on the two areas of
8 concern for Kodak -- the bundling area
9 and the intellectual property rights --
10 had an opportunity to urge the Supreme
11 Court to take up a case and really
12 settle the law in that area, LePage's and
13 then the Xerox case. In both cases the
14 agencies took the view that maybe those
15 issues weren't yet ripe for the Supreme Court
16 to consider.
17 I would suggest that you be
18 very clear in your advice to the Supreme Court
19 in the future when the time is right to take
20 those issues up. We would certainly
21 appreciate that. And it would provide a
22 lot of helpful guidance to the business
23 community.
24 MR. TARONJI: Great. Ron,
25 any final comments?


1 MR. STERN: Nothing other
2 than to thank you and the few hardy souls
3 who actually made it today for joining us.
4 MR. TARONJI: Please join me
5 in a round of applause for our panelists.
6 (Applause)
7 MR. TARONJI: And we will
8 reconvene at 1:30 for our second panel.
9 (At 12:00 noon a luncheon
10 recess was taken until 1:30
11 p.m.)
13 MS. GRIMM: Good afternoon.
14 I am Karen Grimm, Assistant General Counsel
15 for Policy Studies at the Federal Trade
16 Commission. I'm one of the moderators for
17 this afternoon's session. My co-moderator
18 today is Joe Matelis from the Antitrust
19 Division of the U.S. Department of Justice.
20 Before we start, let me cover
21 just two preliminary housekeeping matters.
22 First of all, as a courtesy to our speakers,
23 we'd like for you to turn off your cell
24 phones, Blackberries, and any other devices.
25 And secondly, we ask that the audience not


1 ask questions or make comments during the
2 hearing. Thank you.
3 Before introducing our
4 speakers this afternoon, I would like to
5 first thank the University of Chicago's
6 Graduate School of Business for hosting these
7 joint FTC/DOJ hearings to solicit testimony
8 on single-firm conduct. In particular, I
9 would like to thank Dean Ted Snyder and the
10 staff of the Gleacher Center for offering us
11 their facilities and for making the necessary
12 arrangements for us to hold these hearings
13 here.
14 And finally, I would like to
15 thank my FTC and Justice Department
16 colleagues as well as the FTC's Midwest
17 regional office in Chicago who have worked
18 very hard to put these hearings together.
19 We are honored this afternoon
20 to have a distinguished group of panelists
21 from the business community. Our panelists
22 this afternoon are first Sean Heather from
23 the U.S. Chamber of Commerce, Bruce Sewell
24 from Intel Corporation, and Bruce Wark from
25 American Airlines. Sean, I will note, is


1 standing in at the last moment for Stan
2 Anderson who was unable to be with us.
3 Our format this afternoon
4 will be as follows. Each speaker will make
5 a 20- to 25-minute presentation. We will
6 then take a 15-minute break. And after the
7 break we will reconvene and have a moderated
8 discussion with our panelists.
9 As Jim said at our morning
10 session, these hearings in Chicago are an
11 extremely important component of the joint
12 FTC and Antitrust Division hearings on
13 single-firm conduct under Section 2.
14 Over the past eight months we
15 have held hearings in Washington D.C.
16 primarily focused on specific types of
17 business conduct such as predatory pricing,
18 refusal to deal, bundled and loyalty
19 discounts, tying arrangements, exclusive
20 dealing, and various types of misleading and
21 deceptive conduct which have been challenged
22 under Section 2.
23 While some of these earlier
24 panels have included business executives and
25 their legal advisers, they have for the most


1 part focused on specific types of conduct and
2 have relied most heavily on speakers from
3 academia and the private bar.
4 Our sessions today are
5 somewhat different. They are designed to
6 provide a forum for businesses to tell us
7 what particular Section 2 issues are of
8 concern to them, and to suggest ways in which
9 we at the FTC and the Antitrust Division may
10 be better able to address those issues and
11 provide additional guidance on their
12 particular areas of concern.
13 Our panelists today have
14 accepted our invitation to share with us
15 their perspectives and views on Section 2
16 issues and enforcement. I want to thank them
17 all for agreeing to participate in today's
18 hearing and look forward very much to hearing
19 what insights they have to share with us.
20 I would now like to turn
21 over the podium to my colleague and
22 co-moderator, Joe Matelis, from the Antitrust
23 Division for any remarks he would like to
24 make. Joe.
25 MR. MATELIS: Thanks Karen,


1 and because my remarks will be brief, I'll do
2 them sitting down.
3 The Department of Justice's
4 Antitrust Division is very pleased to take
5 part in today's session, and I'd like to
6 reiterate what Karen said, that we're
7 interested in hearing about the perspectives
8 of businesses. And so we're looking forward
9 to your remarks today. And also repeating
10 Karen, on behalf of the Antitrust Division, I
11 would like to thank Bruce, Bruce, and Sean
12 for coming here and agreeing to share your
13 time and thoughts with us. We know that a
14 lot of effort and work goes into these
15 presentations, so we're extremely grateful
16 for you for rendering this valuable public
17 service, and particularly in February in
18 Chicago.
19 I would also like to thank
20 on behalf of the Antitrust Division the
21 Gleacher Center and the University of Chicago
22 Graduate School of Business for hosting these
23 hearings. And finally, I'd like to thank
24 Karen and her colleagues at the FTC for
25 organizing today's wonderful session.


1 Thanks.
2 MS. GRIMM: Our first speaker
3 this afternoon is Sean Heather. Sean is with
4 the U.S. Chamber of Commerce. He serves as
5 its executive director for global regulatory
6 cooperation. Global regulatory cooperation
7 is a new program at the Chamber focused on
8 regulatory divergence around the globe and
9 its impact on international trade.
10 Prior to leading this project
11 at the Chamber, Sean worked for nearly
12 eight years in the Chamber's formulation
13 and lobbying shops. He has his MBA and
14 undergraduate degrees from the University of
15 Illinois. Sean.
16 MR. HEATHER: Thank you for
17 the opportunity to appear before you today to
18 address the important issue of whether and
19 when specific types of single-firm conduct
20 may violate antitrust law. I will summarize
21 my written remarks, which the Chamber has
22 separately submitted. I would ask that both
23 be included as part of the record.
24 I appear today on behalf of
25 the U.S. Chamber of Commerce, the world's


1 largest business federation, representing more
2 than 3 million businesses of every size,
3 sector, and region.
4 The Commission and the
5 Department should be congratulated for
6 holding these hearings and reaching out to
7 the business community for its views on this
8 critical topic.
9 At the Chamber, we work
10 continuously to promote free market
11 principles, because we see the free market
12 system as essential to ensuring a vibrant and
13 productive economy. And we believe that
14 balanced and effective antitrust enforcement
15 is critical to ensuring a free market.
16 In the U.S. we support the
17 application of Section 2 of the Sherman Act
18 to conduct that threatens competition and
19 harms consumers. And outside the U.S., we
20 support the application of similar laws.
21 However, the Chamber believes
22 that the U.S. and foreign competition
23 authorities must use special care in policing
24 single-firm conduct to avoid chilling
25 behavior that is in fact both procompetitive


1 and beneficial to consumers.
2 To accomplish this, we
3 believe antitrust rules must be 1)
4 transparent, 2) predictable, 3) consistent
5 across jurisdictions, and 4), reasonably
6 stable over time.
7 It is important to remember
8 that new products and new business practices
9 are developed well ahead of their actual
10 introduction and ahead of any scrutiny by
11 antitrust regulators. Firms do want to obey
12 the rules of the road, but discerning and
13 applying those rules is becoming increasingly
14 difficult. In its September 5th written
15 submission to these hearings, the Chamber
16 focused on the need for clear, predictable
17 standards for tying and essential facilities
18 analysis to domestic enforcement of Section
19 2. Today I'd like to extend these principles
20 to international antitrust enforcement and
21 highlight the importance of cooperation among
22 antitrust enforcement officials around the
23 world.
24 The U.S. Chamber of Commerce
25 has recently announced a major new


1 initiative, the Global Regulatory Cooperation
2 Project. This project aims to increase
3 awareness about and to develop successful
4 strategies for combating the growing threat
5 that divergent regulatory systems pose to
6 competitive markets and to international
7 trade.
8 The need for Global
9 Regulatory Cooperation is clear. Barriers to
10 international trade go beyond market access
11 issues. Traditionally, trade agreements and
12 negotiations have focused largely on tariff
13 reductions. While market access must remain
14 a priority, divergent regulations are
15 increasingly impeding trade, and governments
16 around the world need to better understand
17 the impact in-country barriers have.
18 While the Chamber's project
19 focuses on many types of divergent
20 regulations, one area that deserves special
21 consideration is competition policy. I'd
22 like to make the following three points.
23 First, the growing
24 proliferation of antitrust enforcement around
25 the world, together with the globalization of


1 business creates increasing risk of conflict
2 in the application of antitrust rules to
3 single-firm conduct. These conflicts impose
4 costs on firms and harm consumers and are
5 becoming potential barriers to international
6 trade.
7 Second, while many
8 differences may be discerned between U.S. and
9 foreign standards for single-firm conduct,
10 the differences in the enforcement approach
11 on tying and essential facilities analysis
12 is becoming increasingly apparent.
13 Third, now is the time to
14 act on these differences. The U.S. must lead
15 a cooperative effort among industrialized
16 nations to develop and recommend appropriate
17 standards for single-firm conduct and to
18 promote their adoption around the world.
19 Over the past 15 years, the
20 number of jurisdictions with antitrust laws
21 has grown from about 25 to approximately 100
22 today. Many of the newer enforcement
23 agencies have limited training, experience,
24 and resources to police anticompetitive
25 behavior and enforce their laws


1 appropriately.
2 One thing is certain, the
3 impact of competition decisions by any given
4 enforcement agency no longer is confined by
5 its home jurisdiction. Increasingly, those
6 decisions reverberate around the world,
7 forcing firms to conform their behavior to
8 the most restrictive enforcement policies and
9 increasingly have a negative impact on the
10 global marketplace.
11 The underlying goals of
12 antitrust enforcement and trade liberalization
13 are similar in that both aim to achieve open
14 and competitive markets. In their
15 application, however, competition laws may
16 sometimes constitute barriers to trade. In
17 some countries, particular enforcement actions
18 may be motivated by protectionist goals. In
19 other instances, differences in general legal
20 standards or in remedies may have a chilling
21 effect on trade.
22 In her statement opening
23 these hearings, Chairman Majoras remarked
24 that quote: "Disagreement among competition
25 authorities about how to treat unilateral


1 conduct produces uncertainty in national and
2 world markets, reducing market efficiency and
3 imposing costs on consumers."
4 Other government officials,
5 both in the Executive Branch and in Congress,
6 as well as many business and Bar Association
7 groups have also joined in recognizing the
8 growing potential for conflict and the costs
9 and burdens associated with it.
10 The record clearly
11 demonstrates that these costs are very real.
12 For example, Microsoft has been subject to
13 three different sets of remedies in three
14 different jurisdictions for what is
15 essentially similar conduct.
16 In March 2004, the European
17 Commission held that Microsoft had abused a
18 dominant position in violation of Article 82
19 of the EC Treaty by tying the purchase of
20 Windows Media Player to the purchase of the
21 Windows operating system and by refusing to
22 share proprietary communication protocols with
23 competitors and allow their use in developing
24 operating systems that would compete with
25 Microsoft's own products.


1 When the EC issued its
2 decision, then-Assistant Attorney General Pate
3 issued a statement criticizing it as both
4 costly and unnecessary in light of the final
5 judgment entered against Microsoft by the
6 U.S. in 2001.
7 Later Pate expressed quote
8 "deep concern about the apparent basis for
9 this decision and the serious potential
10 divergence it represents." Noting that "It
11 is unfortunate that considerations of
12 international comity and deference did not,
13 in the Commission's judgment, carry
14 sufficient weight to avoid the significant
15 divergence that has now occurred."
16 Soon after the EC's decision,
17 the Korea Fair Trade Commission held that
18 Microsoft had abused a dominant position in
19 South Korea by integrating media and instant
20 messaging software into Windows and posing a
21 code removal remedy similar to the one
22 imposed in Europe. On that day the decision
23 was announced, Deputy Attorney General
24 McDonald released a statement stating that
25 quote: "The Antitrust Division believes that


1 Korea's remedy goes beyond what is necessary
2 or appropriate to protect consumers."
3 More recently, allegations of
4 illegal tying have been the focus of attack
5 on Apple in Europe. Apple uses Fairplay
6 Digital Rights Management technology to
7 encode songs from its iTunes music online
8 store. As a result, the songs may only be
9 downloaded using Apple iPod devices.
10 Norway's Consumer Ombudsman has found that
11 Apple's DRM policies have effectively tied
12 the purchase of iPods to the purchase of its
13 online music, and has ordered Apple to either
14 license its Fairplay technology to competing
15 producers of music players or to develop a
16 new open standard with those companies.
17 According to press reports,
18 authorities in Sweden and Denmark may follow
19 suit in formally charging Apple with
20 violation of local laws. And the French
21 Parliament has enacted legislation that may
22 require music downloads to operate across a
23 range of devices, empowering a government
24 body to force digital providers to share the
25 information as needed to ensure such


1 interoperability.
2 Significantly, while the EC
3 has launched an investigation into Apple's
4 music pricing policies, the EC investigation
5 reportedly does not focus on this purported
6 tie.
7 Apple's success has come
8 about as a result of innovation. Consumers
9 voted with their wallets to reward Apple for
10 its ability to innovate and to commercialize
11 its ideas. Competition authorities should
12 recognize the right of innovators to reap the
13 rewards of their innovation. That is to
14 protect competition, not competitors.
15 Assistant Attorney General
16 Tom Barnett made this point recently in
17 criticizing the attack on Apple pointing out
18 also that quote: "If the government is too
19 willing to step in as a regulator, rivals
20 will devote their resources to legal
21 challenges rather than business innovation".
22 In addition to these cases
23 involving Microsoft and Apple where U.S.
24 companies have actually been charged with
25 violations of foreign laws based on legal


1 standards that are arguably divergent with
2 those in the United States, there are several
3 pending investigations of Intel and Qualcomm
4 that may well result in significant
5 conflicts.
6 Recent press reports indicate
7 that the E.U. might formally charge Intel
8 with abusing its dominance in the market for
9 microprocessors in Europe. According to
10 press accounts, EC investigators potentially
11 believe Intel has interfered improperly with
12 the distribution and purchase of rival
13 products, in part by offering rebates to
14 customers that agree to purchase from Intel
15 exclusively. The Korean Fair Trade
16 Commission is also investigating INTEL's
17 rebate policies.
18 Qualcomm is also reportedly
19 under investigation by both the Korean and
20 Japanese Fair Trade Commissions, in part for
21 offering lower royalty rates for its CDMA
22 wireless technology if licensees agree to
23 license such technology exclusively from
24 Qualcomm.
25 The EC has received a formal


1 complaint about Qualcomm's conduct from a
2 group of Qualcomm competitors, but has yet to
3 actually initiate a formal investigation.
4 U.S. antitrust enforcement
5 officials are far more cautious than foreign
6 jurisdictions, however, upon investigating and
7 challenging such fidelity rebates and related
8 volume discounts and exclusive dealing
9 practices, because in many cases they may be
10 procompetitive and result in lower prices for
11 consumers. Because Intel and Qualcomm may
12 not be formally charged in these proceedings,
13 it is hard to tell what conflicts with U.S.
14 law may emerge, how severe they may be, and
15 what consequences may result.
16 As significant as these
17 conflicts among jurisdictions with mature
18 antitrust enforcement regimes may be, they
19 may be eclipsed in the coming years by the
20 conflicts generated by the adoption of new
21 antitrust laws in emerging and transitioning
22 economies.
23 For example, the current
24 draft of the new anti-monopoly law in China
25 now under consideration contains prohibitions


1 of abuse of dominance that remain unclear,
2 creating fears of an expansive and
3 inconsistent enforcement approach.
4 Ambiguities abound when firms may be
5 considered dominant and when they may be
6 found to have engaged in illegal tying and
7 other abusive conduct are concerns for the
8 chamber. My written statement contains
9 additional details on China's proposed law.
10 A greater effort must be made
11 amongst the jurisdictions with established
12 antitrust enforcement regimes to improve the
13 content and the consistency of their rules
14 governing single-firm conduct and then share
15 their learning and comparatively greater
16 experience with countries that may be
17 developing new antitrust statutes or
18 modernizing existing ones. Legislative
19 drafters in China and elsewhere will be
20 influenced in a positive way by the
21 development of such a consensus.
22 In my testimony, I have
23 quoted a number of U.S. officials who have
24 recognized the growing divergence in
25 antitrust standards governing single-firm


1 conduct and what it means for U.S. companies
2 and consumers. But recognizing the problem
3 isn't enough. The U.S. government needs to
4 address this problem with an increased sense
5 of urgency. The Department of Justice and
6 the Federal Trade Commission have devoted
7 resources for many years to fostering
8 cooperation, convergence, and consistency in
9 antitrust enforcement efforts, as well as in
10 remedies.
11 They have been successful to
12 a degree, but the success has been realized
13 largely in the cartel and merger enforcement
14 areas. Greater priority must be given to the
15 area of unilateral conduct. Today, a handful
16 of companies have been caught up or face the
17 potential of being caught up in divergent
18 interpretations of anticompetitive unilateral
19 conduct.
20 However, if this divergence
21 in understanding of single-conduct behavior
22 continues amongst the world's competition
23 jurisdictions, more companies globally will
24 be the target of future investigations and
25 proceedings. It is this divergence that the


1 Chamber's Global Regulatory Cooperation
2 project seeks to counter.
3 First, the U.S. government
4 must step up its efforts to encourage
5 convergence in substantive antitrust standards
6 for single-firm conduct, and in remedies. To
7 do that, the U.S. must engage more countries
8 bilaterally, and it must work towards greater
9 convergence in the context of such
10 multilateral organizations as the OECD and
11 International Competition Network.
12 The Chamber believes there is
13 a significant opportunity for the U.S.
14 government to have an impact in this area,
15 given the fact that the FTC co-chairs the
16 ICN's working group on Unilateral Conduct.
17 In this leadership role, the U.S. should be
18 in a position to call attention to diverging
19 standards and work to reduce and eliminate
20 them, particularly in the tying and essential
21 facilities areas, which have proven so
22 important as of late.
23 Second, the preliminary draft
24 outline of the Antitrust Modernization
25 Commission recommends that the United States


1 should continue to pursue bilateral and
2 multilateral antitrust cooperation and comity
3 agreements with more of its trading partners
4 and make greater use of comity provisions in
5 existing cooperation agreements.
6 The Chamber believes that the
7 U.S. should explore the concept of enhanced
8 comity, including such elements as an
9 agreement amongst jurisdictions to defer to
10 one another in relation to remedies.
11 While existing bilateral
12 agreements and the existing application of
13 comity principles have certainly been useful,
14 they have limitations, as illustrated by the
15 inconsistent remedies imposed by the U.S.,
16 E.U., and enforcement authorities in the
17 Microsoft matter. Jurisdictions such as these
18 with mature antitrust enforcement regimes
19 should set a coherent and unified example for
20 other countries by expanding their
21 cooperation and making them more consistently
22 successful.
23 Third, the U.S. enforcement
24 agencies should be encouraged to participate
25 more actively and cooperatively in


1 enforcement and policy development activities
2 with their foreign counterparts, by filing
3 amicus briefs, for example, when U.S.
4 agencies are not conducting parallel
5 investigations.
6 We applaud this series of
7 hearings for giving your counterparts in
8 Canada, Mexico, Japan, and the European Union
9 the opportunity to testify last September.
10 This kind of cooperative spirit and
11 substantive sharing of ideas is the platform
12 for starting to combat future competition
13 divergence.
14 Fourth, the need for
15 technical assistance is clear. It is
16 difficult for even the most experienced
17 jurisdictions to define appropriate rules
18 governing single-firm conduct, so newer
19 enforcement agencies may be expected to
20 struggle with them.
21 U.S. agencies should review
22 the adequacy of current technical assistance
23 programs in the area of antitrust, and
24 implement any changes that may be necessary
25 to make them more effective.


1 An agency review should
2 include 1), a review of programs sponsored by
3 other countries as well as the U.S.; 2) a
4 review of the work of international
5 organizations such as the OECN and ICN; and
6 3), a review of the adequacy of U.S. funding
7 levels and how that funding is deployed.
8 The U.S. must approach this
9 issue holistically and in cooperation with
10 other developed countries to ensure that
11 available resources are allocated efficiently
12 and effectively and to ensure that other
13 important initiatives such as the protection
14 of intellectual property are pursued.
15 Finally, the FTC and DOJ must
16 approach these issues with a great awareness
17 of the interface between competition policy
18 and international trade, and the impact the
19 divergent antitrust standards have on trade.
20 To this end, the FTC,
21 Department of Justice, USTR, State and
22 Commerce Departments must coordinate better
23 on these issues. The Department of Treasury
24 should also be involved, as it looks to lead
25 a strategic economic dialogue with China.


1 And to address protectionist tendencies,
2 agencies across the U.S. government must work
3 cooperatively with their counterparts around
4 the world to ensure that competition policies
5 support liberal trade policies.
6 This effort is challenging,
7 but critically important. The Chamber stands
8 ready to assist the FTC and DOJ in any way
9 it can, and we look forward to working with
10 you. Thank you.
11 (Applause)
12 MS. GRIMM: Thank you, Sean.
13 Our next speaker is Bruce Sewell. Bruce is
14 the senior vice president and general counsel
15 for Intel Corporation. He is responsible for
16 Intel's legal and government affairs
17 functions worldwide.
18 Prior to being named general
19 counsel, Bruce was Intel's director of
20 litigation. Before joining Intel, Bruce was
21 a litigation partner at Brown & Bane and was
22 an associate at Schnodder, Harrison, Siegel &
23 Lewis.
24 Bruce received his J.D.
25 degree from the George Washington University


1 and his bachelor's degree from the University
2 of Lancaster in the United Kingdom. Bruce.
3 MR. SEWELL: Good afternoon.
4 Let me begin by thanking the antitrust
5 enforcement agencies for giving me the
6 opportunity to participate in these very
7 important hearings. I appreciate the
8 considerable effort that has been devoted to
9 these hearings and the dedication that the
10 agencys' staffs have brought to bear on these
11 important issues. I'm confident that the
12 agencys' report will make a significant
13 contribution to the analysis of single-firm
14 conduct.
15 The development of the law of
16 single-firm conduct is of obvious interest to
17 my company. We are the defendant in a
18 highly visible Section 2 litigation that has
19 generated considerable interest both in the
20 press and among antitrust specialists.
21 I was somewhat dismayed to
22 see that the plaintiff in our case used these
23 hearings as a forum to rebroadcast
24 allegations that it has made already in its
25 District Court filings and in the press.


1 With respect to this I will only say the
2 following. Intel prefers to litigate in the
3 courtroom, and I will therefore not use this
4 forum as a -- to argue the merits of our
5 case other than to state that I unequivocally
6 deny the allegations that were made against
7 Intel at the January 30th hearings in
8 Berkeley.
9 Instead, my remarks today
10 will address the policy issues that have been
11 the focus of these hearings. In particular,
12 I would like to discuss the appropriate role
13 of Section 2 with respect to pricing and
14 discounting practices. I hope that my
15 company's perspective on these policy issues
16 will help to advance the debate that the
17 agencies have generated through these
18 hearings.
19 At the risk of stating the
20 obvious, the challenge of Section 2
21 enforcement is to curb anticompetitive
22 single-firm conduct that harms consumers
23 without deterring the type of aggressive
24 competition that benefits consumers through
25 lower prices and greater innovation. This is


1 a great challenge.
2 As Professors Baumol and
3 Ordover have observed almost 20 years ago,
4 there is a specter that haunts our antitrust
5 institutions. Its threat is that far from
6 serving as the bulwark of competition, these
7 institutions will become the most powerful
8 instrument in the hands of those who wish to
9 subvert it.
10 Baumol and Ordover stressed
11 the important concept that rules that make
12 vigorous competition dangerous clearly foster
13 protectionism. And they warned of the runner
14 up who hopes to impose legal obstacles on the
15 vigorous efforts of his all-to-successful
16 rival.
17 These observations were more
18 recently echoed by Professor Preston McAfee
19 and Nicholas Vakkur who catalogued seven
20 strategic abuses of the antitrust laws,
21 including punishing non-cooperative behavior
22 and preventing a successful firm from
23 competing aggressively.
24 In his presentation at these
25 hearings, Professor McAfee stressed that the


1 antitrust laws can be used to harass, harm,
2 and extort in order to induce cooperation.
3 The strategic abuse of the
4 antitrust laws is of more than a passing
5 concern to Intel. I was therefore
6 particularly pleased to see both Chairman
7 Majoras and Assistant Attorney General
8 Barnett in their remarks at the beginning of
9 these hearings underscore the importance of
10 having rules that do not deter
11 pro-competitive aggressive competition. As
12 Chairman Majoras stated in her remarks:
13 "There is consensus that antitrust standards
14 that govern unilateral conduct must not deter
15 competition, efficiency, or innovation. This
16 is why we frequently worry about false
17 positives. Pervasive and aggressive
18 competition, in which firms consistently try
19 to better each other by providing higher
20 quality goods and services at lower costs, is
21 crucial to maximizing consumer welfare and
22 economic growth."
23 Assistant Attorney General
24 Barnett echoed one of our chief concerns as a
25 business that devotes considerable resources


1 to antitrust compliance by stating that
2 antitrust rules in the unilateral conduct
3 area must set forth "clear objective
4 standards that businesses can follow and that
5 are also administrable for enforcers, courts,
6 and juries". Particularly in the area of
7 pricing behavior, as the Supreme Court has
8 emphasized on many occasions, and Mr. Barnett
9 endorsed in his remarks, antitrust rules must
10 avoid chilling legitimate price cutting.
11 This requires objective standards that rely
12 on information that is available to corporate
13 decision makers when they act and that allow
14 more efficient firms to exploit their cost
15 advantages. Sound antitrust policy also
16 requires sensitivity to the potential misuse
17 of the antitrust laws by less efficient
18 competitors to reduce price competition.
19 Government enforcement policy
20 has been appropriately cautious in the area
21 of pricing, taking heed of the risk of
22 chilling the very conduct that the antitrust
23 laws seek to encourage, that is, aggressive
24 price cutting.
25 At the same time, the


1 enforcement agencies have aggressively pursued
2 many other forms of conduct that
3 anti-competitively creates or maintains
4 monopoly power.
5 Without getting into the
6 merits of any individual case, it is
7 important to note that the agencies have
8 pursued a number of different forms of
9 conduct under Section 2 theories. Recent
10 cases include patent settlements that may
11 delay entry and thereby extend an incumbent
12 supplier's exclusive rights to supply,
13 representations to standard-setting
14 organizations or governmental bodies regarding
15 patent positions, exclusive dealing, and
16 product design cases.
17 The enforcement agencies have
18 recognized the challenges inherent in
19 aggressive enforcement of Section 2 cases.
20 While bringing a number of Section 2 cases in
21 recent years, the agencies have also
22 expressed cognizance of the potential misuse
23 of the antitrust laws by less efficient
24 rivals.
25 As Deputy Assistant Attorney


1 General Masoudi has noted elsewhere, an
2 antitrust agency must be cautious about
3 complaints it receives from competitors.
4 Such complaints often try to avoid legitimate
5 competition by seeking protection from the
6 government from competitive pressures.
7 This is particularly true
8 when the subject of such complaints it price
9 cutting. We hope that the agencies' final
10 reports on these hearings will impart to the
11 courts the benefit of the agency's experience
12 in enforcing the law aggressively while
13 resisting the demands of complainants who
14 seek to use Section 2 to dampen competition.
15 I read with considerable
16 interest the assertions that were made at the
17 January 30th hearing that the enforcement
18 agencies have been asleep on the job or that
19 they have somehow failed to enforce Section
20 2. This view simply cannot be squared with
21 the record of aggressive enforce that I've
22 just outlined.
23 It was also suggested at that
24 hearing that the enforcement agencies have
25 given the high-tech area a free pass, even


1 ignoring the fact that high tech is not
2 limited just to the computer industry. This
3 claim is equally hard to square with reality.
4 The Agency's most recent
5 actions in the high-tech area include
6 monopolization cases against Microsoft and
7 Rambus, a substantial number of merger
8 enforcement cases involving companies --
9 software companies such as Oracle, PeopleSoft
10 being the best known, and many other
11 high-tech market cases including
12 communications technology, disaster recovery
13 systems and 3-D prototyping. Also massive
14 fines imposed on DRAM companies and jail
15 sentences on some company executives and
16 ongoing criminal investigations involving
17 SRAM, flat-panel displays, and graphics
18 processors.
19 The criminal cases and
20 investigations are particularly notable
21 because they involve price fixing, conduct
22 designed to and having the effect of making
23 consumers pay more. It seems eminently
24 sensible that antitrust enforcement should
25 direct itself at conduct that demonstrably


1 leads to higher prices rather than to
2 attacking price cutting which is the very
3 conduct that the competition laws are
4 designed to promote.
5 It was suggested at the
6 Berkeley hearing that antitrust enforcement
7 should be directed at price cutting and that
8 the reality, as opposed to the myth, is that
9 consumers are harmed when prices come down
10 due to discounting.
11 Here I could not disagree
12 more with the position espoused by AMD. On
13 the issue of discounting we have a
14 fundamentally different point of view. We
15 think that enforcement resources are
16 appropriately directed at conduct that makes
17 consumers pay more, not conduct that gives
18 them lower prices.
19 I believe that our position
20 is supported by both the law as articulated
21 by the Supreme Court, and by very sound
22 policy considerations that underlie the
23 Court's decisions. The Court's statement in
24 Matsushita cogently expresses both the policy
25 and its underpinnings. To quote: "Cutting


1 prices in order to increase business often is
2 the very essence of competition. Thus
3 mistaken inferences in cases such as this one
4 are especially costly because they chill the
5 very conduct the antitrust laws were designed
6 to protect."
7 Justice Breyer, while sitting
8 on the First Circuit, made a similar
9 observation in the Barry Wright case. Again
10 quoting: "the consequence of a mistake here
11 is not simply to force a firm to forego
12 legitimate business activity it wishes to
13 pursue; rather, it is to penalize a
14 procompetitive price cut, perhaps the most
15 desirable activity from an antitrust
16 perspective that can take place in a
17 concentrated industry where price typically
18 exceeds costs."
19 This policy has broad
20 application across all areas of pricing
21 conduct. As the Supreme Court said in the
22 Arco versus USA Petroleum case: "Low prices
23 benefit consumers regardless of how those
24 prices are set, and so long as they are
25 above predatory levels, they do not threaten


1 competition". We have adhered to this
2 principle regardless of the type of antitrust
3 claim involved. This is not only the law,
4 but it is also the right antitrust policy.
5 This policy recognizes that
6 false positives, which are very likely to
7 occur in the absence of clear-cut cost-based
8 rules, can impose a high cost on society by
9 punishing and thereby deterring aggressive
10 price competition.
11 The courts and thebr>
12 enforcement agencies have recognized that the
13 very tangible bird in the hand, that is lower
14 prices enjoyed by consumers today, must not
15 be sacrificed for the bird in the bush, the
16 speculative and almost always illogical hope
17 that attacking price cutting and thereby
18 producing higher prices today will somehow
19 produce lower prices tomorrow.
20 I can tell you from years of
21 experience advising a very successful
22 corporation on how to compete with a very
23 aggressive rival that the need for clarity in
24 this area is paramount. The challenge in
25 counseling a business is to ensure that the


1 company adheres to its legal obligations
2 without forcing it to engage in gentlemanly
3 competition in which business opportunities
4 are squandered by pricing higher than is
5 needed to win the deal, even though the deal
6 can still be won profitably.
7 Intel has long enjoyed a cost
8 advantage due to its strong leadership
9 position in manufacturing. And it is
10 important to me and to the other lawyers
11 advising our management that we neither
12 deprive the company of the competitive
13 advantage that comes from its hard-won,
14 lower-cost position nor deprive consumers of
15 the benefit of lower prices, simply because
16 of unclear antitrust rules.
17 You may have recently read on
18 the front page of the New York Times about
19 Intel's latest breakthrough in semiconductor
20 manufacturing technology. This is the most
21 significant change in the materials used for
22 the manufacture of silicone chips since Intel
23 pioneered the modern integrated circuit
24 transistor more than four decades ago.
25 It is no accident that Intel


1 was the first to achieve this breakthrough.
2 Our company has enjoyed unparalleled
3 leadership in manufacturing for most of its
4 existence, and the benefits of this
5 relationship position are very tangible.
6 With every new generation of
7 manufacturing technology, each of which is
8 introduced on a roughly two-year cycle, we
9 double the number of chips that can be
10 produced on a wafer, holding both the wafer
11 size and the chip design constant. This
12 means that the manufacturing cost of any
13 given chip is cut by roughly 50 percent when
14 the new manufacturing technology is
15 introduced.
16 Now, it's a little bit more
17 complicated than that because we tend to take
18 advantage of this lower cost to put more
19 features onto the chips which trades off some
20 of that cost savings for better performing
21 products. But the cost advantage of being
22 first to adopt the new manufacturing
23 technology is large and tangible. Our recent
24 manufacturing technology breakthrough will
25 ensure that we can continue to progress along


1 the same path for many years to come.
2 So Intel has been on average
3 nine months to a year ahead of its
4 competitors in adopting these new
5 manufacturing technologies. This means that
6 in any given two-year cycle, we are alone in
7 achieving the cost savings during the first
8 year, and we are ramping up on the new
9 manufacturing process during the second year
10 when our competition is just beginning to
11 introduce the new technology.
12 Our sales executives and our
13 management want to use the cost advantage
14 that they enjoy as a result of our
15 manufacturing leadership to win business.
16 Clear antitrust rules are essential to my
17 ability to guide them through the winning
18 outcome to do nothing more than exploit our
19 competitive advantage.
20 A clear and sensible rule is
21 offered by the Areeda & Hovenkamp treatise in
22 its latest supplement. Quoting from that
23 treatise:
24 "When a discount is offered
25 on a single product, whether a quantity or


1 market share discount, the discount should be
2 lawful if the price, after all discounts are
3 taken into account, exceeds the defendant's
4 marginal cost or average variable cost. That
5 is, such discounts are covered by antitrust
6 or antitrust's ordinary predatory pricing
7 rule."
8 A similar approach has been
9 proposed by former FTC chairman Tim Muris,
10 who advocates a modified Brooke Group test
11 based on whether the price of the total
12 amount of goods sold exceeds the cost of the
13 goods.
14 Cost-based rules have a
15 number of advantages beginning with the
16 avoidance of false positives. They enable
17 companies to base pricing decisions on what
18 they know, that is, their own cost structure
19 and the relationship of price to cost instead
20 of speculation about the meaning of
21 potentially vague jury instructions that
22 might, for example, say that a firm must be
23 allowed to compete aggressively but that it
24 cannot behave in an unnecessarily restrictive
25 manner.


1 Because cost-based rules are
2 more predictable than the vague standards
3 that have been applied by some courts in
4 Section 2 cases, they are also inherently
5 more administrable. And they appropriately
6 condemn the type of discounting that does
7 cause competitive harm, i.e. predatory
8 pricing.
9 The antitrust laws are a
10 powerful instrument for consumer protection,
11 but they can also be misused by rivals to
12 attack competition. It is essential that the
13 antitrust rules in the pricing area protectbr>
14 consumers both from anticompetitive conduct
15 that may create, maintain, or enhance a
16 monopoly, and from anticompetitive abuses of
17 the law by rivals that seek to stifle price
18 competition.
19 Thank you once again for the
20 opportunity to provide these comments.
21 (Applause)
22 MS. GRIMM: Our third
23 presenter this afternoon is Bruce Wark.
24 Bruce is the Associate General Counsel for
25 American Airlines, Inc., where he's been


1 since 1993. His responsibilities include
2 litigation and regulatory matters, including
3 those relating to airport access, airport
4 rates and charges, aviation disasters,
5 patents and trade secret litigation,
6 international competition, airline alliances,
7 and antitrust and consumer class actions.
8 Bruce serves on the ABA Air
9 and Space Law Forum and has written a number
10 of articles relating to legal issues
11 affecting the airline industry.
12 He received his JD from
13 Georgetown University Law Center with Honors.
14 Bruce.
15 MR. WARK: I absolutely view
16 it as a privilege to be here today, so I'd
17 like to join others in their opening comments
18 by thanking the DOJ the FTC for the
19 opportunity to appear here today.
20 As an in-house attorney at
21 American Airlines who is responsible for
22 competition matters I hope to offer a unique
23 perspective, one that has been defined by the
24 important, turbulent, and highly competitive
25 nature of the airline industry.


1 I've chosen to focus my
2 comments on Section 2 predatory pricing
3 claims because within the last few years
4 there have been two Circuit Court decisionsbr>
5 relating to predatory pricing in the airline
6 industry.
7 More specifically, these
8 cases address the legality of decisions by
9 carriers like American to match the prices of
10 new entrants and to adjust capacity in
11 response to the new price points in the
12 marketplace.
13 The Department of Justice
14 actually brought the first of these cases
15 against my client, American Airlines in 1999.
16 I'm happy to say, as I'm sure many of you
17 are aware, we prevailed in that dispute when
18 in July of '03 the Tenth Circuit affirmed an
19 order granting summary judgment.
20 That decision found that the
21 Department had failed to establish that
22 American had priced its products below an
23 appropriate measure of its cost as required
24 by the Supreme Court's decision in, among
25 other cases, the Brooke Group.


1 The second recent predation
2 decision in the airline industry came in a
3 case that was brought by Spirit Airlines
4 against Northwest Airlines. As in the case
5 against American, in that case the District
6 Court held that Spirit had failed to prove
7 that Northwest had priced its products below
8 average variable costs on the routes in
9 question, and therefore, the District Court
10 entered summary judgment.
11 On appeal, and unfortunately
12 in my opinion, the Sixth Circuit reversed in
13 a decision that, I believe, fails to apply
14 the objective standards that are absolutely
15 necessary to distinguish between aggressive
16 competition and illegal predation under
17 Section 2.
18 I want to use these two
19 cases today to support two important themes.
20 The first is that predatory pricing claims
21 unconstrained by objective standards and
22 based on unproven economic theory harm the
23 competition that the antitrust laws were
24 intended to protect.
25 As Judge Easterbrook has


1 explained, and I'm quoting here: "An argument
2 that a practice is predatory is likely to
3 point to exactly those things that ordinarily
4 signify efficient conduct. Unless we have
5 some powerful tools to separate predation
6 from its cousin, hard competition, any legal
7 inquiry is apt to lead to more harm than
8 good."
9 Given the general agreement
10 that almost all price reductions, sales
11 increase, additions to capacity and so on are
12 beneficial, we need very good ground indeed
13 to treat a particular instance of such
14 conduct as unlawful.
15 The second and related point
16 that I want to make is that these objective
17 standards should be clearly articulated. The
18 point was made earlier this morning that at
19 least in the area of Section 2, predatory
20 pricing was an area of relative clarity. If
21 that point is true, it's true only on a
22 relative basis.
23 Our experience with the
24 Department of Justice shows that there is
25 still a great deal of ambiguity about what


1 the standard should be or even how those
2 standards should be applied. And as I hope
3 to make clear with the rest of my comments
4 today, it's also clear the courts aren't
5 consistently applying these standards, as I
6 think they need to be.
7 Clarity on these points is
8 particularly important because the antitrust
9 laws can be punitive. The serious
10 consequences of finding that the antitrust
11 laws have been violated forces companies to
12 pull their competitive punches, especially
13 when the lines of aggressive competition and
14 illegal conduct are not clearly delineated.
15 Moreover, even if the
16 defendant prevails, as we did in our case,
17 merely having to defend a Section 2 case is
18 a very expensive proposition, and it diverts
19 a tremendous amount of management attention
20 and company resources.
21 Now, in making those
22 comments, I recognize that given the
23 complexity of markets and U.S. business,
24 perfect clarity of legal standards may really
25 be an unobtainable goal. Individual cases


1 will continue to have to be decided on their
2 own merits, and general legal principles will
3 have to be applied to unique facts.
4 That said, improving of
5 clarity of legal standards in this area
6 should be pursued, and there are areas
7 where clarification can be immediately
8 accomplished such as a clear endorsement of
9 average variable cost as being the only
10 appropriate measure of cost in a predation
11 claim.
12 In our industry, despite the
13 fact we have two fairly recent Circuit Court
14 decisions addressing predatory pricing,
15 Section 2 standards remain unacceptably
16 vague. And even worse, as I've indicated
17 before, I believe the Sixth Circuit decision
18 in Spirit fails to demand the objective
19 standards that are necessary to show that
20 aggressive competition has overstepped the
21 bounds of the law and is a decision that
22 protects smaller competitors rather than
23 competition on the merits.
24 Before discussing the
25 American decision and the Spirit decision in


1 more detail, I think it's useful to give some
2 general observations on the airline industry
3 and how we compete.
4 The airline industry is the
5 backbone for much of U.S. commerce, and the
6 antitrust scrutiny that we find ourselves
7 under is no doubt a product of the important
8 role that the industry occupies.
9 Last year alone American
10 served about 100 million passengers. We took
11 in about 20 billion in revenue. Yet those
12 figures, as impressive as they are, account
13 for only about 20 percent of the U.S.
14 domestic airline industry.
15 Until the early 1980's, the
16 airline industry was a regulated business.
17 But since deregulation, the industry has
18 exploded, and air travel today, although far
19 from perfect, is largely affordable and
20 convenient.
21 Airfares in real terms have
22 fallen significantly, and American and other
23 carriers are now able to offer thousands of
24 convenient on-line connections that did not
25 exist in the regulated environment.


1 At the same time, new
2 entrants are consistently entering the market
3 with new aircraft, lower costs, and new ideas
4 on how to succeed in this crowded and mature
5 marketplace. One or more of these low-cost
6 carriers operate in over 80 percent of the
7 routes that American flies.
8 Clearly, competition has
9 served the air traveler well. Shareholders
10 and other stakeholders haven't faired quite
11 as well however.
12 American is the only Legacy
13 Network carrier that's never filed for
14 bankruptcy. And since the turn of thebr>
15 century, we've lost billions of dollars and
16 have had only one profitable year, that was
17 last year, where we eeked out a profit margin
18 of roughly one percent.
19 These results here aren't
20 intended to engender your sympathy, but
21 simply to remind us that the competition in
22 this industry is not only very dynamic. It's
23 often brutal.
24 Each day the people at
25 American have to make decisions on how


1 they're going to price tens of thousands of
2 markets, and in doing so they act on an
3 experience base that tells them two things.
4 First is that air travelers are going to be
5 motivated by small differences in price.
6 Second, that we are operating a network of
7 interconnected routes. And when we make
8 decisions as to one route, there may well be
9 implication for other routes within that same
10 network.
11 Given our cost structure and
12 position in the marketplace, maintaining a
13 robust network is a competitive imperative to
14 us. Our business folks are designing strategies
15 that we think maximize our success, and that
16 success has been and always will be adversely
17 related to the success of our competitors.
18 In sum, we are convinced that we have to be
19 an aggressive competitor, and, in our business,
20 that competition will always start with
21 price.
22 As the world's largest
23 airline operating in this competitive
24 environment, we understand the importance the
25 antitrust laws play in our market-based


1 economy. We have a longstanding antitrust
2 compliance program, but the ambiguity in the
3 law and the very competitive nature of the
4 industry make it a challenge to provide clear
5 guidance on Section 2.
6 The fact that we hope to
7 accomplish this legal guidance under the
8 circumstances is to sensitize our clients to
9 potential issues and be prepared to answer
10 those questions in real time as issues arise.
11 For reasons that I've already
12 mentioned, pricing doesn't remain constant,
13 and being noncompetitive on price for even a
14 short period of time can be very costly.
15 Our advice has to be as real time as the
16 competitive market in which our clients are
17 operating. And overly conservative advice
18 can inflict substantial damage on the
19 company.
20 We don't have the luxury of
21 a week to pull data and analyze issues,
22 although we know that if we end up in a
23 dispute, those on the other side will review
24 that data with the luxury of both time and
25 hindsight and will be seeking to substantiate


1 a position that is predetermined by the
2 requirements of its claim.
3 As I'll explain shortly, I
4 believe that's exactly what happened in
5 Spirit's case against Northwest when it was
6 able to avoid summary judgment.
7 Moreover, we have learned
8 through our experience that the Department of
9 Justice's attorneys and economists have their
10 own views of competition in the airline
11 industry. And our views of competition in
12 the industry and those of theirs are often at
13 odds.
14 We have the right to
15 challenge those factual and legal assumptions
16 as we did in our lawsuit, but that is a
17 position that we desperately try to avoid.
18 Given the punitive nature of the antitrust
19 laws and the inevitability of private class
20 action litigation, including the prospect of
21 treble damages, defending ourselves in that
22 situation, irrespective of the courage of our
23 convictions, is high-stakes poker indeed.
24 Thus, I thought of several
25 examples in which we have given advice or


1 altered our conduct based not on what we
2 thought was illegal, but on what we feared
3 others might argue is illegal. And in these
4 circumstances competition has likely been
5 compromised.
6 Our experience with the
7 Department in its predation case illustrates
8 how Section 2's lack of clarity can lead to
9 significant disagreement between industry
10 enforcement and how, at least in our opinion,
11 overly aggressive enforcement actions
12 threatened the competition that the antitrust
13 laws were intended to protect.
14 In making that comment,
15 however, I want to note that although we
16 disagreed with the Department's theories and
17 decisions in that case, we didn't question
18 their good faith. Despite those differences
19 of opinion, I don't doubt that they decided
20 to pursue the case against American, and they
21 believed in the merits of their arguments and
22 believed that they were fulfilling their
23 obligations to protect competition and
24 consumers.
25 Indeed, if they're like a lot


1 of lawyers that I know, I suspect that
2 despite the loss, they still think they were
3 right and it's the courts that got it wrong.
4 These good-faith but
5 extremely important disagreements simply
6 highlight the problem of the current state of
7 jurisprudence under a Section 2 predation
8 claim.
9 Let me put our dispute with
10 DOJ in a bit more historical context. The
11 lawsuit was brought in the mid to late
12 1990's, at which time the airline industry,
13 like the rest of the U.S. economy was
14 operating near the peak of the business
15 cycle. American and other large network
16 carriers were profitable. And although those
17 profit margins were generally in the single
18 digits and was modest compared with other
19 industries, they were very good when compared
20 to the industry's historical returns.
21 In response to these
22 conditions, a number of new entrants entered
23 the market, some such as Frontier and Air
24 Tran are still flying today and are generally
25 recognized as being successful. Other new


1 entrants that were less well managed and
2 financed disappeared.
3 The failure of some of
4 these new entrants led to concerns that the
5 markets were failing and that the actions of
6 incumbent airlines, like American, where we
7 matched pricing and expanded output was
8 actually harming competition.
9 The Department of Transportation
10 even considered reregulating the industry when
11 an incumbent carrier matched prices or expanded
12 output in response to new entry.
13 Fortunately, that regulatory
14 initiative failed, and the following five or
15 so years demonstrated that the marketplace
16 was far more resilient and dynamic than the
17 average regulations demanded.
18 By the year 2000, Jet Blue
19 and others had shown that a well-financed and
20 managed new entrant could succeed. And
21 ironically, a lot of that growth was in the
22 hubs of network carriers like Denver and
23 Atlanta, which were once deemed fortress
24 hubs. Perhaps even more ironically, the
25 alleged predators like American and Northwest


1 either filed for bankruptcy or teetered on
2 the brink, while new entrant low-cost
3 carriers became the most profitable and
4 fastest growing segment of the market.
5 The Department's case against
6 American and Spirit's case against Northwest
7 both raised an array of factual and legal
8 issues. I don't intend to address each of
9 those, but I instead want to focus on what I
10 think are two of the most important, the
11 first being the definition of relevant
12 market, and the second being the appropriate
13 measure of cost, and more particularly
14 whether average variable costs is the
15 appropriate standard.
16 Let's start by addressing how
17 the Sixth Circuit dealt with the question of
18 relevant market in its Spirit decision. As
19 mentioned in that case Northwest matched
20 Spirit's pricing and it increased its
21 capacity on routes served by Spirit, which
22 arguably forced Spirit to withdraw from the
23 route. Yet even after Northwest reduced its
24 price and incurred additional costs, its
25 revenue on the route exceeded any reasonable


1 measure of its average variable costs. As a
2 result, if you define the relevant market as
3 airline services on these routes, Spirit's
4 case failed because it could not show that
5 Northwest had priced its product below an
6 appropriate measure of its cost as required
7 by Brooke Group. These undisputed facts are
8 what led the District Court to enter summary
9 judgment.
10 The Sixth Circuit reversed on
11 appeal. The Court concluded that Spirit and
12 the experts established a genuine issue as to
13 a different definition of relevant market,
14 one that divided passengers flying on the
15 same airplane.
16 In order to reach the
17 conclusion necessary to its claim, that is
18 that Northwest's revenues in some relevant
19 market were less than its variables costs,
20 Spirit's experts had to exclude some portion
21 of revenue that Northwest is earning on these
22 routes during the alleged predation period.
23 They accomplished that
24 objective by removing revenue of two types of
25 passengers. First they excluded revenue from


1 passengers traveling on any type of
2 connecting itinerary. And second and even
3 more surprisingly, they removed from the
4 calculation passengers who paid more than
5 $225 for their ticket.
6 That analysis, of course, was
7 completely unrelated to any analysis that
8 Northwest would have undertaken at the time
9 it decided to add in price due to capacity
10 on these routes. Northwest instead would
11 have asked a much more straightforward and
12 appropriate question, that is, with new lower
13 fares and additional capacity, would it be
14 able to generate sufficient revenue from any
15 and all types of passengers to cover its
16 costs? A yes answer to that question should
17 have been the end of Spirit's claims.
18 Spirit's segregation of
19 passengers who paid more than $225 from those
20 who pay less than $225 into separate markets
21 is an artificial after-the-fact analysis that
22 should not have created any genuine issue of
24 As a result, the Sixth
25 Circuit's Spirit decision is one that harms


1 rather than promotes competition. The
2 endorsement of that contrived analysis, at
3 least for the purpose of avoiding summary
4 judgment, puts some common carriers in a
5 no-win situation of one, either not competing
6 for every passenger on price and product; or
7 two, recognizing that if it's too successful,
8 it may have to face a treble damages jury
9 trial brought by a competitor.
10 Pricing capacity decisions in
11 the airline industry are made in the context
12 of a very dynamic marketplace, and no airline
13 can possibly anticipate how the next
14 plaintiff may segregate passengers on the
15 same aircraft in the separate relevant
16 markets, each of which is supposed to
17 independently clear the test of a predatory
18 pricing claim.
19 I'd now like to turn to the
20 question of whether a defendant priced its
21 product below an appropriate measure of its
22 cost. That of course was the issue that was
23 determined in our case. It was also perhaps
24 the most hotly disputed issue in that case
25 since the facts showed that American's


1 revenues on the routes exceeded its average
2 variable costs. This caused the department
3 to develop alternative tests. American had
4 argued against cost measures that included as
5 much as 97 percent of total costs. And
6 others had argued in effect that American's
7 decision failed to maximize its profits.
8 My point for purposes of this
9 hearing is simply this. There was a great
10 deal of disagreement as to what items of cost
11 were properly included, how these costs
12 should be calculated, and how revenues should
13 be attributed to incremental costs.
14 Although we prevailed on this
15 basis, the Tenth Circuit decision left many
16 of these disputed questions unanswered.
17 The Tenth Circuit also left
18 unanswered the important question of whether
19 there should be a meeting competition defense
20 in a Section 2 context.
21 The problem of residual
22 uncertainty in the Tenth Circuit case
23 concerning these questions however is not
24 nearly as problematic in my mind as the Sixth
25 Circuit's treatment of this question. And


1 what I believe is certainly the most
2 troubling statement in its decision, the
3 Sixth Circuit stated, and I quote here:
4 "Even if a jury were to find that Northwest's
5 prices exceeded an appropriate measure of
6 average variable costs, the jury must also
7 consider the market structure in this
8 controversy to determine if Northwest's deep
9 price discounts in response to Spirit's entry
10 and the accompanying expansion of its
11 capacity on these routes injured competition
12 by causing Spirit's departure."
13 This statement from the Sixth
14 Circuit offers no objective standard for the
15 jury to use in distinguishing aggressive
16 conduct by a large but efficient incumbent in
17 the marketplace. It employs none of the
18 powerful economic tools called for by Judge
19 Easterbrook, and is inconsistent with the
20 dictates of the Supreme Court. It simply
21 constitutes an open invitation for juries and
22 courts to condemn aggressive competition in
23 order to protect less efficient but smaller
24 competitors.
25 I want to wrap up my comments


1 by offering some specific suggestions
2 concerning Section 2 enforcement. First,
3 given the ambiguity in the law and harm that
4 a false positive can have in this area of
5 the law, regulators should proceed very
6 cautiously. I believe that especially in the
7 context of a single product pricing case,
8 regulators and courts should heed the Supreme
9 Court's guidance that well-founded claims are
10 extraordinarily rare, and that overly
11 aggressive enforcement can harm competition.
12 Predatory pricing claims are
13 not an area of the law where regulators
14 should pursue aggressive new theories or rely
15 on untested economics.
16 Second, markets are more
17 resilient than is often appreciated at the
18 time. The experience in our industry has
19 debunked many of the theories and assumptions
20 concerning the market, like that of the
21 fortress hub that motivated the Department of
22 Transportation to consider re-regulating the
23 industry and encouraged the Department of
24 Justice to file its lawsuit against American.
25 Trusting markets to perceive shortcomings is


1 often the best policy.
2 Third, definitions of
3 relevant markets should align with the
4 competitive environment, as it was perceived
5 at the time by those whose conduct is being
6 contested. Relevant market definitions
7 contrived by lawyers and economists after the
8 fact are often motivated by predetermined
9 results and almost always fail to account for
10 the full complexities of the market.
11 Fourth, I believe there
12 should be a meeting competition defense under
13 Section 2. Such a rule would provide a
14 clear line, and matching a competitor's price
15 in the hopes of competing for every last
16 customer is exactly what competitors are
17 supposed to do. A competitor that cannot
18 survive at the price point it has chosen is
19 not the type of efficient competitor the
20 antitrust laws should be protecting.
21 Finally, since aggressive
22 competition and predatory conduct often share
23 the same characteristics, careful thought
24 needs to be given to the remedies before the
25 regulators commence litigation.


1 There were times in our
2 dispute with the Department that we would
3 have liked to resolve our differences, but
4 the remedy imposed by the Department would
5 have been competitively debilitating for
6 American in a highly competitive industry.
7 Finally, predatory pricing is
8 an area of the law where remedies are more
9 prone to doing more harm than good. I hope
10 that these comments have been useful, and I
11 look forward to the moderated portion of the
12 discussion.
13 (Applause)
14 MS. GRIMM: I'd like to
15 thank our presenters for their very fine
16 presentations. We will be resuming in about
17 15 minutes. We'll take a break until then.
18 (Break Taken)
19 MS. GRIMM: I would like to
20 start at the end with Bruce Wark. Bruce, do
21 you have any comments? Do you have any
22 questions of your fellow panelists?
23 MR. WARK: Well, there was a
24 great deal of commonality, I think, between
25 what I said and what Bruce Sewell said. So


1 I'll just tell you -- say he was right and
2 leave it at that.
3 On the question of
4 convergence, I agree it's an absolutely
5 important policy goal and needs to be
6 pursued. But equally importantly, you need
7 to make sure you converge at the right place.
8 And you know, particularly with the E.U.,
9 they have a different tradition. They have
10 different biases. I think they are more
11 inclined to protect competitors at the
12 expense of competition. And what I wouldn't
13 want to see is convergence away from what we
14 think is the right standard, which has been
15 developed in this country. And I think the
16 standards employed in this country are the
17 gold standard and we need to stick with them.
18 MS. GRIMM: Bruce.
19 MR. SEWELL: Yeah, I
20 obviously return the favor, Bruce. A lot of
21 mutual admiration here.
22 I guess a couple of the
23 points that were made in your comments that I
24 picked up on, we absolutely agree that
25 average variable cost is the appropriate


1 measure, and I think we're going to explore
2 that a little bit more. But we absolutely
3 and wholeheartedly agree.
4 The other thing that I noted
5 and I'd like to just sort of reinforce this,
6 I think one of the things I took from your
7 comments was this notion that if you were to
8 try to run a business so as to avoid being
9 sued for potential anticompetitive behavior,
10 that almost by definition then you have
11 under-optimized from a consumer standpoint.
12 And that's something that we need to be aware
13 of. And that the risk of lawsuits and the
14 potential punitive aspects of those private
15 lawsuits is enormous. And yet at the same
16 time as a company you almost cannot run your
17 business to say I will never put myself in
18 that position. It under-optimizes.
19 With respect to Sean's
20 comments, again, we're very supportive of
21 this activity. The critical question, as
22 Bruce mentioned, is if you harmonize
23 regulation, if you adopt in effect a single
24 form of regulation, then it's just so
25 important to make sure that you don't go to


1 the highest regulatory level so that you
2 don't end up in effect, in order to get
3 consensus, always choosing the most
4 regulatory or the most highly regulated
5 standard. That would be an easy way to get
6 to convergence, but it's not necessarily the
7 best way to do it. That's about it.
8 MS. GRIMM: Sean, do you
9 have some comments?
10 MR. HEATHER: I would just
11 say to clarify what the Chamber's testimony
12 was in response to both the observations that
13 were made. The Chamber is not about convergence
14 for convergence sake. That it is important
15 that the right standard is picked and would
16 agree that, we believe that, the way in which
17 the U.S. looks at these issues is the gold
18 standard. And the importance is taking that
19 gold standard, and as my father would say,
20 and de-Anglesizing the rest of the world to
21 it. So it's not about convergence for
22 convergence sake, but it definitely is
23 obviously the theme behind the remarks I
24 made.
25 MS. GRIMM: Thank you. I


1 would like to delve into this question of
2 average variable costs in some more detail.
3 Both of our Bruce panelists have definitely
4 endorsed that as a test, I would say. And I
5 would just like to ask each of them to
6 basically tell us more about how average
7 variable costs are kind of arrived at in
8 their particular industry.
9 This morning we heard one of
10 our panelists say that he did not think
11 average variable cost was the right test,
12 especially in high fixed cost industries.
13 And I would just like to hear some more
14 discussion from you on how the average
15 variable cost test would be applied.
16 MR. WARK: Yeah. Want to
17 begin with me again?
18 MS. GRIMM: That would be
19 fine.
20 MR. WARK: I think it's
21 important to recognize that average variable
22 cost is really a proxy for marginal cost
23 because that really it the right test.
24 And when you talk about
25 average variable cost, one of the questions


1 that gets buried in the next level of
2 analysis is variable over what period of time
3 because, you know, everything is variable if
4 you give it enough time.
5 That said, I do think that
6 average variable cost on an appropriate time
7 frame is the best test because it provides
8 clear guidance. And I think the problem you
9 have with people who argue that maybe it
10 doesn't fit in one particular case or
11 another, there really is no other standard
12 that they're articulating. And you end up in
13 a situation like what I pointed out in the
14 Spirit case where the Court's basically
15 saying well, even if they don't meet average
16 variable cost, you the 12 jurors decide
17 whether you think this scenario is good for
18 competition or not. And that is the kind of
19 unobjective predatory pricing analysis that
20 is surely going to result in false positives
21 and will create all kinds of problems, from a
22 counseling perspective, but also, I think, as
23 far as consumers should be concerned.
24 MS. GRIMM: Bruce?
25 MR. SEWELL: Sure. Let me


1 start with one of the principles that I tried
2 to make in my written statements. The laws
3 that we're seeking to conform need to be
4 understandable by the people who are asked to
5 adhere to them. And that leads you to look
6 for ways that you can translate concepts that
7 are relevant for antitrust enforcement into
8 concepts that are also common for business
9 people.
10 And average variable cost is
11 a measure which is widely understood by
12 business people, and I would argue
13 particularly in my industry, potentially in
14 Bruce's too, it's a metric that exists for
15 other than just antitrust enforcement
16 purposes, which means that it's also a metric
17 which exists for legitimate business reasons,
18 and therefore has some additional validity, I
19 think, when you're asking for companies to
20 talk about average variable costs.
21 We at Intel have a model
22 which enables us, and in fact we do a lot of
23 our business planning based on average
24 variable cost or marginal cost.
25 Once the fabrication plant


1 has been built, we have to track the cost of
2 the wafer through that plant. And we've become
3 quite expert at understanding and identifying
4 the various components that have to go into
5 creating a final finished microprocessor, so
6 the cost of the wafer, the cost of the
7 electricity to power the wafer through the
8 plant, the cost of the etching and the
9 chemicals. All of these constituent pieces
10 that go into actually moving the wafer
11 through the plant itself.
12 And this is a model. It's a
13 metric that we use regularly in business. So
14 for that reason, both intellectually, I
15 think, is the correct way to look at the
16 price in question from an antitrust
17 perspective, but it also has that added
18 benefit of being something that business
19 people use in the ordinary course of
20 business, and therefore it has that extra
21 validity.
22 MS. GRIMM: I'm going to
23 follow up with what might be a naive
24 question, but what is the average variable
25 cost of a microprocessor that you produce?


1 MR. SEWELL: I can't answer
2 that today. I could get you the answer very
3 quickly, but I can't answer it off the top
4 of my head. It would depend on what
5 microprocessor you're talking about. So we
6 have a number of different product lines
7 running through different plants at different
8 times on different processes. And the answer
9 for one of those would be different, but it
10 is known.
11 MS. GRIMM: But it is known?
12 MR. SEWELL: Yes.
13 MS. GRIMM: In other words,
14 you could go to one of your business
15 colleagues and basically say give me that
16 information and it would be readily
17 available; is that correct?
18 MR. SEWELL: Correct.
19 MS. GRIMM: Sean, I'd like
20 to find out more about your project that
21 you're heading. I very much would. And I'd
22 like you to share some additional information
23 on how it is organized.
24 You mentioned that divergence
25 in standards is one of the things that you're


1 looking at. If we could get more information
2 on that, that also would be helpful.
3 MR. HEATHER: Sure. I start
4 with this as background. In 1947 the average
5 tariff between industrialized nations was 47
6 percent. Today it stands at less than five
7 percent. And that's because when international
8 countries got around the negotiating table
9 during the last 50 years, they began to find
10 ways to open up markets.
11 And so now with the Doha
12 Round is hopefully coming to a successful
13 conclusion, and we all cross our fingers that
14 it will happen in the next few months, that
15 those barriers to trade will continue to
16 diminish over time.
17 What is left behind is what
18 we call in-country barriers, and we put these
19 into kind of six buckets. Divergence in
20 competition policy, intellectual property
21 rights, standards, state-owned enterprises and
22 subsidies, investment restrictions, and
23 government procurement issues.
24 In these area, we think that
25 the existing policy tools that international


1 countries have, whether it be through
2 bilateral, multilateral, or organizations like
3 the WTO, there's an adequate mechanism by which
4 to address these problems.
5 And so these kinds of
6 in-country barriers are important going
7 forward if we're going to protect a global
8 economy and I think continue to go after open
9 and competitive markets in a way which builds
10 on what we've done in the past.
11 So the U.S. Chamber aims
12 to begin to focus the U.S. government and
13 governments around the world to meet this
14 challenge over the next 50 years in the same
15 way in which the world took on the challenge
16 to opening up markets in a tariff-related
17 sense.
18 In terms of how we're
19 organized, we have got a number of member
20 companies that have been members of the
21 Chamber who have expressed specific interest
22 in this project, see the need for it, see
23 that this being the future of trade
24 discussions and negotiations. And so they've
25 challenged us to take this project on and


1 moved forward. And we have them serving in
2 a steering capacity.
3 We are advancing on a number
4 of different fronts in each of these
5 different buckets, including today on the
6 competition policy front.
7 I think most notably in
8 the news these days is Chancellor Merkel, the
9 E.U. president, German Chancellor, has
10 advanced the notion of a cooperative dialogue
11 between the U.S. and the E.U. on regulatory
12 issues. And so we're going to start
13 there.
14 Then additionally we'll
15 begin to work through international
16 department on China. We see that in a
17 working partnership with the Treasury
18 Department and the Strategic Economic
19 Dialogue that's in place advancing these same
20 kinds of principles and goals to bring about
21 some sort of regulatory playing field that's
22 more common than the patchwork that we see
23 currently existing.
24 MS. GRIMM: You mentioned
25 tying and essential facilities as two areas


1 that you're particularly concerned about, and
2 those are also the areas that you highlighted
3 in your comments that you submitted in
4 September.
5 Are there any areas aside
6 from tying and essential facilities that you
7 are concerned about internationally?
9 Internationally, let me answer that by saying
10 this. We are interested in making sure that
11 again this is not convergence for convergence
12 sake, but that there is a uniform standard
13 that's being applied by antitrust
14 jurisdictions around the world, and that
15 standard is one that is resonating from what
16 we see here in the United States happening.
17 So while the comments that
18 we made back in September talked about tying
19 and essentially facilities, our concerns
20 internationally go beyond that to any
21 particular Section 2 type action, whether it
22 be Article 82 of the E.U. or similar laws
23 in countries around the world.
24 And I think the reason which
25 we brought up the tying and essential


1 facilities was because one of the concerns
2 that was expressed, if you create a standard
3 that is of the highest magnitude, that
4 companies will then have to move to that, and
5 then it would be detrimental. And I think
6 that's particularly important to the issue of
7 intellectual property.
8 When you think about
9 intellectual property, if you have as enforcement
10 and remedy a disclosure of intellectual
11 property, you can't contain that disclosure within
12 a geographical jurisdictional of France or the
13 E.U. Once the cat's out of the bag, the
14 proverbial cat's out of the bag, it spreads
15 quickly across the rest of the known world.
16 So I think it's important
17 that we highlighted essential facilities and
18 tying arrangements because I think we see a
19 lot of that being where the divergence is
20 today. But more broadly, you would want to
21 see convergence around Section 2 issues.
22 MR. MATELIS: Following up a
23 little bit on that, Sean, assuming that
24 convergence might not be happening overnight,
25 you mentioned a couple times in your speech


1 principles that could be used in areas where
2 there's not convergence. You mentioned
3 Assistant Attorney General Pate's reference
4 to comity principals. And then later in your
5 discussion you mentioned agreements to defer
6 among international competition agencies.
7 I'd be interested in your
8 thoughts on that area in general. And Bruce,
9 I suspect this is something you've thought
10 about as well, and Bruce you as well have at
11 it.
12 MR. HEATHER: In my comments,
13 I think you're referring to where we talked
14 about enhanced comity. And while the U.S.
15 Chamber's not at this point prepared to say
16 enhanced comity is the exact way to go, we
17 believe that exploring that further is a
18 potential option.
19 I think that one of the
20 things you could do in terms of creating
21 standards across the board is potentially the
22 use of safe harbors, in the sense of safe
23 harbors in what I believe would be termed
24 the positive saying that if you have a dominant
25 market share position of 50 or 60 percent, that


1 that is not defined as a dominant position, or
2 to suggest certain conduct regarding tying or
3 rebate policies and the like does not
4 constitute an abuse of the dominant position.
5 Coming up with some standards that could be
6 adopted internationally would be one
7 way by which you could put that kind of
8 language into agreements between countries
9 and then exploring the area of enhanced
10 comity where potentially you could defer to
11 decisions of other jurisdictions.
12 MR. SEWELL: Yeah. On
13 comity first and then on safe harbors. The
14 reality is that sovereign countries and
15 sovereign trading blocs, that's the right
16 way to describe the E.U., are going to
17 regulate, are going to exercise their
18 sovereignty. That's perfectly within their
19 right to do so.
20 The problem, I think, is when
21 you have agencies which are really reaching
22 outside of their own geographic or area of
23 sovereignty in trying to regulate conduct
24 which occurs outside of that area.
25 So for example, where you


1 have an agreement between two U.S. companies
2 to price at a certain level, and then that
3 gets reviewed in a third country which is not
4 the host of either of those two companies.
5 And the analysis then becomes can two U.S.
6 companies price in a way which the U.S. would
7 find acceptable but yet some other agency
8 does not? And in those circumstances I think
9 the principles of comity should really be
10 argued and be respected by the agency that's
11 outside of the -- in this case outside of
12 the U.S.
13 Where there is a clear nexus
14 back to non-U.S. competition, so in the case
15 of Europeans, where there is a European actor
16 involved, that's a more difficult argument to
17 make.
18 But certainly where there is
19 no European actor involved and where there's
20 a tenuous connection at best back to European
21 commerce, then I think it's important that
22 issues of comity are respected.
23 With respect to the safe
24 harbor question, I actually think -- I agree
25 with you entirely that we are not going to


1 get international convergence or harmonized
2 antitrust laws any time soon. But I think
3 there is a role for the safe harbor here. I
4 think there is a threshold standard which
5 some number of these 100 antitrust regulatory
6 agencies around the world might be willing to
7 agree should represent the -- sort of the
8 bare requirements with respect to antitrust
9 conduct. And that so long as companies are
10 complying within that threshold standard,
11 that companies should at least have a safe
12 harbor from punitive litigation.
13 And it might be that that's
14 the first step in driving towards what would
15 ultimately become a more harmonized set of
16 international standards.
17 MR. WARK: I really don't
18 have a whole lot more to add on that issue.
19 I think the points have been well made.
20 MS. GRIMM: I'd like to ask
21 our panelists a question similar to that that
22 was asked of our morning panel, and that is
23 in the area of loyalty discounts, whether
24 market share provides a useful screening
25 mechanism in assessing the legality of such


1 discounts, why or why not. And Bruce Sewell,
2 maybe you can take a shot at that first.
3 MR. SEWELL: Let me start
4 with what I think you're asking and then feel
5 free to probe a little bit.
6 I don't fundamentally see the
7 loyalty space as different or as requiring
8 different treatment than a standard pricing
9 inquiry would demand. So I don't see perhaps
10 the relevance of the market share test.
11 It seems to me that whether
12 the discount is in the form of a loyalty
13 discount or some other form, the essential
14 inquiry remains the same. Is the price
15 that's being offered across the units being
16 sold above or below a predatory level? And
17 if the answer is that the price is above
18 what we've defined as a predatory level, then
19 I think that ends the inquiry.
20 If the price it below a
21 predatory level, then I think there are
22 remedies available and laws available to deal
23 with that. But I don't see it as a different
24 analysis.
25 MS. GRIMM: Bruce Wark, do


1 you have anything to add to that?
2 MR. WARK: Yeah. I think I
3 bring almost a unique perspective because I
4 think we have one of the world's most famous
5 loyalty programs. It's called Advantage.
6 And I think that anybody who looks at that
7 and looks at how the loyalty program at least
8 in our industry has grown up, it's absolutely
9 pro-competitive. It's a point of competition
10 that airlines engage in.
11 On the other hand it's not
12 exclusionary. It's clear that new entrants
13 have been able to enter markets, either by
14 developing their own loyalty programs,
15 hooking those loyalty programs onto the
16 loyalty programs of other airlines who may
17 want to do the same thing, making their
18 loyalty programs maybe quicker and easier to
19 redeem.
20 Or take the example of an
21 airline like Jet Blue, which may say well,
22 maybe what I'll do is I'll compete on some
23 other ways and product.
24 So I think the Advantage
25 program in the airline industry is a great


1 example of how loyalty programs can in fact
2 be very pro-competitive.
3 As far as the point that
4 Bruce Sewell just made, I tend to agree with
5 him. Unless you've got some kind of -- if
6 you can equate the loyalty program with
7 making it exclusive, then maybe you have to
8 analyze it in an exclusive dealing context
9 rather than a predatory pricing context. But
10 certainly our program doesn't work that way,
11 and many don't.
12 MR. SEWELL: And I'd add to
13 that too that really the way to look at
14 loyalty discounts is these are incentives to
15 buy. These are not punishments for failure to
16 buy. And that's a really fundamental
17 difference.
18 So the focus on incenting
19 behavior and providing an advantage to buying
20 more is different than threatening to punish
21 in the event that a supplier were to -- that
22 a customer were to buy from a different
23 supplier. Very different kinds of things and
24 should be treated very differently by the
25 antitrust laws.


1 MR. WARK: One other point I
2 guess I want to make which goes back to the
3 original question is what role does market
4 share play. And again, I think the airline
5 industry is interesting because we're 20
6 percent of the U.S. market, which no one's
7 going to say is dangerously close to
8 establishing monopoly. But maybe on an
9 individual route or out of an individual hub
10 we'll be 70, 80 percent of it.
11 So are you going to apply
12 the 70 percent or the 20 percent? So that
13 really gets into what's your relevant market
14 on the loyalty program, and could you really
15 run a different loyalty program based upon
16 the location of the particular participants
17 in that program.
18 So I think when you ask the
19 question what market share means, at least in
20 my mind, part of the question is being able
21 to find relevant market for purposes of the
22 loyalty program.
23 MS. GRIMM: Bruce Sewell, as
24 I understand it, Intel has faced or is facing
25 inquiries in a number of different foreign


1 jurisdictions with respect to its discount
2 policies. Have you encountered differing
3 standards in those foreign jurisdictions?
4 And if so, how?
5 MR. SEWELL: Well, I'm
6 pleased to be able to say that I don't have
7 the data to answer that yet because we
8 haven't been the subject to different -- to
9 the imposition of different standards. We
10 are dealing with agencies around the world.
11 As yet we have not been put in the position
12 where we have to sort of harmonize those
13 different issues.
14 Having said that though, I am
15 concerned that the standards that will be
16 applied, should these agencies choose to act,
17 will be different.
18 And a quick example. The
19 European Commission is now wrestling with
20 this issue of effects based or formalistic
21 application of the antitrust laws. Should
22 one look at the intent, the conduct
23 exclusively, should one look at a prescribed
24 set of formulistic rules, or should one
25 really focus on the effect that the conduct


1 has in the market?
2 And I think in that area the
3 U.S. leads with its willingness to study
4 effects as opposed to exclusively conduct for
5 a formulistic approach.
6 So the result that may obtain
7 in Europe should the European competition
8 authorities decide to bring an action against
9 itself might be different because of the
10 application of a different test. We're not
11 there yet, but I worry that that's the case.
12 Sean mentioned the Chinese
13 anti-monopoly law. It's not at all clear
14 what kind of standards the Chinese would use
15 in assessing market share or in assessing
16 conduct under the anti-monopoly law.
17 It's not currently an issue
18 for us. We're not currently under
19 investigation in China. But it is not at
20 all inconceivable given that we are subject
21 to a competitor which has chosen to use a
22 serial antitrust complaint approach, that we
23 may find ourselves having to defend our
24 conduct in China at some point. And I have
25 very little confidence that I today could


1 tell you what standards would be used by the
2 Chinese government, how that would be
3 understood.
4 MS. GRIMM: Thank you. I'd
5 like to ask you a general question here
6 again, both Bruces, I'd appreciate your
7 responding.
8 We've talked about loyalty
9 discounts. We've talked about predatory
10 pricing. I am wondering if there are any
11 other areas under Section 2 that you think
12 need more guidance from the agencies, areas
13 perhaps in which we could consider safe
14 harbors, areas maybe needing the announcement
15 of some presumptions. I know it's a broad
16 question, but I wonder if you've given any
17 thought to this, or in your experience that
18 there are any other issues that you've found
19 to be of particular concern.
20 MR. WARK: Let me think on
21 that a little bit. I mean, I spoke on
22 predatory pricing in large part because as
23 the provider of essentially a single product,
24 I don't run into some of the bundling issues.
25 There aren't a whole lot of exclusive dealing


1 concerns in my business.
2 And obviously having defended
3 a predatory pricing case and having seen what
4 happened in the Spirit case, that is the
5 issue which is of most importance to me.
6 So I guess, as I listen to
7 Bruce, I'll think whether there's any other
8 areas. I'd be happy to have that one taken
9 care of.
10 MS. GRIMM: Fair enough.
11 Bruce?
12 MR. SEWELL: There isn't
13 anything that's strictly within the antitrust
14 context that comes to my mind, although there
15 is this intersection between intellectual
16 property law and single-firm dominance which
17 I think is an area that deserves a lot more
18 scrutiny and could certainly benefit from
19 some clearer language and clearer standards.
20 So that would be one.
21 And then I think also in
22 this area of standardization, what happens
23 when a firm, either because of its size or
24 because of its intellectual property position
25 engages in a standard-setting activity. And


1 I think also we could use some clarity in
2 that space.
3 MR. MATELIS: This might be
4 a different way of getting at sort of the
5 same point, but Bruce Wark, you mentioned in
6 your remarks that you can recall some
7 instances where American refrained from what
8 you thought was pro-competitive conduct out
9 of fear of baseless antitrust suits.
10 Without going, you know, into
11 the details too much, could you explain in
12 general what sorts of things you were
13 thinking about and, Bruce Sewell, maybe you
14 have some perspective on this as well. And
15 Sean, anything that your members have relayed
16 to you would be of interest too.
17 MR. WARK: In the Section 2
18 context it became clear from our litigation
19 experience that the Department was as much
20 concerned with capacity decisions as it is
21 with pricing. Now, from our perspective they
22 always went hand in hand because when you get
23 a lower price, you now want to compete for
24 anybody who might be into that lower price,
25 which is going to be a bigger universe than


1 what you started with.
2 But it was at least in the
3 DOJ's theory and it was also the theory in
4 the Spirit case that maybe you could match
5 the competitor, but you shouldn't expand
6 capacity.
7 Also when you go back and
8 you look at the history of what the DOT was
9 proposing, they were basically idea of being
10 well, you can match price, but we just don't
11 want you expanding output.
12 So with that sensitivity, you
13 know, we really do have to sit there and say
14 okay. We have to look at the market and say
15 well, are we comfortable expanding capacity
16 in that market, knowing that although we
17 think it's perfectly legal and
18 pro-competitive, are we going to have to
19 re-address this thing that we're adding
20 capacity where we shouldn't.
21 There are a couple of other
22 examples that primarily also we've had some
23 other disputes with the Department about,
24 more along the line of Section 1 cases and
25 how we publish fares. And details probably


1 wouldn't interest too many people here. But
2 that's also another area where we think we
3 would have to be conservative, in large part
4 not because we think we're wrong, but
5 because, you know, we're not interested in
6 having another argument.
7 MR. SEWELL: I don't want to
8 give you a flip answer. The temptation would
9 be to say whatever happened, we haven't been
10 very successful at it because we are
11 currently being sued.
12 The structure of my industry
13 is a little different than Bruce's. We
14 really primarily are worried about one
15 particular competitor. And I can't think of
16 any situation in which we have foregone an
17 opportunity that was demonstrable and was
18 understood was sitting on the table because
19 we feared a suit by our competitor.
20 But Intel expends an enormous
21 amount of resources, legal resources, trying
22 to figure out where these lines are and
23 trying to make sure that we believe we can
24 defend everything that we do if challenged.
25 We fully expect to be challenged and we are


1 routinely challenged.
2 So I don't think we
3 intentionally leave money on the table, as it
4 were, or intentionally price in a way which
5 does not seek to provide the maximum benefit
6 to consumers. But we spend an awful lot of
7 time trying to make these decisions.
8 And as is apparent, we don't
9 always get it right in the sense that we're
10 not successfully avoiding the litigation. We
11 absolutely believe that we can defend the
12 decisions that we've made, and we'll
13 eventually have that opportunity.
14 But it is a cost. It's a
15 large cost for doing business. And it would
16 be helped in large part by some clearer rules
17 so that we could set systems and educate our
18 clients with greater certainty about where
19 the lines need to be drawn.
20 And then we would still
21 probably have to defend ourselves in court,
22 but it would be on the basis of greater
23 certainty.
24 MR. HEATHER: If I heard
25 your question right, it's do legal


1 environments lead to businesses making
2 decisions based on those.
3 MR. MATELIS: Right. And
4 then in particular, are there pro-competitive
5 pro-consumer business decisions that companies
6 -- you know, your members, for instance, are
7 avoiding because they fear antitrust
8 liability in some form?
9 MR. HEATHER: Well, our
10 members have told us on numerous occasions
11 that obviously in the general sense that
12 these kinds of legal environments do impact
13 their business decisions. And we most
14 readily track that through our Institute of
15 Legal Reform, which has been around for the
16 last four or five years. We release a study
17 study annually that ranks the 50 states on
18 whether or not they have a positive legal
19 environment that encourages business
20 investment or whether they have a legal
21 environment that discourages business
22 investment.
23 In that survey we haven't
24 gone into antitrust issues, so I would
25 leave it at generically stating that yes,


1 there is a link between cause and effect.
2 And obviously companies react and make their
3 business planning based on the legal
4 environment.
5 MS. GRIMM: I'd like to
6 pursue that a little bit more in the
7 international context again and basically ask
8 very much the same question that was asked of
9 our panelists this morning.
10 In terms of how businesses
11 such as yours, Bruce and Bruce, respond to
12 variations in the competition laws
13 internationally, in particular I'd like to
14 know, for example, whether your business
15 decentralizes decision making as to different
16 foreign environments. Secondly, whether your
17 business generally seeks to comply with the
18 most restrictive laws in those environments.
19 I'd also like to ask whether the uncertainty
20 could even impact on where you, for example,
21 Intel, put your factories.
22 And fourth, I think maybe you
23 answered this, but whether the difference in
24 international enforcement standards
25 substantially raises your cost of doing


1 business. Those are kind of four
2 subquestions under the large question. But
3 if you could try to address those, it would
4 be helpful.
5 MR. SEWELL: Sure. I'll
6 start, and then if I miss one, then let me
7 know.
8 We start with the position
9 that as a global company, we need to be
10 compliant with the antitrust laws globally.
11 And since there is not a unified standard for
12 that, we have to look at each area in which
13 we do business.
14 For Intel philosophically, we
15 start with the premise that we must be
16 compliant in the U.S., and then overlay that
17 U.S. compliance approach with foreign
18 requirements to the extent that we can
19 discern what those foreign requirements are.
20 So at any given point, we
21 would be able to answer this question by
22 saying we are sure we are compliant with U.S.
23 antitrust law, and we are doing everything
24 that we can to be compliant with foreign
25 antitrust law although it's more difficult


1 because that law is less certain in many
2 cases, and in some cases even is nascent, is
3 not really yet codified.
4 So we decentralize the
5 decision making to some degree based on that
6 model. So we have antitrust experts outside
7 of the U.S. who focus on antitrust compliance
8 issues in major regions, not in every single
9 country in which we do business.
10 And we have pricing experts
11 outside of the U.S. who seek to inform the
12 pricing people within the central core of the
13 company as to where a particular price or a
14 discount or an incentive program might be
15 potentially problematic outside of the U.S.
16 In terms of your last point,
17 was could it impact where we might select to
18 do business, and the answer is in general,
19 yes. It's a factor that we consider. Because
20 our approach is to try to say that we will
21 be compliant wherever we do business, even if
22 that means that we will hire lawyers and hire
23 specialists to tell us how to do that, in
24 the end it's a cost of doing business that
25 we would normally absorb. And the decision


1 as to where to locate a factory tends to be
2 driven by things other than the antitrust
3 laws in a particular country, because we just
4 -- we assume that we're going to figure out
5 how to live within those laws, and we'll
6 absorb that cost.
7 The same would not
8 necessarily be true for intellectual property
9 laws where the risk of putting a factory into
10 a country with punitive intellectual property
11 laws could be much more devastating. We'll
12 figure how to get through the antitrust
13 issues. Some of the IP issues are sticky.
14 But the last point is that
15 it certainly is that the disharmony and the
16 lack of convergence represents a substantial
17 and significant cost for us, and that cost
18 could be alleviated or at least substantially
19 reduced if we had greater consistency among
20 the various laws.
21 MS. GRIMM: Bruce, would you
22 like to add to that?
23 MR. WARK: Sure. The
24 airline industry is a little different than a
25 lot of industries in the sense that there


1 isn't a whole lot of foreign investment is
2 U.S. airlines in part because of law and vice
3 versa.
4 So my competitive footprint
5 in Europe, being the most important example,
6 is small. So I never really have to worry
7 about an Article 82 claim standing alone.
8 I think where those issues do
9 come up for us is we compete with airlines
10 like British Airways, but we also cooperate
11 with airlines like British Airways through
12 airline alliances.
13 So for example, I may be
14 competing with them between Chicago and
15 London, but I may be cooperating with them to
16 move somebody from Chicago to Tel Aviv.
17 So we're kind of in this
18 interesting position of sometimes competing
19 with airlines, sometimes cooperating with
20 airlines. That's more of a Section 1 or an
21 Article 81 issue, although you do have this
22 kind of concept of collective dominance. I
23 don't know that anybody really knows what
24 that means under Article 82. I think that's
25 being developed as we speak.


1 So when we talk to the other
2 airlines about what we can do as an alliance,
3 I can say that we always have to fall to the
4 lowest common denominator. I personally
5 believe there are some very pro-competitive
6 things alliances can and would do but for the
7 fact that again, you're always operating on
8 the lowest level for fear that you will
9 stumble on what is the highest competitive
10 hurdle.
11 MS. GRIMM: I have no more
12 questions.
13 MR. MATELIS: Something that
14 a lot of people have spoken about today are
15 loyalty discounts. Bruce, let's start with
16 you. I wonder if you could -- you know, I
17 think most people intuitively grasp how
18 loyalty discounts help firms get business.
19 But I wonder if you could help tell us by
20 tracing that through to the potentially
21 pro-competitive effects on consumers.
22 MR. WARK: Which Bruce?
23 MR. MATELIS: Bruce Sewell.
24 MR. SEWELL: Maybe I'mbr>
25 missing something, but the trace-through from


1 my perspective is that loyalty discounts are
2 discounts. Loyalty discounts reduce the
3 price that the consumer pays, and for that
4 reason -- I mean, that is the essential and
5 the nub of what we're trying to accomplish
6 through regulation of competition.
7 So the track to me is very
8 simple. It's a discount. As I said before,
9 I think it should be looked at as any other
10 kind of pricing mechanism.
11 Sometimes these discounts may
12 be cash discounts. Sometimes they may be
13 discounts in kind. Sometimes they may be
14 incentives to cooperate in areas that
15 increase visibility of the products or other
16 marketing areas.
17 But in the end, from the
18 perspective of a consumer, all of these
19 discounts ultimately produce a lower price in
20 the marketplace. And I think that's the
21 social benefit.
22 MR. MATELIS: Are there
23 cost-saving efficiencies that might not be
24 readily apparent to somebody outside a firm,
25 or is that not significant?


1 MR. SEWELL: Well, in our
2 industry it can be very significant because
3 issues of scale have such a direct impact on
4 the cost. So from our perspective, there are
5 pro-competitive and pro-business reasons for
6 looking to expand the scale and the volume of
7 parts that we sell.
8 So I'm not sure that's
9 directly a consumer benefit, but it's
10 certainly a business justification for the
11 discounting practice.
12 MR. MATELIS: Bruce Wark or
13 Sean, any thoughts?
14 MR. WARK: I wouldn't add
15 anything to that.
16 MR. MATELIS: Okay. I
17 wanted to return to something that Bruce
18 Sewell mentioned earlier and ask it of you
19 Bruce Wark. Bruce said that at Intel,
20 average variable cost is a readily available
21 figure often. Is that the case at American
22 as well?
23 MR. WARK: Well, we had a
24 very long piece of litigation where in fact
25 there was a great deal of argument about what


1 average variable costs should be. I think we
2 thought we knew what it meant for purposes of
3 that case. It was a different number than
4 what the Justice thought the number should
5 be.
6 MR. MATELIS: I don't mean
7 to interrupt you. But outside the context of
8 litigation, is average variable cost a
9 concept that -- or a figure that is important
10 to American's own internal deliberative
11 process, or do you have different ways of
12 thinking about your business?
13 MR. WARK: We have a route
14 accounting system that takes account of all
15 kinds of different layers of cost, from fully
16 allocated to something that is much more
17 variable. So yes, I think that the short
18 answer to your question is yes.
19 MR. MATELIS: Another
20 predatory pricing question for -- I guess for
21 you, Bruce Wark. You mentioned in your
22 prepared remarks that you thought it was
23 appropriate to acknowledge a meeting
24 competition defense in the Section 2 context.
25 I guess the flip side to -- or the argument


1 against the meeting competition defense is
2 that if it precludes liability in exactly
3 those situations where, you know, a low-cost
4 -- a lower cost new entrant might be seeking
5 to enter, and a higher cost incumbent lowers
6 cost. So in that instance the meeting
7 competition defense would provide a safe
8 harbor for sort of the core theory of how
9 predatory pricing can work to harm
10 competition.
11 Sort of in general give me
12 your thoughts on why the meeting competition
13 defense is appropriate and why my attempt to
14 defend it might not be the right way to look
15 at it.
16 MR. WARK: Well, I think
17 from the perspective of the alleged preditee,
18 they picked a point in the marketplace where
19 they have to decide they're going to be
20 successful. We didn't.
21 It is a different situation
22 than when that cost is imposed on them. If
23 I went out and imposed a cost on them that
24 was below my measure of marginal or
25 incremental costs with the intention of


1 driving them out, and they couldn't survive
2 at that price, then that would be a different
3 situation than when you have the alleged
4 victim setting the price in the marketplace.
5 If they raise their price and
6 we didn't follow, that might be a different
7 fact. But I think that if a competitor that
8 basically sets its own price in the market
9 can't survive, it's not the kind of efficient
10 competitor that the competition laws are
11 intended to protect.
12 MR. MATELIS: Do you have
13 any thoughts on how easy or hard it is to
14 compare costs when you're seeking to apply
15 the meeting competition defense? Is the cost
16 comparative always intuitive, or are there
17 hidden costs that make that comparison
18 difficult?
19 MR. WARK: Well, I guess
20 what I'm arguing is that the defense, you
21 don't have to worry about my costs. I ought
22 to be able to compete for every passenger I
23 can at the price determined by my competitor.
24 MS. GRIMM: I think those
25 are all the questions that Joe and I have.


1 I would like to ask our panelists if they
2 have any additional questions or observations
3 they'd like to make.
4 MR. WARK: Just to simply
5 extend my thanks again for the opportunity.
6 MS. GRIMM: And I'd like to
7 thank all of you for joining us here today.
8 The weather is very challenging, and we
9 really appreciate your taking time off from
10 your very busy schedules to be with us and
11 prepare for these hearings. Your remarks
12 have been very insightful, and we appreciate
13 your sharing your views with us. Can we all
14 give them a hand of applause?
15 (Applause)
16 MS. GRIMM: Thank you all
17 and have a safe trip home.
18 (Which were all the
19 proceedings had in the
20 above-entitled cause this
21 date and time.)
23 * * *


3 I, PAMELA STAFFORD, Certified Shorthand
4 Reporter for the State of Illinois, do hereby certify
5 that the
6 foregoing was reported by stenographic and mechanical
7 means, which matter was held on the date, and at the time
8 and place set out on the title page hereof and that the
9 foregoing constitutes a true and accurate transcript of
10 same.
11 I further certify that I am not related to any of the
12 parties, nor am I an employee of or related to any of the
13 attorneys representing the parties, and I have no
14 financial
15 interest in the outcome of this matter.
16 I have hereunder subscribed my hand on the
17 day of                 ,         .


Updated January 2, 2024